As filed with the Securities and Exchange Commission on April 24, 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. 28 [X]
---
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
Amendment No. 29 [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.
[X] on MAY 1, 1997, pursuant to paragraph (b) of Rule 485.
[ ] 60 days after filing pursuant to paragraph (a) of Rule 485.
[ ] on _______, pursuant to paragraph (a) of Rule 485.
[ ] 75 days after filing pursuant to paragraph (a) (2) of Rule 485.
[ ] on _______, 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> <C>
Item 1. Cover Page.................................................. Cover Page
Item 2. Synopsis.................................................... Not Applicable
Item 3. Condensed Financial Information............................. Financial Highlights
Item 4. General Description of Registrant........................... Other Information - The
Fund and Its Shares
Item 5. Management of the Fund...................................... Management of the
Fund
Item 5.A. Management's Discussion of Fund Performance................. Not Applicable
Item 6. Capital Stock and other Securities.......................... Other Information - The
Fund and Its Shares
Item 7. Purchase of Securities Being Offered........................ Other Information -
Purchase and
Redemption of
Shares; Valuation
of Shares
Item 8. Redemption or Repurchase.................................... Other Information -
Purchase and
Redemption of
Shares
Item 9. Pending Legal Proceedings................................... Not Applicable
PART B. LOCATION IN STATEMENT
- ------- OF ADDITIONAL INFORMATION
-------------------------
Item 10. Cover Page.................................................. Cover Page
Item 11. Table of Contents........................................... Table of Contents
Item 12. General Information and History............................. Not Applicable
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
WRL SERIES FUND, INC.
Cross Reference Sheet (Continued)
LOCATION IN
STATEMENT OF
FORM N-1A ADDITIONAL
ITEM NUMBER INFORMATION
- ----------- ------------
<S> <C> <C>
Item 13. Investment Objectives and Policies......................... Investment Objectives
and Policies
Item 14. Management of the Registrant............................... Management of the
Fund
Item 15. Control Persons and Principal
Holders of Securities...................................... Purchase and
Redemption of
Shares
Item 16. Investment Advisory and Other Services..................... Management of
the Fund
Item 17. Brokerage Allocation and
Other Practices............................................ Portfolio Transactions
and Brokerage
Item 18. Capital Stock and Other Securities......................... Capital Stock of
the Fund
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered................................... Purchase and
Redemption of Shares
Item 20. Tax Status................................................. Taxes
Item 21. Underwriter................................................ Management of the
Fund - The Investment
Adviser - Distribution
Agreement
Item 22. Calculations of Yield Quotations of
Performance Data........................................... Calculation of
Performance Related
Information
Item 23. Financial Statements....................................... Financial Statements
(incorporated by
reference)
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
WRL SERIES FUND, INC.
C.A.S.E. Quality Growth Portfolio
C.A.S.E. Growth & Income Portfolio
C.A.S.E. Growth Portfolio
Cross Reference Sheet
FORM N-1A LOCATION IN
ITEM NUMBER PROSPECTUS
- ----------- ------------
PART A.
<S> <C> <C>
Item 1. Cover Page................................................ Cover Page
Item 2. Synopsis.................................................. Not Applicable
Item 3. Condensed Financial Information........................... Not Applicable
Item 4. General Description of Registrant......................... The C.A.S.E. Quality
Growth Portfolio,
C.A.S.E. Growth &
Income Portfolio and
C.A.S.E. Growth
Portfolio and the Fund;
The Fund and its
Shares
Item 5. Management of the Fund.................................... Management of the
Fund
Item 5.A. Management's Discussion of fund Performance............... Not Applicable
Item 6. Capital Stock and Other Securities........................ The Fund and Its
Shares
Item 7. Purchase of Securities Being Offered...................... Purchase and
Redemption
of Shares; Valuation
of Shares
Item 8. Redemption or Repurchase.................................. Purchase and
Redemption of
Shares
Item 9. Pending Legal Proceedings................................. Not Applicable
PART B. LOCATION IN STATEMENT
- ------- OF ADDITIONAL INFORMATION
-------------------------
Item 10. Cover Page................................................ Cover Page
Item 11. Table of Contents......................................... Table of Contents
Item 12. General Information and History........................... Not Applicable
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
WRL SERIES FUND, INC.
C.A.S.E. Quality Growth Portfolio
C.A.S.E. Growth & Income Portfolio
C.A.S.E. Growth Portfolio
Cross Reference Sheet (Continued)
LOCATION IN
STATEMENT OF
FORM N-1A ADDITIONAL
ITEM NUMBER INFORMATION
- ----------- ------------
<S> <C> <C>
Item 13. Investment Objective and Policies............................Investment Objectives
and Policies
Item 14. Management of the Registrant.................................Management of the
Fund
Item 15. Control Persons and Principal
Holders of Securities........................................Purchase and
Redemption of
Shares
Item 16. Investment Advisory and Other
Services.....................................................Management of the
Fund
Item 17. Brokerage Allocation and
Other Practices..............................................Portfolio Transactions
and Brokerage
Item 18. Capital Stock and Other Securities...........................Capital Stock of the
Fund
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered.....................................Purchase and
Redemption of Shares
Item 20. Tax Status...................................................Taxes
Item 21. Underwriting.................................................Management of the
Fund - Restructuring
Item 22. Calculations of Yield Quotations of
Performance Data.............................................Calculation of
Performance Related
Information
Item 23. Financial Statements.........................................Financial Statements
(Incorporated by
reference)
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
WRL SERIES FUND, INC.
GLOBAL SECTOR PORTFOLIO
US SECTOR PORTFOLIO
FOREIGN SECTOR PORTFOLIO
Cross Reference Sheet
LOCATION IN
STATEMENT OF
FORM N-1A ADDITIONAL
ITEM NUMBER INFORMATION
- ----------- ------------
PART A.
<S> <C> <C>
Item 1. Cover Page................................................... Cover Page
Item 2. Synopsis..................................................... Not Applicable
Item 3 Condensed Financial Information.............................. Financial Highlights
Item 4. General Description of Registrant............................ Global Sector Portfolio,
US Sector Portfolio
and Foreign Sector
Portfolio and the Fund;
The Fund and Its
Shares
Item 5. Management of the Fund....................................... Management of the
Fund
Item 5.A. Management's Discussion of Fund Performance.................. Not Applicable
Item 6. Capital Stock and other Securities........................... 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>
v
<PAGE>
<TABLE>
<CAPTION>
WRL SERIES FUND, INC.
Global Sector Portfolio
US Sector Portfolio
Foreign Sector Portfolio
Cross Reference Sheet (Continued)
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
- ----------- -------------------------
<S> <C> <C>
Item 13. Investment Objectives and Policies........................... Investment Objectives
and Policies
Item 14. Management of the Registrant................................. Management of the
Fund
Item 15. Control Persons and Principal
Holders of Securities........................................ Purchase and
Redemption of Shares
Item 16. Investment Advisory and Other
Services..................................................... Management of the
Fund
Item 17. Brokerage Allocation and
Other Practices.............................................. Portfolio Transactions
and Brokerage
Item 18. Capital Stock and Other Securities........................... Capital Stock of the
Fund
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered..................................... Purchase and
Redemption of Shares
Item 20. Tax Status................................................... Taxes
Item 21. Underwriter.................................................. Management of the
Fund - The Investment
Adviser - Distribution
Agreement
Item 22. Calculations of Yield Quotations of
Performance Data............................................. Calculation of
Performance Related
Information
Item 23. Financial Statements......................................... Financial Statements
(incorporated by
reference)
</TABLE>
vi
<PAGE>
<TABLE>
<CAPTION>
WRL SERIES FUND, INC.
Growth Portfolio
Cross Reference Sheet
FORM N-1A LOCATION IN
ITEM NUMBER PROSPECTUS
- ----------- -----------
PART A.
- -------
<S> <C> <C>
Item 1. Cover Page................................................... Cover Page
Item 2. Synopsis..................................................... Not Applicable
Item 3. Condensed Financial Information.............................. Financial Highlights
Item 4. General Description of Registrant............................ The Growth Portfolio
and The Fund
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>
vii
<PAGE>
<TABLE>
<CAPTION>
WRL SERIES FUND, INC.
GROWTH PORTFOLIO
CROSS REFERENCE SHEET (CONTINUED)
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
- ----------- -------------------------
<S> <C> <C>
Item 13. Investment Objectives and Policies........................... Investment Objectives
and Policies
Item 14. Management of the Registrant................................. Management of the
Fund
Item 15. Control Persons and Principal
Holders of Securities........................................ Purchase and
Redemption of Shares
Item 16. Investment Advisory and Other
Services..................................................... Management of the
Fund
Item 17. Brokerage Allocation and
Other Practices.............................................. Portfolio Transactions
and Brokerage
Item 18. Capital Stock and Other Securities........................... Capital Stock of the
Fund
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered..................................... Purchase and
Redemption of Shares
Item 20. Tax Status................................................... Taxes
Item 21. Underwriter.................................................. Management of the
Fund - The Investment
Adviser - Distribution
Agreement
Item 22. Calculations of Yield Quotations of
Performance Data............................................. Calculation of
Performance Related
Information
Item 23. Financial Statements......................................... Financial Statements
(incorporated by
reference)
</TABLE>
viii
<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-one 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, Growth & 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 8.
Shares of the Fund's Portfolios are currently sold only to separate accounts
(the "Separate Accounts") of Western Reserve Life Assurance Co. of Ohio ("WRL"),
PFL Life Insurance Company ("PFL"), and AUSA Life Insurance Company, Inc.
("AUSA") (WRL, PFL, and AUSA together, the "Life Companies") to fund the
benefits under certain individual flexible premium variable life insurance
policies (the "Policies") and individual and group variable annuity contracts
(the "Annuity Contracts"). The Life Companies are affiliates. The Separate
Accounts, which may or may not be registered with the Securities and Exchange
Commission (the "SEC"), invest in shares of one or more of the Portfolios in
accordance with the allocation instructions received from holders of the
Policies and the Annuity Contracts (collectively, the "Policyholders"). Such
allocation rights are further described in the prospectuses or disclosure
documents for the Policies and the Annuity Contracts. A particular Portfolio of
the Fund may not be available under the Policy or Annuity Contract you have
chosen or may not be available in your state due to certain state insurance law
considerations. The prospectus or disclosure document for the particular Policy
or Annuity Contract you have chosen will indicate the Portfolios which are
generally available under the applicable Policy or Annuity Contract and should
be read in conjunction with this Prospectus.
This Prospectus sets forth concisely the information about the Portfolios that
prospective investors ought to know before investing. Investors should read this
Prospectus and retain it for future reference.
Additional information about the Fund and the Portfolios has been filed with the
SEC and is available upon request without charge by calling or writing the Fund.
The Statement of Additional Information (the "SAI") pertaining to the Portfolios
bears the same date as this Prospectus and is incorporated by reference into
this Prospectus in its entirety.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, A BANK OR OTHER FINANCIAL INSTITUTION, AND THE SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT PROSPECTUS OR DISCLOSURE
DOCUMENT FOR THE APPLICABLE VARIABLE ANNUITY CONTRACT OR FLEXIBLE PREMIUM
VARIABLE LIFE INSURANCE POLICY. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR
FUTURE REFERENCE.
AN INVESTMENT IN THE MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY
THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE PORTFOLIO WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
Prospectus Dated 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 ................................. 9
PERFORMANCE INFORMATION ................................. 11
THE PORTFOLIOS IN DETAIL ................................. 15
MANAGEMENT OF THE FUND ................................. 41
OTHER INFORMATION ....................................... 50
DISTRIBUTIONS AND TAXES ................................. 52
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
using average shares outstanding throughout each year. 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 Fund Annual Report
contains additional performance information for each Portfolio. A copy of the
Annual Report and SAI 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 as of December
31, 1996.)
GROWTH PORTFOLIO*
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994 1993
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period ............................ $ 31.66 $ 23.81 $ 26.25 $ 25.83
Income from operations:
Net investment income (loss) ..... .34 .26 .22 .28
Net realized and unrealized
gain (loss) on investments ........ 5.35 10.97 (2.41) .79
---------- ---------- --------- --------
Total Income (loss) from
operations ........................ 5.69 11.23 (2.19) 1.07
---------- ---------- --------- --------
Distributions:
Dividends from net investment
income ............................ (.35) (.24) (.22) (.28)
Dividends in excess of net
investment income ................. (.01) .00 .00 .00
Distributions from net realized
gains on investments .............. (1.99) (3.14) .00 (.37)
Distributions in excess
of net realized gains on
investments ....................... .00 .00 (.03) .00
---------- ---------- --------- --------
Total Distributions .............. (2.35) (3.38) (.25) (.65)
---------- ---------- --------- --------
Net asset value, end of period ..... $ 35.00 $ 31.66 $ 23.81 $ 26.25
========== ========== ========= ========
Total Return (a) ................... 17.96% 47.12% (8.31%) 3.97%
Ratios and supplemental data:
Net assets at end of period
(in thousands) .................... $1,527,409 $1,195,174 $814,383 $934,810
Ratio of expenses to average
net assets (b) .................... .88% .86% .84% .87%
Ratio of net investment
income (loss) to average
net assets (b) .................... .98% .90% .88% 1.07%
Ratio of commissions paid to
number of shares .................. 4.93% N/A N/A N/A
Portfolio turnover rate (a) ...... 45.21% 130.48% 107.33% 77.91%
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1992 1991 1990 1989 1988 1987
----------- ----------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ............................ $ 26.26 $ 17.48 $ 17.85 $ 12.97 $11.14 $ 10.14
Income from operations:
Net investment income (loss)...... .36 .27 .30 .19 .31 .21
Net realized and unrealized
gain (loss) on investments ........ .52 10.75 (.33) 6.29 1.83 1.00
-------- -------- --------- ------- ------ -------
Total Income (loss) from
operations ........................ .88 11.02 (.03) 6.48 2.14 1.21
-------- -------- --------- ------- ------ -------
Distributions:
Dividends from net investment
income ............................ (.36) (.27) (.30) (.19) (.31) (.21)
Dividends in excess of net
investment income ................. .00 .00 .00 .00 .00 .00
Distributions from net realized
gains on investments .............. (.95) (1.97) (.04) (1.41) .00 .00
Distributions in excess
of net realized gains on
investments ....................... .00 .00 .00 .00 .00 .00
-------- -------- --------- ------- ------ -------
Total Distributions .............. (1.31) (2.24) (.34) (1.60) (.31) (.21)
-------- -------- --------- ------- ------ -------
Net asset value, end of period ..... $ 25.83 $ 26.26 $ 17.48 $ 17.85 $12.97 $ 11.14
======== ======== ========= ======= ====== =======
Total Return (a).................... 2.35% 59.79% (.22%) 47.04% 18.62% 10.90%
Ratios and supplemental data:
Net assets at end of period
(in thousands)..................... $711,422 $393,511 $129,057 $74,680 $28,497 $15,815
Ratio of expenses to average
net assets (b) .................... .86% .90% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment
income (loss) to average
net assets (b) .................... 1.44% 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 N/A
Portfolio turnover rate (a) ...... 77.70% 7.27% 157.01% 123.80% 76.27% 222.13%
</TABLE>
* SEE NOTES TO FINANCIAL HIGHLIGHTS ON P. 8.
1
<PAGE>
BOND PORTFOLIO*
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994 1993
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 11.35 $ 9.80 $ 11.24 $ 11.18
Income from operations:
Net investment income (loss) ....... 0.64 .69 .63 .72
Net realized and unrealized gain
(loss) on on investments ............ (0.64) 1.55 (1.44) .95
------- ------- -------- -------
Total income (loss) from
operations .......................... .00 2.24 (.81) 1.67
------- ------- -------- -------
Distributions:
Dividends from net investment
income .............................. (.64) (.69) (.63) (.72)
Dividends in excess of net
investment income ................... .00 .00 .00 .00
Distributions from net realized
gains on investments ................ .00 .00 .00 (.89)
Distributions in excess of net
realized gains on investments ....... .00 .00 .00 .00
------- ------- -------- -------
Total distributions ............... (.64) (.69) (.63) (1.61)
------- ------- -------- -------
Net asset value, end of period ....... $ 10.71 $ 11.35 $ 9.80 $ 11.24
======= ======= ======== =======
Total return (a) ..................... 0.14% 22.99% (6.94%) 13.38%
Ratios and supplemental Data:
Net assets end of period
(in thousands) ...................... $95,759 $96,972 $71,064 $90,715
Ratio of expenses to average
net assets (b) ...................... .64% .61% .59% .64%
Ratio of net investment income
(loss) to average net assets (b) .... 5.96% 6.45% 5.94% 5.94%
Ratio of commissions paid to
number of shares .................... N/A N/A N/A N/A
Portfolio turnover rate (a) ........ 187.72% 120.54% 131.73% 149.02%
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1992 1991 1990 1989 1988 1987
------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $11.18 $ 9.91 $10.07 $ 9.29 $ 9.22 $ 10.28
Income from operations:
Net investment income (loss) ....... .75 .86 .79 .75 .90 .25
Net realized and unrealized gain
(loss) on on investments ............ .32 1.30 (.16) .78 .07 (.89)
------ ------ ------ ------ ------ -------
Total income (loss) from
operations .......................... 1.07 2.16 .63 1.53 .97 (.64)
------ ------ ------ ------ ------ -------
Distributions:
Dividends from net investment
income .............................. (.75) (.86) (.79) (.75) (.90) (.38)
Dividends in excess of net
investment income ................... .00 .00 .00 .00 .00 .00
Distributions from net realized
gains on investments ................ (.32) (.03) .00 .00 .00 (.04)
Distributions in excess of net
realized gains on investments ....... .00 .00 .00 .00 .00 .00
------ ------ ------ ------ ------ -------
Total distributions ............... (1.07) (.89) (.79) (.75) (.90) (.42)
------ ------ ------ ------ ------ -------
Net asset value, end of period ....... $11.18 $11.18 $ 9.91 $10.07 $ 9.29 $ 9.22
====== ====== ====== ====== ====== =======
Total return (a) ..................... 6.79% 18.85% 6.21% 14.65% 7.73% (5.66%)
Ratios and supplemental Data:
Net assets end of period
(in thousands) ...................... $56,820 $22,291 $10,143 $7,025 $3,372 $ 1,400
Ratio of expenses to average
net assets (b) ...................... .70% .70% .69% .70% .70% .86%
Ratio of net investment income
(loss) to average net assets (b) .... 6.49% 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 N/A
Portfolio turnover rate (a) ........ 80.73% 33.47% 18.09% 23.26% 21.54% 134.76%
</TABLE>
GLOBAL PORTFOLIO*
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992 (c)
------- ------- ------- ------ --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ................... $ 15.52 $ 13.12 $ 13.62 $10.16 $ 10.00
Income from operations:
Net investment income (loss) ......................... 0.08 .10 .10 .04 (.02)
Net realized and unrealized gain
(loss) on investments ................................. 4.20 2.91 .10 3.72 .18
------- ------- ------- ------ ---------
Total income (loss) from operations ................. 4.28 3.01 .20 3.76 .16
------- ------- ------- ------ ---------
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 net realized gains
on investments ........................................ (1.47) (.61) (.56) (.26) .00
Distributions in excess of net realized
gains on investments .................................. .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 (a) ....................................... 27.74% 23.06% .25% 35.05% 1.62%
Ratios and supplemental data:
Net assets at end of period (in thousands) ........... $534,820 $289,506 $261,778 $99,094 $ 508
Ratio of expenses to average net assets (b) .......... .99% .99% 1.01% 1.09% 2.48%
Ratio of net investment income (loss)
to average net assets (b) ............................. .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 (a) .......................... 88.31% 130.60% 192.06% 79.93% .00%
</TABLE>
* SEE NOTES TO FINANCIAL HIGHLIGHTS ON P. 8.
2
<PAGE>
MONEY MARKET PORTFOLIO*
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994 1993
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ........ $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from operations:
Net investment income (loss) .............. .05 .05 .04 .02
Net realized and unrealized gain (loss)
on investments ............................. .00 .00 .00 .00
-------- ------- ------- -------
Total income (loss) from operations ...... .05 .05 .04 .02
-------- ------- ------- -------
Distributions:
Dividends from net investment income ....... (.05) (.05) (.04) (.02)
Dividends from net realized gains on
investments .............................. .00 .00 .00 .00
Distributions from net realized gains on
investments ................................ .00 .00 .00 .00
-------- ------- ------- -------
Distributions in excess of net realized
gains on investments ....................... .00 .00 .00 .00
Total distributions ...................... (.05) (.05) (.04) (.02)
-------- ------- ------- -------
Net asset value, end of period .............. $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======= ======= =======
Total return (a) ............................ 5.03% 5.40% 3.44% 2.45%
Ratios and supplemental data:
Net assets at end of period (in thousands) $122,114 $80,544 $93,081 $45,782
Ratio of expenses to average net assets
(b) ........................................ .52% .56% .60% .66%
Ratio of net investment income (loss) to
average net assets (b) ..................... 5.03% 5.30% 3.59% 2.41%
Ratio of commissions paid to number of
shares ..................................... N/A N/A N/A N/A
Portfolio turnover rate (a) ............... N/A N/A N/A N/A
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1992 1991 1990 1989 1988 1987
------ ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from operations:
Net investment income (loss) .............. .03 .05 .07 .07 .05 .04
Net realized and unrealized gain (loss)
on investments ............................. .00 .00 .00 .00 .00 .00
------- ------- ------- ------ ------ ------
Total income (loss) from operations ...... .03 .05 .07 .07 .05 .04
------- ------- ------- ------ ------ ------
Distributions:
Dividends from net investment income ....... (.03) (.05) (.07) (.07) (.05) (.04)
Dividends from net realized gains on
investments ................................ .00 .00 .00 .00 .00 .00
Distributions from net realized gains on
investments ................................ .00 .00 .00 .00 .00 .00
------- ------- ------- ------ ------ ------
Distributions in excess of net realized
gains on investments ....................... .00 .00 .00 .00 .00 .00
Total distributions ..................... .(03) (.05) (.07) (.07) (.05) (.04)
------- ------- ------- ------ ------ ------
Net asset value, end of period .............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ====== ====== ======
Total return (a) ............................ 3.03% 5.25% 7.09% 8.09% 5.77% 4.56%
Ratios and supplemental data:
Net assets at end of period (in thousands) $45,600 $33,695 $24,931 $6,233 $5,114 $ 582
Ratio of expenses to average net assets
(b) ........................................ .70% .70% .66% .70% .70% .89%
Ratio of net investment income (loss) to
average net assets (b) ..................... 2.99% 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 N/A
Portfolio turnover rate (a) ............... N/A N/A N/A N/A N/A N/A
</TABLE>
SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO*
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992 (c)
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ................................... $ 10.42 $ 9.72 $ 10.30 $ 10.02 $ 10.00
Income from operations:
Net investment income (loss) ......................................... .56 .60 .50 .36 .02
Net realized and unrealized gain (loss) on investments ............... (.21) .70 (.58) .29 .02
------- ------- ------- ------- -------
Total income (loss) from operations ................................ .35 1.30 (.08) .65 .04
------- ------- ------- ------- -------
Distributions:
Dividends from net investment income .................................. (.53) (.60) (.50) (.35) (.02)
Dividends from net realized gains on investments ...................... .00 .00 .00 .00 .00
Distributions from net realized gains on investments .................. .00 .00 .00 (.02) .00
------- ------- ------- ------- -------
Distributions in excess of net realized gains on investments .......... .00 .00 .00 .00 .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 (a) ....................................................... 3.48% 13.54% (.43%) 4.58% .45%
Ratios and supplemental data:
Net assets end of period (in thousands) ............................... $26,098 $23,588 $20,356 $24,864 $2,509
Ratio of expenses to average net assets (b) ........................... .76% .78% 0.81% 1.00% 1.00%
Ratio of net investment income (loss) to average net assets (b) ....... 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 (a) ........................................... 58.15% 51.82% 93.70% 28.64% .00%
</TABLE>
* SEE NOTES TO FINANCIAL HIGHLIGHTS ON P. 8.
3
<PAGE>
BALANCED PORTFOLIO*
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994 (e)
------- ------- --------
<S> <C> <C> <C>
Net asset value, beginning of period ................................... $ 10.63 $ 9.24 $ 10.00
Income from operations:
Net investment income (loss) ......................................... .34 .44 .34
Net realized and unrealized gain (loss) on investments ............... .80 1.38 (.76)
------- ------- -------
Total income (loss) from operations ................................. 1.14 1.82 (.42)
------- ------- -------
Distributions:
Dividends from net investment income ................................. (.28) (.43) (.34)
Dividends in excess of net investment income ......................... .00 .00 .00
Distributions from net realized gains on investments ................. (.10) .00 .00
Distributions in excess of net realized gains on investments ......... .00 .00 .00
------- ------- -------
Total distributions ................................................. (.38) (.43) (.34)
------- ------- -------
Net asset value, end of period ......................................... $ 11.39 $ 10.63 $ 9.24
======= ======= =======
Total return (a) ....................................................... 10.72% 19.80% (5.73%)
Ratios and supplemental data:
Net assets at end of period (in thousands) ............................ $49,331 $31,114 $19,422
Ratio of expenses to average net assets (b) ........................... .97% .97% 1.00%
Ratio of net investment income (loss) to average net assets (b) ....... 3.14% 4.38% 4.27%
Ratio of commissions paid to number of shares ......................... .24% N/A N/A
Portfolio turnover rate (a) ........................................... 76.90% 98.55% 57.73%
</TABLE>
EMERGING GROWTH PORTFOLIO*
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994 1993 (d)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ................................... $ 16.25 $ 11.55 $ 12.47 $ 10.00
Income from operations:
Net investment income (loss) ......................................... (.04) .01 .01 (.04)
Net realized and unrealized gain (loss) on investments ............... 3.10 5.42 (.92) 2.51
-------- -------- -------- --------
Total income (loss) from operations ................................. 3.06 5.43 (.91) 2.47
-------- -------- -------- --------
Distributions:
Dividends from net investment income ................................. .00 .00 (.01) .00
Dividends in excess of net investment income ......................... .00 .00 .00 .00
Distributions from net realized gains on investments ................. (.85) (.73) .00 .00
Distributions in excess of net realized gains on investments ......... .00 .00 .00 .00
-------- -------- -------- --------
Total distributions ................................................. (.85) (.73) (.01) .00
-------- -------- -------- --------
Net asset value, end of period ......................................... $ 18.46 $ 16.25 $ 11.55 $ 12.47
======== ======== ======== ========
Total return (a) ....................................................... 18.88% 46.79% (7.36%) 24.71%
Ratios and supplemental data:
Net assets at end of period (in thousands) ............................ $431,454 $288,519 $182,650 $102,472
Ratio of expenses to average net assets (b) ........................... .94% .91% .92% 1.00%
Ratio of net investment income (loss) to average net assets (b) ....... (.24%) .03% .06% (.30%)
Ratio of commissions paid to number of shares ......................... 5.65% N/A N/A N/A
Portfolio turnover rate (a) ........................................... 80.02% 124.13% 72.62% 12.79%
</TABLE>
* SEE NOTES TO FINANCIAL HIGHLIGHTS ON P. 8.
4
<PAGE>
STRATEGIC TOTAL RETURN PORTFOLIO* (1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994 1993 (d)
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ................................... $ 12.86 $ 10.90 $ 11.23 $ 10.00
Income from operations:
Net investment income (loss) ......................................... .37 .37 .31 .19
Net realized and unrealized gain (loss) on investments ............... 1.56 2.33 (.33) 1.33
------- ------- ------- -------
Total income (loss) from operations ................................. 1.93 2.70 (.02) 1.52
------- ------- ------- -------
Distributions:
Dividends from net investment income ................................. (.32) (.37) (.31) (.19)
Dividends in excess of net investment income ......................... .00 .00 .00 .00
Distributions from net realized gains on investments ................. (.50) (.37) .00 (.10)
Distributions in excess of net realized gains on investments ......... .00 .00 .00 .00
-------- ------- ------- ------
Total distributions ................................................. (.82) (.74) (.31) (.29)
-------- -------- -------- -------
Net asset value, end of period ......................................... $ 13.97 $ 12.86 $ 10.90 $ 11.23
======== ======== ======== =======
Total return (a) ....................................................... 15.00% 24.66% (.53%) 13.49%
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................... $390,141 $256,806 $183,867 $90,560
Ratio of expenses to average net assets (b) .......................... .91% .87% .89% 1.00%
Ratio of net investment income (loss) to average net assets (b) ...... 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 (a) .......................................... 49.32% 52.59% 53.50% 27.41%
</TABLE>
AGGRESSIVE GROWTH PORTFOLIO*
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994 (e)
-------- -------- ---------
<S> <C> <C> <C>
Net asset value, beginning of period ................................... $ 13.25 $ 9.86 $ 10.00
Income from operations:
Net investment income (loss) ......................................... (.01) (.06) .02
Net realized and unrealized gain (loss) on investments ............... 1.38 3.96 (.14)
-------- -------- --------
Total income (loss) from operations ................................. 1.37 3.90 (.12)
-------- --------- --------
Distributions:
Dividends from net investment income ................................. .00 .00 (.02)
Dividends in excess of net investment income ......................... (.19) .00 .00
Distributions from net gains on investments .......................... (.25) (.51) .00
Distributions in excess of net realized gains on investments .........
Total distributions ................................................. (.44) (.51) (.02)
-------- --------- ---------
Net asset value, end of period ......................................... $ 14.18 $ 13.25 $ 9.86
======== ======== ========
Total return (a) ....................................................... 10.45% 38.02% (1.26%)
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................... $220,552 $158,534 $38,826
Ratio of expenses to average net assets (b) .......................... .98% 1.07% 1.00%
Ratio of net investment income (loss) to average net assets (b)....... (.10%) (.48%) 0.20%
Ratio of commissions paid to number of shares ........................ 7.08% N/A N/A
Portfolio turnover rate (a) .......................................... 101.28% 108.04% 89.73%
</TABLE>
* SEE NOTES TO FINANCIAL HIGHLIGHTS ON P. 8.
(1) PRIOR TO MAY 1, 1997, THIS PORTFOLIO WAS NAMED THE EQUITY-INCOME PORTFOLIO.
5
<PAGE>
TACTICAL ASSET ALLOCATION PORTFOLIO*
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 (f)
--------- ---------
<S> <C> <C>
Net asset value, beginning of period ................................... $ 11.49 $ 10.00
Income from operations:
Net investment income (loss) ......................................... .33 .41
Net realized and unrealized gain (loss) on investments ............... 1.33 1.93
-------- --------
Total income (loss) from operations .................................. 1.66 2.34
-------- --------
Distributions:
Dividends from net investment income ................................. (.30) (.41)
Dividends in excess of net investment income ......................... .00 .00
Distributions from net realized gains on investments ................. (.24) (.44)
Distributions in excess of net realized gains on investments ......... .00 .00
-------- --------
Total distributions ................................................. (.54) (.85)
-------- --------
Net asset value, end of period ......................................... $ 12.61 $ 11.49
======== ========
Total return (a) ....................................................... 14.42% 20.09%
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................... $206,172 $120,531
Ratio of expenses to average net assets (b) .......................... .90% .93%
Ratio of net investment income (loss) to average net assets (b)....... 2.78% 3.76%
Ratio of commissions paid to number of shares ........................ .50% N/A
Portfolio turnover rate (a) .......................................... 98.97% 38.68%
</TABLE>
GROWTH & INCOME PORTFOLIO*(1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994 (e)
------ ------ --------
<S> <C> <C> <C>
Net asset value, beginning of period ................................... $11.12 $ 9.30 $ 10.00
Income from operations:
Net investment income (loss) ......................................... .42 .46 .43
Net realized and unrealized gain (loss) on investments ............... .87 1.93 (.70)
------ ------ -------
Total income (loss) from operations ................................. 1.29 2.39 (.27)
------ ------ -------
Distributions:
Dividends from net investment income ................................. (.33) (.46) (.43)
Dividends in excess of net investment income ......................... .00 .00 .00
Distributions from net realized gains on investments ................. (.32) (.11) .00
Distributions in excess of net gains on investments .................. .00 .00 .00
------ ------ -------
Total distributions ................................................. (.65) (.57) (.43)
------ ------ -------
Net asset value, end of period ......................................... $ 11.76 $ 11.12 $ 9.30
======= ======= =======
Total return (a) ....................................................... 11.64% 25.25% (4.58%)
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................... $38,115 $24,607 $10,482
Ratio of expenses to average net assets (b) .......................... 1.00% 1.00% 1.00%
Ratio of net investment income (loss) to average net assets (b) ...... 3.73% 4.56% 5.36%
Ratio of commissions paid to number of shares ........................ 4.33% N/A N/A
Portfolio turnover rate (a) .......................................... 68.53% 78.34% 36.13%
</TABLE>
* SEE NOTES TO FINANCIAL HIGHLIGHTS ON P. 8.
(1) PRIOR TO MAY 1, 1997, THIS PORTFOLIO WAS NAMED THE UTILITY PORTFOLIO.
6
<PAGE>
C.A.S.E. GROWTH PORTFOLIO*
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
--------- -------
<S> <C> <C>
Net asset value, beginning of period ................................... $ 11.66 $ 10.00
Income from operations:
Net investment income (loss) ......................................... .12 .12
Net realized and unrealized gain (loss) on investments .............. 1.92 2.49
------- -------
Total income (loss) from operations ................................. 2.04 2.61
------- -------
Distributions:
Dividends from net investment income .. .............................. (.05) (.12)
Dividends in excess of net investment income ......................... .00
Distributions from net realized gains on investments ................. (.23) (.83)
Distributions in excess of net realized gains on investments ......... .00
-------
Total distributions ................................................. (.28) (.95)
------- -------
Net asset value, end of period ......................................... $ 13.42 $ 11.66
======= =======
Total return (a) ....................................................... 17.50% 20.65%
Ratios and supplemental data:
Net assets at end of period (in thousands) .. ........................ $26,560 $ 2,578
Ratio of expenses to average net assets (b) .......................... 1.00% 1.00%
Ratio of net investment income (loss) to average net assets (b) ...... .94% 1.02%
Ratio of commissions paid to number of shares .. ..................... 6.04% N/A
Portfolio turnover rate (a) .......................................... 160.27% 121.62%
</TABLE>
GLOBAL SECTOR PORTFOLIO*
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1996 (h)
-----------
<S> <C>
Net asset value, beginning of period ................................... $10.00
Income from operations:
Net investment income (loss) ......................................... .06
Net realized and unrealized gain (loss) on investments ............... .55
------
Total income (loss) from operations ................................. .61
------
Distributions:
Dividends from net investment income ................................. (.02)
Dividends in excess of net investment income ......................... .00
Distributions from net realized gains on investments ................. (.04)
Distributions in excess of net realized gains on investments ......... .00
------
Total distributions ................................................. (.06)
------
Net asset value, end of period ........................................ $10.55
======
Total return (a) ....................................................... 6.08%
Ratios and supplemental data:
Net assets at end of period (in thousands) .. ........................ $6,986
Ratio of expenses to average net assets (b) .......................... 2.37%
Ratio of net investment income (loss) to average net assets (b) ...... .62%
Ratio of commissions paid to number of shares ........................ 3.13%
Portfolio turnover rate (a) .......................................... 27.58%
</TABLE>
* SEE NOTES TO FINANCIAL HIGHLIGHTS ON P. 8.
7
<PAGE>
VALUE EQUITY PORTFOLIO*
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1996 (h)
------------
<S> <C>
Net asset value, beginning of period ................................... $10.00
Income from operations:
Net investment income (loss) ......................................... .10
Net realized and unrealized gain (loss) on investments ............... 1.23
------
Total income (loss) from operations ................................. 1.33
------
Distributions:
Dividends from net investment income ................................. (.04)
Dividend in excess of net investment income .......................... .00
Distributions from net realized gains on investments ................. (.02)
Distributions in excess of net realized gains on investments ......... .00
------
Total distributions ................................................. (.06)
------
Net asset value, end of period ......................................... $11.27
======
Total return (a) ....................................................... 13.19%
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................... $49,394
Ratio of expenses to average net assets (b) .......................... 1.00%
Ratio of net investment income (loss) to average net assets (b) ...... .89%
Ratio of commissions paid to number of shares ........................ 6.96%
Portfolio turnover rate (a) .......................................... 7.93%
</TABLE>
* SEE NOTES TO FINANCIAL HIGHLIGHTS BELOW
NOTES TO FINANCIAL HIGHLIGHTS
(a) For periods of less than one year the total return and portfolio turnover
rate are not annualized.
(b) For periods of less than one year the ratio of expenses to average net
assets and the ratio of net investment income (loss) to average net assets
are annualized. Without the advisory fee waiver by WRL (the Fund's
Investment Adviser prior to January 1, 1997) the ratio for each period
presented would be as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------------------------------
Portfolio 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- --------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market .......................... * * * * * * * .84% 1.16% 1.63%
Bond .................................. * * * * * .82 * .82% 1.07% 2.12%
Growth ................................ * * * * * * * 1.13% 1.49% 1.90%
Short-to-Intermediate Government ...... * * * 1.02% 1.41% ** ** ** ** **
Global ................................ * * * * * ** ** ** ** **
Strategic Total Return ............... * * * 1.12% ** ** ** ** ** **
Emerging Growth ....................... * * * 1.16% ** ** ** ** ** **
Aggressive Growth ..................... * * 1,18% ** ** ** ** ** ** **
Balanced .............................. * * 1.34% ** ** ** ** ** ** **
Growth & Income ....................... * 1.08% 1.90% ** ** ** ** ** ** **
Tactical Asset Allocation ............. * * * ** ** ** ** ** ** **
C.A.S.E. Growth ....................... 1.64% 4.15% ** ** ** ** ** ** ** **
Global Sector ......................... N/A ** ** ** ** ** ** ** ** **
Value Equity .......................... 1.03% ** ** ** ** ** ** ** ** **
<FN>
- ----------
* No waiver-portfolio did not exceed expense limitations.
** Portfolio was not in existence during this period.
(c) The inception of this portfolio was December 3, 1992.
(d) The inception of the portfolio was March 1, 1993.
(e) The inception of this portfolio was March 1, 1994.
(f) The inception of this portfolio was January 3, 1995.
(g) The inception of this portfolio was May 1, 1995.
(h) The inception of this portfolio was May 1, 1996.
</FN>
</TABLE>
8
<PAGE>
PORTFOLIOS AT A GLANCE
The Fund consists of twenty-one 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. 41. 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. 31.)
SUB-ADVISER: Van Kampen American Capital Asset Management, Inc.
/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
9
<PAGE>
Stocks (the "S&P 500") on a quarterly basis, but wants a diversified portfolio
that seeks to have investments in companies that have below-market risk
characteristics. The investor should be comfortable with the price fluctuations
of a stock portfolio.
SUB-ADVISER: C.A.S.E. Management, Inc.
/diamond/U.S. EQUITY PORTFOLIO
OBJECTIVE: Seeks long-term growth of capital.
INVESTMENT POLICY: The U.S. Equity Portfolio invests primarily in equity
securities of U.S. companies. Under normal conditions, the Portfolio will invest
at least 65% of its assets in equity securities, consisting of common stocks and
preferred stocks, and securities convertible into common stocks, consisting of
convertible bonds, convertible debentures, convertible notes, convertible
preferred stocks and warrants or rights issued by U.S. companies.
INVESTOR PROFILE: For the investor seeking growth from a broadly diversified
portfolio consisting of both "value" and "growth" equities, which the
Portfolio's Sub-Adviser believes will have characteristics similar to the S&P
500 and the potential to outperform the S&P 500 on a total return basis. The
investor should be comfortable with the price fluctuations of a stock portfolio.
SUB-ADVISER: GE Investment Management Incorporated
/diamond/VALUE EQUITY PORTFOLIO
OBJECTIVE: Seeks to achieve maximum, consistent total return with minimum risk
to principal.
INVESTMENT POLICY: The Value Equity Portfolio invests primarily in common stocks
with above-average statistical value which, in the Sub-Adviser's opinion, are in
fundamentally attractive industries and are undervalued at the time of purchase.
INVESTOR PROFILE: For the investor who seeks both capital preservation and
long-term capital appreciation.
SUB-ADVISER: NWQ Investment Management Company, Inc.
/diamond/GLOBAL SECTOR PORTFOLIO
OBJECTIVE: Seeks growth of capital.
INVESTMENT POLICY: The Global Sector Portfolio follows an asset allocation
strategy that shifts among a wide range of asset categories and within them,
market sectors. The Portfolio will invest primarily in the following asset
categories: equity securities of domestic and foreign issuers, including common
stocks, preferred stocks, convertible securities and warrants; debt securities
of domestic and foreign issuers, including mortgage-related 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 March 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 current income, long-term growth of income and
capital appreciation.
INVESTMENT POLICY: The Strategic Total Return Portfolio invests primarily in a
blend of equity and fixed-income securities, including common stocks, income
producing securities convertible into common stocks, and fixed-income
securities.
INVESTOR PROFILE: For the investor who wants current income with the prospect of
income growth, plus the prospect of capital growth. The investor should be
comfortable with the price fluctuations of a stock portfolio that invests in
both equity and fixed income securities.
SUB-ADVISER: Luther King Capital Management Corporation
10
<PAGE>
/diamond/GROWTH & INCOME PORTFOLIO
OBJECTIVE: Seeks total return by investing in securities that have defensive
characteristics.
INVESTMENT POLICY: The Growth & Income 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
/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
11
<PAGE>
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 direct
Portfolio expenses, and assume that all dividends and capital gains
distributions during the period are reinvested in the Portfolio when made.
The rates of return shown below depict the actual investment experience of each
of the Portfolios 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.) THE
INFORMATION PROVIDED BELOW SHOWS THE HISTORICAL INVESTMENT EXPERIENCE OF EACH OF
THE PORTFOLIOS. IT DOES NOT REPRESENT PROJECTED FUTURE INVESTMENT PERFORMANCE.
Also shown are comparable figures for the unmanaged S & P 500, and IBC's
Taxable Money Funds, widely used measures of market performance.
AVERAGE ANNUAL COMPOUNDED RATES OF RETURN
FOR THE PERIODS ENDED ON DECEMBER 31, 1996
<TABLE>
<CAPTION>
INCEPTION
FUND PORTFOLIO INCEPTION 10 YEARS 5 YEARS 1 YEAR DATE
- ---------------------------- --------- -------- ------- ------ -----------------
<S> <C> <C> <C> <C> <C>
Aggressive Growth 15.50% N/A N/A 10.45% March 1, 1994
Emerging Growth 20.04% N/A N/A 18.88% March 1, 1993
International Equity N/A N/A N/A N/A January 1, 1997
Global 20.82% N/A N/A 27.74% December 3, 1992
Growth 17.66% 17.98% 11.11% 17.96% October 2, 1986
C.A.S.E. Growth 23.22% N/A N/A 17.50% May 1, 1995
U.S. Equity N/A N/A N/A N/A January 1, 1997
Value Equity 13.19% N/A N/A N/A May 1, 1996
Global Sector 6.08% N/A N/A N/A May 1, 1996
Tactical Asset Allocation 17.27% N/A N/A 14.42% January 3, 1995
Strategic Total Return (1) 13.36% N/A N/A 15.00% March 1, 1993
Growth & Income (2) 10.69% N/A N/A 11.64% March 1, 1994
Balanced 8.19% N/A N/A 10.72% March 1, 1994
Bond 7.63% 7.40% 6.77% 0.14% October 2, 1986
Short-to-Intermediate
Government 5.18% N/A N/A 3.48% December 3, 1992
Money Market 4.98% 4.99% 3.86% 5.03% October 2, 1986
Standard & Poor's Index
of 500 Common Stocks 15.46% 15.28% 15.22% 22.96%
IBC's Taxable Money Funds 5.55% N/A 4.03% 4.85%
<FN>
- --------------
(1) Prior to May 1, 1997, this Portfolio was known as Equity-Income Portfolio.
(2) Prior to May 1, 1997, this Portfolio was known as Utility Portfolio.
</FN>
</TABLE>
/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
12
<PAGE>
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.
/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 SIMILAR SUB-ADVISER FUNDS OR SIMILAR SUB-ADVISER
ACCOUNTS HAVE SUBSTANTIALLY SIMILAR INVESTMENT OBJECTIVES, POLICIES, AND
STRATEGIES AS 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 Fund or Similar Sub-Adviser Account, due to,
among other things, certain inherent differences between a Portfolio and the
Similar Sub-Adviser Fund or Similar Sub-Adviser Account.
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. Each Similar Sub-Adviser Fund has higher total
expenses than its corresponding Portfolio of the Fund. The average annual total
returns for the Similar Sub-Adviser Funds are shown with and without the
deductions of any applicable sales load. YOU SHOULD NOTE THAT THE PERFORMANCE OF
THE SIMILAR SUB-ADVISER FUNDS DOES NOT REFLECT THE HISTORICAL PERFORMANCE OF ANY
PORTFOLIOS.
13
<PAGE>
<TABLE>
<CAPTION>
SIMILAR SUB-ADVISER FUND PERFORMANCE
------------------------------------ AVERAGE ANNUAL TOTAL RETURN
(WITH SALES LOADS)
--------------------------------------
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 5/15/91 5,046,304,293 26.40(1) 17.45(1) 19.86(1)
Aggressive The Alger Fund
Growth Portfolio Capital Appreciation 11/1/93 156,027,971 9.79(2) N/A(2) 28.50
Emerging Van Kampen
Growth Portfolio American Capital Class A
Emerging Growth 10/2/70 1,652,300 11.13(3) 15.21(3) 16.54(3)
<FN>
- --------------
(1) The Janus Worldwide Fund does not have a sales load.
(2) Total return reflects a deferred sales load of - 5.0% during the first year
and 2.0% during the fifth year.
(3) Total returns are for Class A shares of the Van Kampen American Capital
Emerging Growth Fund and reflect a deduction of a 5.75% front end sales
load. The fund also has Class B and Class C shares with different sales
loads. Calculating total return with those sales loads may have resulted in
lower total returns.
</FN>
</TABLE>
<TABLE>
<CAPTION>
SIMILAR SUB-ADVISER FUND PERFORMANCE
------------------------------------
AVERAGE ANNUAL TOTAL RETURN
(WITHOUT SALES LOADS)
-------------------------------
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 5/15/91 5,046,304,293 26.40 17.45 19.86
Aggressive The Alger Fund
Growth Portfolio Capital Appreciation 11/1/93 156,027,971 13.80 N/A 28.90
Emerging Van Kampen
Growth Portfolio American Capital Class A
Emerging Growth 10/2/70 1,652,300 17.91 16.58 17.23
</TABLE>
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.
The Similar Sub-Adviser Accounts used to calculate the composite performance
information shown below may not have been subject to the same types of expenses
to which the Portfolios are subject nor to the diversification requirements,
specific tax restrictions, and investment limitations imposed on the Portfolios
by the 1940 Act or the Internal Revenue Code. Consequently, the performance
results for the composite performance data might have been adversely affected if
the Similar Sub-Adviser Accounts included in the composite had been regulated as
investment companies under the 1940 Act, or had been subject to the same
Internal Revenue Code.
14
<PAGE>
<TABLE>
<CAPTION>
SIMILAR SUB-ADVISER ACCOUNT
PERFORMANCE
------------------------------
SUB-ADVISER 1 YEAR 5 YEARS 10 YEARS
- ------------------------------ ------ ------- --------
<S> <C> <C> <C>
Scottish Equitable
(Co-Sub-Adviser -
International Equity Portfolio) 9.50 13.03 13.03**
Dean Investment Associates
(Sub-Adviser - Tactical Asset
Allocation Portfolio) 17.68 10.65 13.56
NWQ Investment Management
Company, Inc. (Sub-Adviser -
Value Equity Portfolio) 23.40 14.70 15.40
GE Investment Management
Incorportated (Sub-Adviser -
U.S. Equity Portfolio) 23.34 15.19 15.86
GE Investment Management
Incorporated (Co-Sub-Adviser -
International Equity Portfolio) 14.82 12.10 10.33
<FN>
- --------------
* 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.
** Similar Sub-Adviser Account performance has been calculated on the nine-year
period beginning January 31, 1988.
</FN>
</TABLE>
THE INVESTMENT RESULTS OF THE SUB-ADVISERS' COMPOSITE SIMILAR SUB-ADVISER
ACCOUNTS ARE UNAUDITED. THE PERFORMANCE OF THE COMPOSITE SIMILAR SUB-ADVISER
ACCOUNTS DOES NOT REPRESENT THE HISTORICAL PERFORMANCE OF THE CORRESPONDING
PORTFOLIOS, AND IT IS NOT INTENDED TO PREDICT OR SUGGEST THE RETURNS THAT MIGHT
BE EXPERIENCED BY A PORTFOLIO OR A POLICYHOLDER IN THE FUTURE. 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.)
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 SAI, which is available without charge upon request.
15
<PAGE>
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 Appendix A, 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.
/diamonds/
/diamond/EMERGING GROWTH PORTFOLIO
The Emerging Growth Portfolio seeks to achieve its investment objective by
investing primarily in common stocks of small and medium-sized companies. Under
normal conditions, at least 65% of the Portfolio's total assets will be invested
in common stocks of small and medium-sized companies, both domestic and foreign,
in the early stages of their life cycle, that the Sub-Adviser believes have the
potential to become major enterprises. Investments in such companies may offer
greater opportunities for growth of capital than larger, more established
companies, but also involve certain special risks. Emerging growth companies
often have limited product lines, markets, or financial resources, and they may
be dependent upon one or a few key people for management. The securities of such
companies may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general.
The Portfolio does not limit its investments to any single group or type of
security. The Portfolio does not intend to invest more than 5% of its net assets
in unseasoned companies or special situations involving new management, special
products and techniques, unusual developments, mergers or liquidations.
Investments in unseasoned companies and special situations often involve much
greater risks than are inherent in ordinary investments, because securities of
such companies may be more than likely to experience unexpected fluctuations in
price.
The Portfolio's primary approach is to seek what the Sub-Adviser believes to be
unusually attractive growth investments on an individual company basis. The
Portfolio may invest in securities that have above average volatility of price
movement. The Portfolio attempts to reduce overall exposure to risk from
declines in securities prices by spreading its investments over many different
companies in a variety of industries.
16
<PAGE>
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.
/diamonds/
/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
Co-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
April 30, 1998, 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. 41).
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, GE Investment Management
Incorporated ("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
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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
Investment Management Limited ("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" p. 31, 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).
/diamonds/
/diamond/GLOBAL PORTFOLIO
The Global Portfolio seeks to achieve its investment objective by investing in
companies on a worldwide basis, regardless of country of organization or place
of principal business activity, as well as domestic and foreign governments,
government agencies and other governmental entities. Realization of income is
not a significant investment consideration and any income realized on the
Portfolio's investments will, therefore, be incidental to the Portfolio's
objective.
The Portfolio's assets will normally be invested in securities of issuers from
at least five different countries, including the United States. The Portfolio
may, on a temporary basis, invest all of its assets in less than five, or even a
single country. When recommending allocations of the Portfolio's investments
among regions and countries, the Portfolio's Sub-Adviser considers various
factors such as prospects for relative economic growth among countries, regions
or geographic areas; expected levels of inflation; government policies
influencing business conditions; and the outlook for currency relationships.
Although it is the policy of the Portfolio to purchase and hold securities for
long-term capital growth in a manner consistent with preservation of capital,
changes in the Portfolio will generally be made when the Sub-Adviser believes
they are advisable, typically either as a result of a security having reached a
price objective or by reason of developments not foreseen at the time of the
security's purchase.
Because the sale of a security ordinarily will be made without reference to the
length of time the security has been held, a significant number of short-term
transactions may result. The rate of portfolio turnover will not be a limiting
factor when changes are deemed to be appropriate. However, certain tax rules may
restrict the Portfolio's ability to sell securities in some circumstances when a
security has been held for an insufficient length of time. Increased portfolio
turnover necessarily results in correspondingly higher brokerage costs for the
Portfolio. These are ultimately borne by the Policyholders.
The Sub-Adviser seeks to reduce the risks associated with these considerations
through diversification and active professional management.
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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).
/diamonds/
/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.
/diamonds/
/diamond/C.A.S.E. GROWTH PORTFOLIO
The C.A.S.E. Growth Portfolio seeks to achieve its investment objective through
investments in small to medium-sized companies. For these purposes, the Sub-
Adviser considers "small cap" stocks to be stocks issued by companies with
market capitalization of between $50 million and $500 million. The Sub-Adviser
considers "mid-capitalization" stocks to be stocks issued by companies with
market capitalization of between $350 million and $3 billion. (Companies with
market capitalization from $350 million to $500 million may be classified by the
Sub-Adviser as either small cap or medium cap, depending upon the Sub-Adviser's
evaluation of the liquidity of trading in the company's stock.)
This Portfolio will generally invest in smaller, less well-established
companies, with limited product lines and financial resources. The Portfolio
seeks, however, to invest in such companies with above-market growth
characteristics in several investment classifications including sales, earnings,
returns and institutional support. Income derived is incidental to the
Portfolio's investment objective.
The Portfolio seeks to invest substantially all if its assets in common stocks
when the Sub-Adviser believes that the relevant market environment favors
profitable investing in those securities. Common stock investments are selected
from industries and companies that the Sub-Adviser believes are experiencing
favorable demand for their products and services, and which operate in a
favorable competitive environment and regulatory climate.
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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 may invest in government securities, corporate
bonds and debentures, high-grade commercial paper, preferred stocks,
certificates of deposit or other securities of U.S.issuers when the Sub-Adviser
perceives an opportunity for capital growth from such securities, or so that the
Portfolio may receive a competitive return on its uninvested cash.
The Portfolio's investments in debt securities will be made in securities of
U.S. and foreign companies, the U.S. Government, foreign governments, and U.S.
and foreign governmental agencies and instrumentalities and other governmental
entities. The Portfolio does not presently intend to invest more than 5% of its
assets in debt securities rated less than investment grade.
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 does not intend to invest more than 20% of
its assets in when-issued securities.)
The Portfolio may invest up to 25% of its net assets in the securities of
foreign issuers and obligors. Investments may be made in both domestic and
foreign companies. If appropriate and available, the Sub-Adviser may purchase
foreign securities through ADRs, EDRs, GDRs and other types of receipts of
shares evidencing ownership of the underlying foreign securities.
/diamonds/
/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
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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 on p. 31 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 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
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writing put and call options on foreign currencies; entering into securities
transactions on a when-issued or delayed-delivery basis; and lending portfolio
securities.
/diamonds/
/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 value 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).
/diamonds/
/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. The Sub-Adviser
determines the allocation of the Portfolio's assets among the asset categories
described above, based on proprietary quantitative research.
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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 the Sub-Adviser's assessment of business, economic
and market conditions. If the Sub-Adviser'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 debt securities and
instruments based on financial indexes (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
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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.
/diamonds/
/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 a
blend of equity and fixed-income securities, including common stocks, 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, some of which
may be convertible into common stocks.
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.
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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.)
/diamonds/
/diamond/GROWTH & INCOME PORTFOLIO
The Growth & 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 may invest include, but are
not limited to, utilities, financial services, real estate investment trusts,
health care, natural resources and energy sectors. Except for utilities, 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 Portfolio's stock selection emphasizes those common stocks in each sector
that have good value, attractive yield or dividend growth potential. 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, U.S. Government securities, money market instruments,
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, as
well as securities of foreign issuers that trade on foreign stock exchanges. The
Portfolio will limit its investment in foreign securities not publicly traded on
recognized exchanges to 15% of its total assets.
Restricted securities are any securities in which the Portfolio may otherwise
invest pursuant to its investment objective and policies, but which are subject
to restriction on resale under federal securities law. To the extent restricted
securities are deemed to be illiquid, the Portfolio will limit their purchase,
including non-negotiable time deposits, repurchase agreements providing for
settlement in more than seven days after notice, and certain restricted
securities determined by the Fund's Board not be be liquid, up to 15% of its net
assets.
The Portfolio may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the 1933 Act.
The Portfolio may invest in convertible securities. Convertible securities are
fixed income securities which may be exchanged or converted into a predetermined
number of the issuer's underlying common stock at the option of the holder
during a specified time period.
The Portfolio may 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).
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The Portfolio may purchase securities on a when-issued or delayed delivery
basis. The Portfolio will limit 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.
/diamonds/
/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 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.)
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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.
/diamonds/
/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".
/diamonds/
/diamond/SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
The Short-to-Intermediate Government Portfolio seeks to achieve its investment
objective by investing primarily in U.S. Government securities and certain other
securities as described below. Under normal conditions, at least 65% of the
Portfolio's total assets will be invested in U.S. Government securities,
including repurchase agreements with respect to U.S. Government securities. The
Portfolio will not enter into a repurchase agreement or reverse repurchase
agreement which would cause more than 15% of its net assets to be subject to
repurchase or reverse repurchase agreements not terminable within seven days,
together with other illiquid investments. The Portfolio itself, and its share
price and yield, are not guaranteed by the U.S. Government.
The Portfolio seeks to manage share price stability by investing in obligations
with short or intermediate maturities that are not as sensitive to interest rate
changes as obligations with longer maturities. In selecting securities for the
Portfolio, the Portfolio's Sub-Adviser attempts to maintain the Portfolio's
overall sensitivity to interest rates in a range similar to the average for
short-term to intermediate-term Government bonds with an aggregate average
dollar-weighted remaining maturity of one to seven years. The Portfolio's
dollar-weighted average maturity may be longer than seven years from time to
time, but will not exceed ten years under normal operating conditions. The
Portfolio may hold individual securities with maturities of more than ten years
as long as its average maturity remains within this range.
The Portfolio may also invest in debt securities of all types, E.G., bonds,
debentures, notes, equipment lease and trust certificates (debt securities
secured by direct or indirect interest in specified equipment or equipment
leases), mortgage-backed securities, asset-backed securities (rated at least "A"
by S&P or Moody's), taxable municipal bonds, bond warrants, obligations issued
or guaranteed by supranational issuers or collateralized mortgage obligations
("CMOs") assembled for sale to investors by governmental agencies ("mortgage
securities"). The Portfolio may also invest in commercial paper (rated Prime-1
by Moody's or A-1 by S&P).
Corporate debt securities in which the Portfolio invests will generally have a
rating within the three highest grades as determined by Moody's or S&P. The
Portfolio may, however, invest in debt securities within the fourth highest
grade as determined by Moody's or S&P, if the Sub-Adviser determines the debt
securities' ratings are supported by an internal credit review that the Sub-
Adviser will conduct in each such instance. (See Appendix A for a description of
debt securities ratings.)
The Portfolio may invest a portion of its assets in very short-term instruments
with remaining maturities of one
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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.
/diamonds/
/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 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
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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 Appendix A.)
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.)
/diamonds/
OTHER INVESTMENT POLICIES AND RESTRICTION
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, with respect to 75% of the total assets of a
Portfolio, the Portfolio may not own more than 10% of the outstanding
voting shares of any issuer (other than U.S. Government securities) as
defined in the 1940 Act and, with respect to some Portfolios, in other
types of cash items.
/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 Growth & Income Portfolio) will invest more than 25% of its assets
in any one particular industry, other than U.S. Government securities.
Under normal market conditions, the Growth & Income Portfolio will
invest at least 25% of its assets in utilities.
/diamond/PORTFOLIO TURNOVER
A portfolio turnover rate is, in general, the percentage calculated by taking
the lesser of purchases or sales of portfolio securities (excluding certain
short-term securities) for a year and dividing it by the monthly average of the
market value of such securities during the year. (See "Financial Highlights" for
each Portfolio on pages 1-8 for more information on historical turnover rates.)
Changes in security holdings are made by a Portfolio's Sub-Adviser when it is
deemed necessary. Such
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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 331/3% 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 Growth & 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.
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 Growth & Income and
Global Sector Portfolios will not lend securities or other assets, if as a
result, more than 331/3% 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, a Portfolio may be delayed or prevented
from recovering collateral, or may be otherwise required to cover a transaction
in the security loaned.
If portfolio securities are loaned, collateral values must be continuously
maintained at no less than 100% by pricing both the securities loaned and the
collateral daily.
If a material event is to be voted upon affecting a Portfolio's investment in
securities which are on loan, the Portfolio will take such actions as may be
appropriate in order to vote its shares.
The Growth, Bond, Global, International Equity, Short-to-Intermediate
Government, Emerging Growth and 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.
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/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 their total assets, calculated at the
time of purchase, in the securities of money market funds, which are investment
companies. The Portfolios may not invest (i) more than 5% of their 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 RISKS 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," p.16, 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).
/diamond/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.
/diamond/PREFERRED STOCK ranks senior to common stock and has certain
fixed-income features.
Preferred stockholders receive dividends before they are distributed to the
common stockholders.
/diamond/RISK FACTORS
The price of any equity security rises and falls. Common stocks
generally represent the riskiest investment in a company. It is
possible that investors may lose their entire investment.
In addition to the risk associated with individual equity
securities, an equity-indexed security carries overall market risk
and the risk of fluctuation inherent in the indexed security as
distinguished from the securities comprising the applicable index.
Any equity security also presents the risks inherent in the
particular industry of the issuer of the
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equity security. Certain of these sectors, and the risks presented
by such sectors, are described below.
/daimond/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.
/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
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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 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 into 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
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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.
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
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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 taxes on interest income, the possible
seizure or nationalization of foreign deposits, the possible establishment of
exchange controls and/or the addition of other foreign governmental restrictions
that might adversely affect the payment of principal and interest on these
obligations.
In addition, there may be less publicly available and reliable information about
a foreign bank than about domestic banks owing to different accounting,
auditing, reporting and recordkeeping standards.
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/diamond/FOREIGN SECURITIES
Foreign securities include equity and debt securities of foreign issuers. Each
Portfolio may invest in foreign securities subject to its investment
limitations.
In addition to direct foreign investment, many of the Portfolios may invest in
foreign securities through ADRs or ADSs, which are dollar-denominated receipts
issued by domestic banks or securities firms. ADRs and ADSs are publicly traded
on U.S. exchanges, and may not involve the same risks as securities denominated
in foreign currency.
Some Portfolios may also indirectly invest in foreign securities through EDRs,
which are typically issued by European banks; in GDRs, which may be issued by
domestic or foreign banks; and in other types of receipts evidencing ownership
of foreign securities.
/diamond/RISK FACTORS
For U.S. investors, the returns on foreign securities are influenced not only by
the returns on the foreign investments themselves, but also by several risks
which include:
/diamond/CURRENCY RISK. Changes in the value of the currencies in which the
securities are denominated relative to the U.S. dollar may affect the
value of foreign securities and the value of their dividend or interest
payments and, therefore, a Portfolio's share price and returns.
Generally, in a period when the U.S. dollar commonly rises against
foreign currencies, the return on foreign securities for a U.S.
investor are diminished. By contrast, in a period when the U.S. dollar
generally declines, the returns on foreign securities generally are
enhanced.
Exchange rates are affected by numerous factors, including relative
interest rates, balances of trade, levels of foreign investment and
manipulation by central banks. The foreign currency market is
essentially unregulated and can be subject to speculative trading. From
time to time, many countries impose exchange controls which limit or
prohibit trading in certain currencies.
ADRs and ADSs do not involve the same direct currency and liquidity
risks as securities denominated in foreign currencies. However, the
value of the currency in which the foreign security represented by the
ADR or ADS is denominated may affect the value of the ADR or ADS.
To the extent that a Portfolio invests in foreign securities
denominated in foreign currencies, its share price reflects the price
movements both of its securities and of the currencies in which they
are denominated. The share price of a Portfolio that invests in both
U.S. and foreign securities may have a low correlation with movements
in the U.S. markets. If most of the securities in a Portfolio are
denominated in foreign currencies or depend on the value of foreign
currencies, the relative strength of the U.S. dollar against those
foreign currencies may be an important factor in the Portfolio's
performance.
/diamond/CURRENCY TRADING COSTS. A Portfolio incurs costs in converting foreign
currencies into U.S. dollars, and vice versa.
/diamond/DIFFERENT ACCOUNTING AND REPORTING PRACTICES. Foreign companies are
generally subject to tax laws and to accounting, auditing and financial
reporting standards, practices and requirements different from those
that apply in the U.S.
/diamond/LESS INFORMATION AVAILABLE. There is generally less public information
available about foreign companies.
/diamond/MORE DIFFICULT BUSINESS NEGOTIATIONS. A Portfolio may find it difficult
to enforce obligations in foreign countries or to negotiate favorable
brokerage commission rates.
/diamond/REDUCED LIQUIDITY/INCREASED VOLATILITY. Some foreign securities are
less liquid and their prices more volatile, than securities of
comparable U.S. companies.
/diamond/SETTLEMENT DELAYS. Settling foreign securities may take longer than
settlements in the U.S.
/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
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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.
A Portfolio may engage in futures contracts and options. The Portfolios intend
to use such derivatives primarily for bona fide hedging purposes, including to
protect portfolio positions against market, interest rate or currency
fluctuations, to equitize a cash position, for duration management, or to reduce
the risk inherent in the management of the portfolio involved. If used for other
purposes as may be permitted under applicable rules pursuant to which the
Portfolio would remain exempt from the definition of a "commodity pool operator"
under the rules of the CFTC, the aggregate initial margin and premiums required
to establish any non-hedging positions will not exceed 5% of the fair market
value of the Portfolio's net assets.
FORWARD CONTRACTS are contracts to purchase or sell a specified amount of
property for an agreed upon price at a specified time. Forward contracts are not
currently exchange traded and are typically negotiated on an individual basis. A
Portfolio may enter into forward currency contracts to hedge against declines in
the value of non-dollar denominated securities or to reduce the impact of
currency appreciation on purchases of non-dollar 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
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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 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.
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<PAGE>
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 33.
In addition, the mortgage securities market may be adversely affected by changes
in government regulation or tax policies.
/diamond/REAL ESTATE INVESTMENT TRUSTS ("REITS")
REITs are pooled investment vehicles which invest primarily in income producing
real estate, or real estate 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.
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<PAGE>
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 33.)
/diamond/ZERO COUPON, STRIPS, PAY-IN-KIND AND STEP COUPON SECURITIES
Zero coupon bonds do not make regular interest payments; rather, they are sold
at a discount from face value. Principal and accreted discount (representing
interest accrued but not paid) are paid at maturity. Step coupon bonds sell at a
discount and pay a low coupon rate for an initial period and a higher coupon
rate thereafter. Pay-in-kind securities may pay interest in cash or a similar
bond. Strips are debt securities that are stripped of their interest after the
securities are issued, but otherwise are comparable to zero coupon bonds.
/diamond/RISK FACTORS
The market value of zero coupon bonds, step coupon bonds, pay-in-kind securities
and strips generally fluctuates in response to changes in interest rates to a
greater degree than interest-paying securities of comparable term and quality.
A Portfolio may realize greater gains or losses as a result of such
fluctuations. In order to pay cash distributions from these types of securities,
a Portfolio may sell certain portfolio securities and may incur a gain or loss
on such sales.
/diamond/HIGH-YIELD/HIGH-RISK SECURITIES
High-yield/high-risk securities (or "junk bonds") are debt securities rated
below investment grade by the primary rating agencies (such as S&P and Moody's).
(See Appendix A for a description of debt securities ratings.)
/diamond/RISK FACTORS
The value of lower quality securities generally is more dependent on the ability
of the issuer to meet interest and principal payments (I.E., credit risk) than
is the case for higher quality securities. Conversely, the value of higher
quality securities may be more sensitive to interest rate movements than lower
rated securities. Issuers of high-yield securities may not be as strong
financially as those issuing bonds with higher credit ratings. Investments in
such companies are considered to be more speculative than higher quality
investments.
Issuers of high-yield securities are more vulnerable to real or perceived
economic changes (for instance, an economic downturn or prolonged period of
rising interest rates), political changes or adverse developments specific to
the issuer. Adverse economic, political or other developments may impair the
issuer's ability to service principal and interest obligations, to meet
projected business goals and to obtain additional financing, particularly if the
issuer is highly leveraged.
In the event of a default, a Portfolio would experience a reduction of its
income and could expect a decline in the market value of the defaulted
securities.
The market for lower quality securities is generally less liquid than the market
for higher quality bonds. Adverse publicity and investor perceptions, as well as
new or proposed laws, may also have a greater negative impact on the market for
lower quality securities. Unrated debt, 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
40
<PAGE>
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 WRL, which is wholly-owned by First AUSA Life
Insurance Company, a stock life insurance company, which is wholly-owned by
AEGON USA, Inc. ("AEGON"). AEGON is a financial services holding company whose
primary emphasis is on life and health insurance and annuity and investment
products. AEGON is a wholly-owned indirect subsidiary of AEGON nv, a Netherlands
corporation which is a publicly traded international insurance group. The
Investment Adviser has served as the investment adviser to the Fund since
January 1, 1997. Prior to this date, WRL served as investment adviser to each
Portfolio.
Subject to the supervision of the Fund's Board, the Investment Adviser is
responsible for furnishing continuous advice and recommendations to the Fund as
to the acquisition, holding or disposition of any or all of the securities or
other assets which the Portfolios may own or contemplate acquiring from time to
time; to cause its officers to attend meetings and furnish oral or written
reports, as the Fund may reasonably require, in order to keep the Board of
Directors and appropriate officers of the Fund fully informed as to the
conditions of each investment portfolio of the Portfolios, the investment
recommendations of the Investment Adviser, and the investment considerations
which have given rise to those recommendations; to supervise the purchase and
sale of securities of the Portfolios as directed by the appropriate officers of
the Fund; and to maintain all books and records required to be maintained by the
Investment Adviser pursuant to the 1940 Act and the rules and regulations
promulgated thereunder with respect to transactions on behalf of the Fund.
/diamond/ADVISORY FEES PAID BY THE PORTFOLIOS
Subject to the supervision and direction of the Fund's Board, the Investment
Adviser is responsible for managing the Portfolios in accordance with each
Portfolio's stated investment objective and policies. As compensation for its
services to the Portfolios, the Investment Adviser receives monthly compensation
at an annual rate of a percentage of the average daily net assets of each
Portfolio. The table below lists each Portfolio and the annual rate of the
monthly compensation the Investment Adviser received for the fiscal year ended
December 31, 1996.
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<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(2) 0.80%
Global 0.80% Aggressive Growth 0.80%
Money Market 0.40% (prior to 5/1/96, Growth & Income(3) 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%(1) Global Sector 1.10%(4)
U.S. Equity 0.80%(1)
<FN>
- --------------
(1) No advisory fees were paid by these Portfolios in 1996 because they 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.
(4) Subject to shareholder approval, which will be sought on or about June 16,
1997, the Investment Advisory Fee will be reduced to 0.80% of average daily
net assets.
</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.
EXPENSE ACTUAL
PORTFOLIO LIMIT EXPENSES REIMBURSEMENT
Growth 1.00% 0.88% NONE
Bond 0.70% 0.64% NONE
Global 1.00% 0.99% NONE
Money Market 0.70% 0.52% NONE
Short-to-Intermediate Government 1.00% 0.76% NONE
Balanced 1.00% 0.97% NONE
Emerging Growth 1.00% 0.94% NONE
Strategic Total Return(3) 1.00% 0.91% NONE
Aggressive Growth 1.00% 0.98% NONE
Growth & Income(4) 1.00% 1.00% NONE
Tactical Asset Allocation 1.00% 0.90% NONE
C.A.S.E. Growth 1.00% 1.64% 73,269
Value Equity(1) 1.00% 1.03% 13,672
International Equity(2) 1.50% N/A NONE
U.S. Equity(2) 1.30% N/A NONE
- --------------
(1) This Portfolio commenced operations May 1, 1996.
(2) These Portfolios had not commenced operations as of December 31, 1996.
(3) Prior to May 1, 1997, this Portfolio was named the Equity-Income Portfolio.
(4) Prior to May 1, 1997, this Portfolio was named the Utility Portfolio.
In addition to the Investment Adviser's responsibilities discussed above, the
Investment Adviser's advisory agreement with the Fund (the "Advisory Agreement")
contemplates that the Investment Adviser, in connection with the performance of
its responsibilities under the Advisory Agreement, will enter into sub-advisory
agreements ("Sub-Advisory-Agreements") with Sub-Advisers to provide each
Portfolio with portfolio management. Under current law, every Sub-Advisory
Agreement must be submitted to and approved by shareholders of a Portfolio
before the Sub-Adviser can provide investment advice to that Portfolio. For
example, if a new Sub-Adviser were retained, shareholders would be required to
approve the Sub-Advisory agreement with that Sub-Adviser. Similarly, if a
Sub-Advisory Agreement currently in effect were amended in any material respect,
such amendment would generally be deemed to result in a new contract for which
shareholder approval would also
42
<PAGE>
be required. Moreover, in most instances when there is a change of control of a
Sub-Adviser, shareholder approval is required.
The Fund's Board of Directors has determined that shareholders of each Portfolio
have, in effect, elected to have the Investment Adviser select one or more Sub-
Advisers best suited to achieve the Portfolio's investment objectives. The Board
believes that part of a shareholder's investment decision is a determination to
have those selections made by the Investment Adviser, a professional management
organization with personnel having substantial experience in making such
evaluations, selections and terminations.
Under applicable law, the Fund is not generally required to hold annual
shareholders' meetings, and does not generally hold such meetings, unless
legally required to do so, in order to avoid the attendant costs. The Fund is
currently required to call a meeting of shareholders of a Portfolio whenever it
decides to employ new or additional Sub-Advisers, or to approve a new
Sub-Advisory Agreement after an "assignment," or due to a material change in
Sub-Advisory Agreement terms, with respect to such Portfolio. Given the nature
of the Fund's operations and shareholders' reasons for investing in various of
the Portfolios, such expenses are considered to provide little if any benefit to
shareholders. For these reasons, the Fund and the Investment Adviser have
applied to the SEC for an exemption from the provisions of the 1940 Act to
permit the Fund and the Investment Adviser, subject to certain conditions, to
enter into, materially amend, and terminate, and to permit Sub-Advisers to act
pursuant to, Sub-Advisory Agreements without shareholder approval (the "Proposed
Sub-Advisory Arrangement").
If the SEC exemption is granted, certain conditions would apply. The conditions
are intended to ensure that shareholders receive adequate disclosure about the
Sub-Advisers or a decision by the Investment Adviser and the Fund's Board of
Directors to appoint a new Sub-Adviser or to change materially the terms of a
Sub-Advisory Agreement. In addition, before a Portfolio could rely on the
exemption, the Proposed Sub-Advisory Arrangement must be approved by a majority
of the outstanding voting shares of the Portfolio. Shareholders of the Emerging
Growth Portfolio, Global Sector Portfolio, US Sector Portfolio and Foreign
Sector Portfolio will be asked in the near future to approve the Proposed Sub-
Advisory Arrangement, and the Fund's Board of Directors and the Investment
Adviser intend to ask shareholders of the other Portfolios from time to time to
approve the Proposed Sub-Advisory Arrangement.
/diamond/DISTRIBUTION AND SERVICE PLANS
DISTRIBUTION PLAN AND DISTRIBUTION AGREEMENT
Effective January 1, 1997, the Fund adopted a Plan of Distribution pursuant to
Rule 12b-1 under the 1940 Act ("Distribution Plan") and pursuant to the Plan,
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 include, but not
necessarily be limited to, the following: costs 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
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<PAGE>
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 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 WRL, to furnish the Fund with administrative services to assist
the Fund in carrying out certain of its functions and operations. Under this
Agreement, WRL Services shall furnish to each Portfolio, subject to the overall
supervision of the 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. Prior to January 1,
1997, WRL 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.
/diamonds/
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. 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.
/diamonds/
J.P. MORGAN INVESTMENT MANAGEMENT INC.
J. P. Morgan Investment Management Inc. ("J.P. Morgan Investment"), located at
522 Fifth Avenue, New York, NY
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<PAGE>
10036, has served as the Sub-Adviser to the Money Market Portfolio since May 1,
1996. J. P. Morgan Investment is a wholly-owned subsidiary of J.P. Morgan & Co.
Incorporated. J.P. Morgan Investment provides investment management and related
services for corporate, public, and union employee benefit funds, foundations,
endowments, insurance companies and government agencies.
/diamond/PORTFOLIO MANAGER:
ROBERT R. JOHNSON serves as Portfolio Manager of the Money Market Portfolio. Mr.
Johnson is responsible for several short term fixed income portfolios and the
business development of short term fixed income products. Mr. Johnson is a Vice
President of J.P. Morgan Investment. He is also a member of the Fixed Income
Peer Review Committee. Prior to joining J.P. Morgan Investment in 1988, he
founded and managed R.R. Johnson Associates, merchant bankers. He also held
senior positions with the Bank of Montreal and U.S. Steel. He is a graduate of
Dartmouth College and has done graduate work at both Wayne State and Duquesne
Universities.
/diamonds/
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, Indianapolis 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.
/diamonds/
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 in mid-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.
/diamonds/
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.
/diamonds/
45
<PAGE>
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 March 31, 1997, Alger Management had
approximately $6.4 billion in assets under management for investment companies
and private accounts.
/diamond/PORTFOLIO MANAGERS:
DAVID D. ALGER, SEILAI KHOO AND RONALD TARTARO are primarily responsible for the
day-to-day management of the Aggressive Growth Portfolio. Mr. Alger has been
employed by Alger Management as Executive Vice President and Director of
Research since 1971 and as President since 1995. Ms. Khoo has been employed by
Alger Management as a senior research analyst since 1989 and as a Senior Vice
President since 1995. Mr. Tartaro has been employed by Alger Management as a
senior research analyst since 1990 and as a Senior Vice President since 1995.
Mr. David Alger has served as Portfolio Manager of the Aggressive Growth
Portfolio since its inception. Ms. Khoo and Mr. Tartaro have each served as
Co-Portfolio Managers of the Aggressive Growth Portfolio since May 1, 1996. Mr.
Alger, Ms. Khoo and Mr. Tartaro also serve as portfolio managers for other
mutual funds and investment accounts managed by Alger Management.
/diamonds/
FEDERATED INVESTMENT COUNSELING
Federated Investment Counseling ("Federated"), located at Federated Investors
Tower, Pittsburgh, PA 15222-3779, serves as the Sub-Adviser to the Growth &
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 Growth & Income Portfolio.
Ms. Duessel served as Co-Portfolio Manager of the Growth & Income Portfolio from
July, 1996 until February, 1997. 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.
/diamonds/
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.
/diamonds/
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
46
<PAGE>
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.
/diamonds/
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).
/diamonds/
MERIDIAN INVESTMENT
MANAGEMENT CORPORATION
Meridian Investment Management Corporation ("Meridian"), located at 12835 East
Arapahoe Road, Tower II, Penthouse, 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 March 1, 1997, had aggregate assets of approximately $700
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.
/diamonds/
SCOTTISH EQUITABLE INVESTMENT
MANAGEMENT LIMITED
Scottish Equitable Investment Management Limited ("Scottish Equitable"), located
at Edinburgh Park,
47
<PAGE>
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 $21 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 Portfolio Manager of the International Equity
Portfolio since its inception. Ms. Clark is the Manager of Scottish Equitable's
Asset Allocation group and has served both as a Portfolio Manager and Investment
Analyst. Ms. Clark joined Scottish Equitable in 1983 directly from Glasgow
University where she earned a MA (Honors) in Political Economy; and she also
holds the Securities Industry Diploma.
GE INVESTMENT MANAGEMENT INCORPORATED
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 $56.9 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.
48
<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(1)
Balanced 0.40%, less 50% of amount of excess expenses(1)
Emerging Growth 0.40%, less 50% of amount of excess expenses(1)
Strategic Total Return 0.40%
Aggressive Growth 0.40%
Tactical Asset Allocation 0.40%, less 50% of amount of excess expenses(1)
C.A.S.E. Growth 0.40%
Growth & 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(1)
Global Sector 0.30% of first $100 million in average
daily net assets and 0.35% of assets
in excess of $100 million(3)
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(2)
U.S. Equity 0.40%, less 50% of amount of excess expenses(2)
<FN>
- --------------
(1) Excess expenses are those expenses paid by the Investment Adviser on behalf
of a Portfolio pursuant to any expense limitation.
(2) 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.
(3) Prior to March 1, 1997, INVESCO Global Asset Management Limited ("INVESCO")
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 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. Subject to
shareholder approval, which will be sought on or about June 16, 1997,
Meridian will receive monthly compensation from the Investment Adviser at an
annual rate of 0.40% of average daily net assets.
</FN>
</TABLE>
/diamond/
49
<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 ISI and AEGON USA Securities, Inc., affiliated brokers of the Investment
Adviser and AEGON Management.
The other Sub-Advisers may also from time to time place portfolio brokerage with
their affiliates in accordance with SEC regulations.
OTHER INFORMATION
/diamond/JOINT TRADING ACCOUNTS
Subject to approval by the Fund's Board, the Growth, Bond and Global Portfolios
may transfer uninvested cash balances on a daily basis into certain joint
trading accounts. Assets in the joint trading accounts are invested in money
market instruments. All other participants in the joint trading accounts will be
other clients, including registered mutual fund clients, of Janus Capital or its
affiliates. The Growth, Bond and Global Portfolios will participate in the joint
trading accounts only to the extent that the investments of the joint trading
accounts are consistent with each Portfolio's investment policies and
restrictions. Janus Capital anticipates that the investment made by a Portfolio
through the joint trading accounts will be at least as advantageous to that
Portfolio as if the Portfolio had made such investment directly. (See
"Management of the Fund - The Sub-Advisers" in the SAI.)
/diamond/PERSONAL SECURITIES TRANSACTIONS
The Fund permits "Access Persons" as defined by Rule 17j-1 under the 1940 Act to
engage in personal securities transactions, subject to the terms of the Code of
Ethics and Insider Trading Policy ("Ethics Policy") that has been adopted by the
Fund's Board. Access Persons are required to follow the guidelines established
by this Ethics Policy in connection with all personal securities transactions
and are subject to certain prohibitions on personal trading. The Fund's
Sub-Advisers, pursuant to Rule 17j-1 and other applicable laws, and pursuant to
the terms of the Ethics Policy, must adopt and enforce their own Code of Ethics
and Insider Trading Policies appropriate to their operations. Each Sub-Adviser
is required to report to the Fund's Board on a quarterly basis with respect to
the administration and enforcement of such Ethics Policy, including any
violations thereof which may potentially affect the Fund.
/diamond/PURCHASE AND REDEMPTION OF SHARES
Shares of the Portfolios are sold and redeemed at their net asset value next
determined after receipt of a purchase order or notice of redemption in proper
form. Shares are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain sales and other charges may
apply to the Policies and the Annuity Contracts. Such charges are described in
the respective prospectuses for the Policies and the Annuity Contracts.
/diamond/VALUATION OF SHARES
Each Portfolio's net asset value per share is ordinarily determined, once daily,
as of the close of the regular session of business on the New York Stock
Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day the
Exchange is open.
50
<PAGE>
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 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.
51
<PAGE>
/diamond/CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, MA 02111, acts as
Custodian and Dividend Disbursing Agent of the Portfolios' assets.
/diamond/ADDITIONAL INFORMATION
The telephone number or the address of the Fund appearing on the first page of
this Prospectus should be used for requests for additional information.
DISTRIBUTION AND TAXES
/diamond/DIVIDENDS AND DISTRIBUTIONS
Each Portfolio intends to distribute substantially all of its net investment
income, if any. Dividends from investment income of a Portfolio normally are
declared daily and reinvested monthly in additional shares of the Portfolio at
net asset value. Distributions of net realized capital gains from security
transactions normally are declared and paid in additional shares of the
Portfolio at the end of the fiscal year.
/diamond/TAXES
Each Portfolio has qualified and expects to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended ("Code"). As qualified under Subchapter M, a Portfolio is not subject to
Federal income tax on that part of its investment company taxable income that it
distributes to its Policyholders. Taxable income consists generally of net
investment income, net gains from certain foreign currency transactions, and net
short-term capital gain, if any and any net capital gain (the excess of net
long-term capital gain over net short-term capital loss. It is each Portfolio's
intention to distribute all such income and gains.
Shares of each Portfolio are offered only to the Separate Accounts, which are
insurance company separate accounts that fund the Policies and the Annuity
Contracts. Under the Code, an insurance company pays no tax with respect to
income of a qualifying separate account when the income is properly allocable to
the value of eligible variable annuity or variable life insurance contracts. For
a discussion of the taxation of life insurance companies and the Separate
Accounts, as well as the tax treatment of the Policies and Annuity Contracts and
the holders thereof, see "Federal Tax Matters" included in the respective
prospectuses for the Policies and the Annuity Contracts.
Section 817(h) of the Code and the regulations thereunder impose
"diversification" requirements on each Portfolio. Each Portfolio intends to
comply with the diversification requirements. These requirements are in addition
to the diversification requirements imposed on each Portfolio by Subchapter M
and the 1940 Act. The 817(h) requirements place certain limitations on the
assets of each separate account that may be invested in securities of a single
issuer. These limitations apply to each Portfolio's assets that may be invested
in securities of a single issuer. Specifically, the regulations provide that,
except as permitted by "safe harbor", described below, as of the end of each
calendar quarter or within 30 days thereafter, no more than 55% of the
Portfolio's total assets may be represented by any one investment, no more than
70% by any two investments, no more than 80% by any three investments, and no
more than 90% by any four investments.
Section 817(h) provides, as a safe harbor, that a separate account will be
treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities, and
securities of other regulated investment companies. For purposes of section
817(h), all securities of the same issuer, all interests in the same real
property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or instrumentality
is treated as a separate issuer, while the securities of a particular foreign
government and its agencies, instrumentalities, and political subdivisions all
will be considered securities issued by the same issuer. Failure of a Portfolio
to satisfy the section 817(h) requirements would result in taxation of the
Separate Accounts, the insurance companies, the Policies and the Annuity
Contracts, and tax consequences to the holders thereof, other than as described
in the respective prospectuses for the Policies and the Annuity Contracts.
The foregoing is only a summary of some of the important Federal income tax
considerations generally affecting a Portfolio and its Policyholders; see the
SAI for a more detailed discussion. Prospective investors are urged to consult
their tax advisors.
52
<PAGE>
APPENDIX A
BRIEF EXPLANATION OF RATING CATEGORIES
<TABLE>
<CAPTION>
BOND RATING EXPLANATION
------------ ------------
<S> <C> <C>
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, and 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.
</TABLE>
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.
<TABLE>
<CAPTION>
<S> <C> <C>
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.
</TABLE>
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
<TABLE>
<S> <C> <C>
DISTRIBUTOR: INDEPENDENT ACCOUNTANTS: TRANSFER AGENT:
- ---------------------- ----------------------- ----------------------------
InterSecurities, Inc. Price Waterhouse LLP WRL Investment Services, Inc.
201 Highland Avenue 1055 Broadway 201 Highland Avenue
Largo, FL 33770-2597 Kansas City, MO 64105 Largo, FL 33770-2597
</TABLE>
<TABLE>
<CAPTION>
SUB-ADVISERS:
<S> <C>
JANUS CAPITAL CORPORATION AEGON USA INVESTMENT MANAGEMENT, INC.
100 Fillmore Street 4333 Edgewood Road, N.E.
Denver, CO 80206 Cedar Rapids, IA 52499
LUTHER KING CAPITAL MANAGEMENT CORPORATION DEAN INVESTMENT ASSOCIATES
301 Commerce Street 2480 Kettering Tower
Fort Worth, TX 76102 Dayton, OH 45423-2480
FEDERATED INVESTMENT COUNSELING FRED ALGER MANAGEMENT, INC.
Federated Investors Tower 75 Maiden Lane
Pittsburgh, PA 15222-3779 New York, NY 10038
C.A.S.E. MANAGEMENT, INC. VAN KAMPEN AMERICAN CAPITAL ASSET
2255 Glades Road MANAGEMENT, INC.
Suite 221-A One Parkview Plaza
Boca Raton, FL 33431 Oakbrook Terrace, IL 60181
J.P. MORGAN INVESTMENT MANAGEMENT INC. NWQ INVESTMENT MANAGEMENT COMPANY, INC.
522 Fifth Avenue 655 South Hope Street
New York, NY 10036 11th Floor
Los Angeles, CA 90017
MERIDIAN INVESTMENT MANAGEMENT CORPORATION
12835 East Arapahoe Road GE INVESTMENT MANAGEMENT INCORPORATED
Tower II, Penthouse 3003 Summer Street
Englewood, CO 80112 Stamford, CT 06905
</TABLE>
SCOTTISH EQUITABLE INVESTMENT MANAGEMENT LIMITED
Edinburgh Park
Edinburgh EH12 9SE, Scotland
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
GROWTH & 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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE
OF TO
ADDITIONAL INFORMATION PAGE IN PROSPECTUS
---------------------- ------------------
<S> <C> <C>
INVESTMENT OBJECTIVES AND POLICIES 1 9
Investment Restrictions 1 29
Aggressive Growth Portfolio 1 16
Emerging Growth Portfolio 2 16
International Equity Portfolio 3 17
Global Portfolio 5 18
Growth, C.A.S.E. Growth and Bond Portfolios 6 19;27
U.S. Equity Portfolio 7 20
Value Equity Portfolio 9 22
Global Sector Portfolio 10 22
Tactical Asset Allocation Portfolio 11 23
Strategic Total Return Portfolio 12 24
Growth & Income Portfolio 13 25
Balanced Portfolio 15 26
Short-to-Intermediate Government Portfolio 16 27
Money Market Portfolio 17 28
Investment Policies 18 29
Lending 18 30
Borrowing 19 30
Foreign Securities 19 36
Investment Funds (International Equity Portfolio) 19 N/A
Repurchase and Reverse Repurchase
Agreements 20 34
U.S. Government Securities 20 35
Non-Investment Grade Debt Securities 20 40
Convertible Securities 21 33
Investments in Futures, Options and Other
Derivative Instruments 21 37
Zero Coupon, Pay-In-Kind and Step Coupon
Securities 32 40
Warrants and Rights 33 41
Mortgage-Backed Securities 33 39
Asset-Backed Securities 34 39
Pass-Through Securities 34 39
Other Income Producing Securities 35 34
Illiquid and Restricted/144A Securities 35 37
Other Investment Companies 36 31
Quality and Diversification Requirements (Money
Market Portfolio) 36 N/A
Bank and Thrift Obligations 37 35
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE
OF TO
ADDITIONAL INFORMATION PAGE IN PROSPECTUS
---------------------- ------------------
<S> <C> <C>
Management of the Fund 38 41
Directors and Officers 38 41
The Investment Adviser 40 41
The Sub-Advisers 43 44
Portfolio Transactions and Brokerage 46 50
Portfolio Turnover 46 29
Placement of Portfolio Brokerage 47 50
Purchase and Redemption of Shares 50 50
Determination of Offering Price 50 50
Net Asset Valuation 50 51
Calculation of Performance Related
Information 50 11
Total Return 50 12
Yield Quotations 51 12
Yield Quotations - Money Market Portfolio 51 12
Taxes 52 52
Capital Stock of the Fund 54 51
Registration Statement 54 N/A
Financial Statements 54 51
Other Information 54 52
Appendix A - Description of Portfolio
Securities A-1 31
</TABLE>
ii
<PAGE>
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, Growth & 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 ("WRL") and to separate accounts of certain of its
affiliated life insurance companies (collectively, the "Separate Accounts") to
fund the benefits under certain variable life insurance policies (the
"Policies") and variable annuity contracts (the "Annuity Contracts").
As indicated in the Prospectus, 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. State
insurance laws and regulations may impose additional limitations on the Fund's
investments, including the Fund's ability to borrow, lend and use options,
futures and other derivative instruments. In addition, such laws and regulations
may require that a Portfolio's investments meet additional diversification or
other requirements.
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.
1
<PAGE>
Furthermore, the Portfolio has adopted the following non-fundamental investment
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or Policyholder approval:
(A) The Portfolio 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 (E) 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 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.
(E) 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.
(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 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 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.
(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 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.
(G) The Portfolio may not invest in companies for the purpose of
exercising control or management.
(H) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.
(I) The Portfolio may not invest in securities of foreign issuers
denominated in foreign currency and not publicly traded in the United States if
at the time of acquisition more than 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 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).
3
<PAGE>
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 331/3% of
the value of the Portfolio's total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that exceed 331/3% 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
331/3% 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.
(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.
4
<PAGE>
(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 Securities and Exchange Commission ("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 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
5
<PAGE>
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 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.
(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.
/DIAMOND/ GROWTH PORTFOLIO, C.A.S.E. GROWTH PORTFOLIO AND BOND PORTFOLIO
A Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than cash items and "Government securities"
as defined in the 1940 Act) if immediately after and as a result of such
purchase (a) the value of the holdings of the Portfolio in the securities of
such issuer exceeds 5% of the value of the Portfolio's total assets, or (b) the
Portfolio owns more than 10% of the outstanding voting securities of any one
class of securities of such issuer.
2. Invest more than 25% (15% for C.A.S.E. Growth Portfolio) of the value
of the Portfolio's assets in any particular industry (other than Government
securities).
3. Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this restriction
shall not prevent the Portfolio from purchasing or selling options, futures
contracts, caps, floors and other derivative instruments, engaging in swap
transactions or investing in securities or other instruments backed by physical
commodities).
4. Invest directly in real estate or interests in real estate, including
limited partnership interests; however, the Portfolio may own debt or equity
securities issued by companies engaged in those businesses.
5. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of portfolio securities of the Portfolio.
6. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation does
not apply to purchases of commercial paper, debt securities or to repurchase
agreements).
Furthermore, the Portfolios have adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:
6
<PAGE>
(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 more than 25% of its net assets at the
time of purchase in the securities of foreign issuers and obligors.
(I) A Portfolio may not invest in companies for the purpose of exercising
control or management.
(J) 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
7
<PAGE>
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
331/3% 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.
Furthermore, the Portfolio has adopted the following non-fundamental investment
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or Policyholder approval:
(A) The Portfolio may not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount of the securities
sold short.
(B) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for clearance of
transactions. (For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with futures contracts, financial
futures contracts or related options, and options on securities, options on
securities indexes and options on currencies will not be deemed to be a purchase
of securities on margin by the Portfolio.)
(C) The Portfolio may not purchase securities of other investment
companies, other than a security acquired in connection with a merger,
consolidation, acquisition, reorganization or offer of exchange and except as
otherwise permitted under the 1940 Act. Investments by the Portfolio in GEI
Short-Term Investment Fund, a private investment fund advised by 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
8
<PAGE>
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 SEC thereunder.
4. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments.
5. Purchase or sell real estate or real estate limited partnerships (but
this shall not prevent the Portfolio from investing in securities or other
instruments backed by real estate, including mortgage-backed securities, or
securities of companies engaged in the real estate business).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
Furthermore, the Portfolio has adopted the following non-fundamental investment
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or Policyholder approval:
(A) The Portfolio may not purchase on margin or sell short.
(B) The Portfolio may not invest more than an aggregate of 15% of the net
assets of the Portfolio, determined at the time of investment, in illiquid
securities, subject to legal or contractual restrictions on resale or securities
for which there are no readily available markets.
(C) The Portfolio may not invest in companies for the purpose of
exercising control or management.
9
<PAGE>
(D) 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.
(E) 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.
(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. 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.
(G) 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 331/3% of the
value of its total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that come to exceed 331/3% 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
331/3% limitation. This restriction shall not prohibit deposits of assets to
margin or guarantee positions in futures, options, swaps or forward contracts,
or the segregation of assets in connection with such contracts.
3. Invest directly in real estate or interests in real estate; however,
the Portfolio may own debt or equity securities issued by companies engaged in
those businesses.
4. Purchase or sell physical commodities other than gold or foreign
currencies unless acquired as a result of ownership of securities (but this
shall not prevent the Portfolio from purchasing or selling options, futures,
swaps and forward contracts or from investing in securities or other instruments
backed by physical commodities).
5. Lend any security or make any other loan if, as a result, more than
331/3% 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).
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
10
<PAGE>
Portfolio would exceed the market value of the total assets of the Portfolio.
(B) The Portfolio may not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount to the securities
sold short without the payment of any additional consideration therefor, and
provided that transactions in options, swaps and forward futures contracts are
not deemed to constitute selling securities short.
(C) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the clearance
of transactions, and provided that margin payments and other deposits in
connection with transactions in options, futures, swaps and forward contracts
shall not be deemed to constitute purchasing securities on margin.
(D) The Portfolio may not (i) purchase securities of closed-end
investment companies, except in the open market where no commission except the
ordinary broker's commission is paid, or (ii) purchase or retain securities
issued by other open-end investment companies. Limitations (i) and (ii) do not
apply to money market funds, funds that are the only practical means, or one of
the few practical means, of investing in a particular emerging country, or to
securities received as dividends, through offers of exchange, or as a result of
a reorganization, consolidation, or merger.
(E) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net asset value, provided that this limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or placed in
a segregated account in connection with such contracts.
(F) The Portfolio may not purchase 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 Sub-Adviser acting pursuant to authority delegated by the Board
of Directors, may determine that a readily available market exists for
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933 Act, or any successor to such rule. According to the determination, such
securities would not be subject to the foregoing limitation.
(G) 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 (F) above, the Fund's Board of Directors
has delegated to the Sub-Adviser the authority to determine that a liquid market
exists for securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 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 Sub-Adviser will consider the following factors,
among others, in making this determination: (1) the frequency of trades and
quotes for the security; (2) the number of dealers willing to purchase or sell
the security and the number of other potential purchasers; (3) the willingness
of dealers to undertake to make a market in the security; and (4) the nature of
the security and the nature of marketplace trades (E.G., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer).
/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
11
<PAGE>
engaged in the same industry. Utilities will be divided according to their
services; for example, gas, gas transmission, electric and telephone, and each
will be considered a separate industry for purposes of this restriction. In
addition, there shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities, or of
certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments.
4. Purchase or sell real estate (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real estate,
including mortgage-backed securities, or securities of companies engaged in the
real estate business).
5. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation does
not apply to purchases of commercial paper or debt securities).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
Furthermore, the Portfolio has adopted the following non-fundamental investment
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or Policyholder approval:
(A) The Portfolio 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 in companies for the purpose of
exercising control or management.
(F) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.
(G) 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. 19.
(H) 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
12
<PAGE>
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.
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 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.
(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 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.
(G) The Portfolio may not invest in companies for the purpose of
exercising control or management.
(H) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.
(I) The Portfolio may not invest in securities of foreign issuers
denominated in foreign currency and not publicly traded in the United States if
at the time of acquisition more than 10% of the Portfolio's total assets would
be invested in such securities.
/DIAMOND/ GROWTH & 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
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<PAGE>
defined in the 1940 Act) if immediately after and as a result of such purchase
(a) the value of the holdings of the Portfolio in the securities of such issuer
exceeds 5% of the value of the Portfolio's total assets, or (b) the Portfolio
owns more than 10% of the outstanding voting securities of any one class of
securities of such issuer.
2. Purchase or sell commodities. However, the Portfolio may purchase put
options on portfolio securities and on financial futures contracts. In addition,
the Portfolio reserves the right to hedge the Portfolio by entering into
financial futures contracts and to sell calls on financial futures contracts.
3. Purchase or sell real estate, although it may invest in the securities
of companies whose business involves the purchase or sale of real estate or in
securities which are secured by real estate or interests in real estate.
4. Lend any of its assets except portfolio securities up to one-third of
the value of its total assets. This shall not prevent the purchase or holding of
corporate bonds, debentures, notes, certificates of indebtedness or other debt
securities of an issuer, repurchase agreements, or other transactions which are
permitted by the Portfolio's investment objective and policies.
5. Underwrite any issue of securities, except as it may be deemed to be
an underwriter under the 1933 Act in connection with the sale of restricted
securities which the Portfolio may purchase pursuant to its investment objective
and policies.
Furthermore, the Portfolio has adopted the following non-fundamental investment
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or Policyholder approval:
(A) The Portfolio will not sell securities short unless: (i) during the
time the short position is open, it owns an equal amount of the securities sold
or securities readily and freely convertible into or exchangeable, without
payment of additional consideration, for securities of the same issue as, and
equal in amount to, the securities sold short; and (ii) not more than 10% of the
Portfolio's net assets (taken at current value) is held as collateral for such
sales at any one time.
(B) The Portfolio will not purchase securities on margin, other than in
connection with the purchase of put options on financial futures contracts, but
may obtain such short-term credits as may be necessary for the clearance of
transactions.
(C) The Portfolio will not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 Act or any securities for
which the Board of Directors or the Sub-Adviser has made a determination of
liquidity, as permitted under the 1940 Act.
(D) The Portfolio will not 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.
(E) 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.
(F) 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.
(G) The Portfolio will not purchase the securities of any issuer (other
than the U.S.
14
<PAGE>
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.
(H) The Portfolio will not write call options on securities unless the
securities are held in the Portfolio's portfolio or unless the Portfolio is
entitled to them in deliverable form without further payment or after
segregating cash in the amount of any further payment. The Portfolio will not
purchase put options on securities unless the securities are held in the
Portfolio's portfolio.
/DIAMOND/ BALANCED PORTFOLIO
The Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in the
1940 Act) if immediately after and as a result of such purchase (a) the value of
the holdings of the Portfolio in the securities of such issuer exceeds 5% of the
value of the Portfolio's total assets, or (b) the Portfolio owns more than 10%
of the outstanding voting securities of such issuer.
2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services, for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction. In addition, there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Portfolio from purchasing or selling options, futures, swaps and forward
contracts or from investing in securities or other instruments backed by
physical commodities).
4. Purchase or sell real estate (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real estate,
including mortgage-backed securities, or securities of companies engaged in the
real estate business).
5. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation does
not apply to purchase of commercial paper or debt securities).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
Furthermore, the Portfolio has adopted the following non-fundamental investment
restrictions 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 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.
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<PAGE>
(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 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.
(G) The Portfolio may not invest in companies for the purpose of
exercising control or management.
(H) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.
(I) The Portfolio may not invest in securities of foreign issuers
denominated in foreign currency and not publicly traded in the United States if
at the time of acquisition more than 25% of the Portfolio's total assets would
be invested in such securities. See "Foreign Securities", p. 19.
/DIAMOND/ SHORT-TO-INTERMEDIATE
GOVERNMENT PORTFOLIO
The Portfolio may not, as a matter of fundamental policy:
1. (a) With respect to 75% of the Portfolio's assets, invest in the
securities (other than Government securities as defined in the 1940 Act) of any
one issuer if immediately thereafter, more than 5% of the Portfolio's total
assets would be invested in securities of that issuer; or (b) with respect to
100% of the Portfolio's assets, own more than either (i) 10% in principal amount
of the outstanding debt securities of an issuer, or (ii) 10% of the outstanding
voting securities of an issuer, except that such restrictions shall not apply to
Government securities, bank money market instruments or bank repurchase
agreements.
2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services; for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction, provided that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities unless acquired as a result of
ownership of 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.
16
<PAGE>
(E) The Portfolio may borrow money only for temporary or emergency
purposes (not for leveraging or investment) in an amount not exceeding 25% of
the value of the Portfolio's total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that exceed 25% of the value
of the Portfolio's total assets by reason of a decline in net assets will be
reduced within three business days to the extent necessary to comply with the
25% limitation. This policy shall not prohibit reverse repurchase agreements.
(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 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.
(G) The Portfolio may not invest in companies for the purpose of
exercising control or management.
(H) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.
(I) The Portfolio may not invest in securities of foreign issuers
denominated in foreign currency and not publicly traded in the United States if
at the time of acquisition more than 10% of the Portfolio's total assets would
be invested in such securities. See "Foreign Securities," p. 19.
/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
17
<PAGE>
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 in companies for the purpose of
exercising control or management.
(H) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.
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.
/DIAMOND/ 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
18
<PAGE>
Investment Policies And Restrictions - Borrowing" in the Fund's Prospectus.)
/DIAMOND/ BORROWING
Subject to its investment restrictions, each Portfolio may borrow money from
banks for temporary or emergency purposes. (The Aggressive Growth Portfolio may
also borrow for investment purposes.) For a complete discussion of Portfolio
borrowing, see "Other Investment Policies And Restrictions - Borrowing" in the
Fund's Prospectus.
/DIAMOND/ FOREIGN SECURITIES
Subject to the limitations set forth above, a Portfolio may purchase certain
foreign securities. Investments in foreign securities, particularly those of
non-governmental issuers, involve considerations which are not ordinarily
associated with investing in domestic issuers. These considerations include
changes in currency rates, currency exchange control regulations, the
possibility of expropriation, the unavailability of financial information or the
difficulty of interpreting financial information prepared under foreign
accounting standards, less liquidity and more volatility in foreign securities
markets, the impact of political, social or diplomatic developments, and the
difficulty of assessing economic trends in foreign countries. It is possible
that market quotations for foreign securities will not be readily available. In
such event, these securities shall be valued at fair market value as determined
in good faith by the Sub-Adviser for each Portfolio under the supervision of the
Board of 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.
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<PAGE>
/DIAMOND/ REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
Subject to a Portfolio's investment restrictions and Policies, a Portfolio may
enter into repurchase or reverse repurchase agreements.
In a repurchase agreement, a Portfolio purchases a security and simultaneously
commits to resell that security to the seller at an agreed upon price on an
agreed upon date within a number of days (usually not more than seven) from the
date of purchase. The resale price reflects the purchase price plus an agreed
upon incremental amount that is unrelated to the coupon rate or maturity of the
purchased security. A repurchase agreement involves the obligation of the seller
to pay the agreed upon price, which obligation is in effect secured by the value
(at least equal to the amount of the agreed upon resale price and
marked-to-market daily) of the underlying security. A Portfolio may engage in a
repurchase agreement with respect to any security in which it is authorized to
invest. While it does not presently appear possible to eliminate all risks from
these transactions (particularly the possibility of a decline in the market
value of the underlying securities, as well as delays and costs to a Portfolio
in connection with bankruptcy proceedings), it is the policy of the Portfolio to
limit repurchase agreements to those parties whose creditworthiness has been
reviewed and found satisfactory by a Portfolio's Sub-Adviser. (See "Repurchase
and Reverse Repurchase Agreements", in 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 ("S&P") (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
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<PAGE>
involve greater risk of default or price declines due to changes in the issuer's
creditworthiness than investment-grade debt securities. Because the market for
lower-grade debt securities may be thinner and less active than for investment
grade debt securities, there may be market price volatility for these securities
and limited liquidity in the resale market. Market prices for lower- grade debt
securities may decline significantly in periods of general economic difficulty
or rising interest rates. Through portfolio diversification and credit analysis,
investment risk can be reduced, although there can be no assurance that losses
will not occur.
The quality limitation set forth in each Portfolio's investment policies is
determined immediately after the Portfolio's acquisition of a given security.
Accordingly, any later change in ratings will not be considered when determining
whether an investment complies with the Portfolio's investment policies.
/DIAMOND/ CONVERTIBLE SECURITIES
Subject to any investment limitations set forth in a Portfolio's policies or
investment restrictions, a Portfolio may invest in convertible securities.
Convertible securities may include corporate notes or preferred stock, but
ordinarily are a long-term debt obligation of the issuer convertible at a stated
exchange rate into common stock of the issuer. As with all debt securities, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, to increase as interest rates decline. Convertible
securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. However, when the market price of
the common stock underlying a convertible security exceeds the conversion 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 (Dividend Enhanced Convertible Stock, or Debt Exchangeable for Common Stock
when-issued as a debt security) 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 stock at the time of
maturity. DECS contain two call options at different strike prices. The DECS
participate with the common stock up to the first call price. They are
effectively capped at that point unless the common stock rises above a second
price point, at which time they participate with unlimited upside potential.
PERCS (Preferred Equity Redeemable Stock, into an equity issue that pays a high
cash dividend, has a cap price and mandatory conversion to common stock at
maturity) offer a substantial 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
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markets" by the Commodity Futures Trading Commission ("CFTC") and must be
executed through a futures commission merchant ("FCM"), or brokerage firm, which
is a member of the relevant contract market. Through their clearing
corporations, the exchanges guarantee performance of the contracts as between
the clearing members of the exchange. Since all transactions in the futures
market are made through a member of, and are offset or fulfilled through a
clearinghouse associated with, the exchange on which the contracts are traded, a
Portfolio will incur brokerage fees when it buys or sells futures contracts.
When a Portfolio buys or sells a futures contract, it incurs a contractual
obligation to receive or deliver the underlying instrument (or a cash payment
based on the difference between the underlying instrument's closing price and
the price at which the contract was entered into) at a specified price on a
specified date. Transactions in futures contracts generally will not be made
other than to seek to hedge against potential changes in interest or currency
exchange rates or the prices of a security or a securities index which might
correlate with or otherwise adversely affect either the value of a Portfolio's
securities or the prices of securities which the Portfolio is considering buying
at a later date.
The buyer or seller of futures contracts is not required to deliver or pay for
the underlying instrument unless the contract is held until the delivery date.
However, both the buyer and seller are required to deposit "initial margin" for
the benefit of an FCM when the contract is entered into. Initial margin deposits
are equal to a percentage of the contract's value, as set by the exchange on
which the contract is traded, and may be maintained in cash or certain high-
grade liquid assets. If the value of either party's position declines, that
party will be required to make additional "variation margin" payments with an
FCM to settle the change in value on a daily basis. The party that has a gain
may be entitled to receive all or a portion of this amount. Initial and
variation margin payments are similar to good faith deposits or performance
bonds, unlike margin extended by a securities broker, and initial and variation
margin payments do not constitute purchasing securities on margin for purposes
of the Portfolio's investment limitations. In the event of the bankruptcy of an
FCM that holds margin on behalf of a Portfolio, the Portfolio may be entitled to
return of margin owed to the Portfolio only in proportion to the amount received
by the FCM's other customers. The Portfolio's Sub-Adviser will attempt to
minimize the risk by careful monitoring of the creditworthiness of the FCM's
with which the Portfolio does business and by depositing margin payments in a
segregated account with the custodian when practical or otherwise required by
law.
Although a Portfolio would hold cash and liquid assets in a segregated account
with a value sufficient to cover the Portfolio's open futures obligations, the
segregated assets would be 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
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take advantage of the potential rise in the value of equity securities without
buying them until the market has stabilized. At that time, the futures contracts
could be liquidated and the Portfolio could buy equity securities on the cash
market. To the extent a Portfolio enters into futures contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Portfolio's obligations with respect to futures contracts will consist of liquid
assets from its portfolio in an amount equal to the difference between the
contract price and the aggregate value of the initial and variation margin
payments made by the Portfolio with respect to the futures contracts.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial margin and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out futures contracts through offsetting
transactions which could distort the normal price relationship between the cash
and futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced and prices in the futures market
distorted. Third, from the point of view of speculators, the margin deposit
requirements in the futures market are less onerous than margin requirements in
the securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility of
the foregoing distortions, a correct forecast of general price trends by a
Portfolio's Sub-Adviser still may not result in a successful use of futures
contracts.
Futures contracts entail risks. Although each Portfolio's Sub-Adviser believes
that use of such contracts can benefit a Portfolio, if the Sub- Adviser's
investment judgment is incorrect, a Portfolio's overall performance could be
worse than if the Portfolio had not entered into futures contracts. For example,
if a Portfolio has attempted to hedge against the effects of a possible decrease
in prices of securities held by the Portfolio and prices increase instead, the
Portfolio may lose part or all of the benefit of the increased value of these
securities because of offsetting losses in the Portfolio's futures positions. In
addition, if the Portfolio has insufficient cash, it may have to sell securities
from its portfolio to meet daily variation margin requirements. Those sales may,
but will not necessarily, be at increased prices which reflect the rising market
and may occur at a time when the sales are disadvantageous to a Portfolio.
The prices of futures contracts depend primarily on the value of their
underlying instruments. Because there are a limited number of types of 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.
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Because futures contracts are generally settled within a day from the date they
are closed out, compared with longer settlement periods for some types of
securities, the futures markets can provide superior liquidity to the securities
markets. Nevertheless, there is no assurance a liquid secondary market will
exist for any particular futures contract at any particular time. In addition,
futures exchanges may establish daily price fluctuation limits for futures
contracts and may halt trading if a contract's price moves upward or downward
more than the limit in a given day. On volatile trading days when the price
fluctuation limit is reached, it may be impossible for a Portfolio to enter into
new positions or close out existing positions. If the secondary market for a
futures contract is not liquid because of price fluctuation limits or otherwise,
a Portfolio may not be able to promptly liquidate unfavorable positions and
potentially be required to continue to hold a futures position until the
delivery date, regardless of changes in its value. As a result, the Portfolio's
access to other assets held to cover its futures positions also could be
impaired.
Although futures contracts by their terms call for the delivery or acquisition
of the underlying commodities or a cash payment based on the value of the
underlying commodities, in most cases the contractual obligation is offset
before the delivery date of the contract by buying, in the case of a contractual
obligation to sell, or selling, in the case of a contractual obligation to buy,
an identical futures contract on a commodities exchange. Such a transaction
cancels the obligation to make or take delivery of the commodities.
Each Portfolio intends to comply with guidelines of eligibility for exclusion
from the definition of the term "commodity pool operator" with the CFTC and the
National Futures Association, which regulate trading in the futures markets.
Such guidelines presently require that to the extent that a Portfolio enters
into futures contracts or options on a futures position that are not for bona
fide hedging purposes (as defined by the CFTC), the aggregate initial margin and
premiums on these positions (excluding the amount by which options are
"in-the-money") may not exceed 5% of the Portfolio's net assets.
OPTIONS ON FUTURES CONTRACTS. A Portfolio may buy and write options on futures
contracts. An option on a futures contract gives the Portfolio the right (but
not the obligation) to buy or sell a futures contract at a specified price on or
before a specified date. The purchase and writing of options on futures
contracts is similar in some respects to the purchase and writing of options on
individual securities. See "Options on Securities" on page 27. 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
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futures may to some extent be reduced or increase by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is similar in some respect to
the purchase of protective put options on portfolio securities. For example, a
Portfolio may buy a put option on a futures contact to attempt to hedge the
Portfolio's securities against the risk of falling prices.
The amount of risk a Portfolio assumes when it buys an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the options bought.
FORWARD CONTRACTS. A Portfolio may enter into forward foreign currency exchange
contracts ("forward currency contracts") to attempt to minimize the risk to the
Portfolio from adverse changes in the relationship between the U.S. dollar and
other currencies. A forward currency contract is an obligation to buy or sell an
amount of a specified currency for an agreed price (which may be in U.S. dollars
or a foreign currency) at a future date which is individually negotiated between
currency traders and their customers. A Portfolio may invest in forward currency
contracts with stated contract values of up to the value of the Portfolio's
assets.
A Portfolio may exchange foreign currencies for U.S. dollars and for other
foreign currencies in the normal course of business and may buy and sell
currencies through forward currency contracts in order to fix a price for
securities it has agreed to buy or sell. A Portfolio may enter into a forward
currency contract, for example, when it enters into a contract to buy or sell a
security denominated in or exposed to fluctuations in a foreign currency in
order to "lock in" the U.S. dollar price of the security ("transaction hedge").
Additionally, when a Portfolio's Sub-Adviser believes that a foreign currency in
which portfolio securities are denominated may suffer a substantial decline
against the U.S. dollar, a Portfolio may enter into a forward currency contract
to sell an amount of that foreign currency (or a proxy currency whose
performance is expected to replicate the performance of that currency) for U.S.
dollars approximating the value of some or all of the portfolio securities
denominated in that currency (not exceeding the value of the Portfolio's assets
denominated in that currency) or by participating in options or futures
contracts with respect to the currency, or, when the Portfolio's Sub-Adviser
believes that the U.S. dollar may suffer a substantial decline against a foreign
currency for a fixed U.S. dollar amount ("position hedge"). This type of hedge
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.
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A Portfolio will cover outstanding forward currency contracts by maintaining
liquid portfolio securities denominated in the currency underlying the forward
contract or the currency being hedged. To the extent that a Portfolio is not
able to cover its forward currency positions with underlying portfolio
securities, the Fund's custodian will segregate cash or other liquid assets
having a value equal to the aggregate amount of the Portfolio's commitments
under forward contracts entered into with respect to position hedges and
cross-hedges. If the value of the segregated securities declines, additional
cash or liquid assets will be segregated on a daily basis so that the value of
the account will be equal to the amount of the Portfolio's commitments with
respect to such contracts. As an alternative to maintaining all or part of the
segregated assets, a Portfolio may buy call options permitting the Portfolio to
buy the amount of foreign currency subject to the hedging transaction by a
forward sale contract or the Portfolio may buy put options permitting the
Portfolio to sell the amount of foreign currency subject to a forward buy
contract.
While forward contracts are not currently regulated by the CFTC, the CFTC may in
the future assert authority to regulate forward contracts. In such event a
Portfolio's ability to utilize forward contracts in the manner set forth in the
Prospectus may be restricted. Forward contracts will reduce the potential gain
from a positive change in the relationship between the U.S. dollar and foreign
currencies. Unforeseen changes in currency prices may result in poorer overall
performance for a Portfolio than if it had not entered into such contracts. The
use of foreign currency forward contracts will not eliminate fluctuations in the
underlying U.S. dollar equivalent value of the proceeds of or rates of return on
a Portfolio's foreign currency denominated portfolio securities.
The matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency denominated asset that
is the subject of the hedging transaction generally will not be precise. In
addition, a Portfolio may not always be able to enter into forward contracts at
attractive prices and accordingly may be limited in its ability to use these
contracts in seeking to hedge the Portfolio's assets.
Also, with regard to a Portfolio's use of cross- hedging transactions, there can
be no assurance that historical correlations between the movement of certain
foreign currencies relative to the U.S. dollar will continue. Thus, at any time
poor correlation may exist between movements in the exchange rates of the
foreign currencies underlying a Portfolio's cross-hedges and the movements in
the exchange rates of the foreign currencies in which the Portfolio's assets
that 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.
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A Portfolio may write options on foreign currencies for the same types of
hedging purposes. For example, in attempting to hedge against a potential
decline in the U.S. dollar value of foreign currency denominated securities due
to adverse fluctuations in exchange rates, a Portfolio could, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurs, the option will most likely not be exercised and the
diminution in value of portfolio securities will be offset by the amount of the
premium received.
Similarly, instead of purchasing a call option to attempt to hedge against a
potential increase in the U.S. dollar cost of securities to be acquired, a
Portfolio could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the Portfolio to
hedge the increased cost up to the amount of premium. As in the case of other
types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium received, and
only if exchange rates move in the expected direction. If that does not occur,
the option may be exercised and the Portfolio would be required to buy or sell
the underlying currency at a loss which may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, a Portfolio also
may lose all or a portion of the benefits which might otherwise have been
obtained from favorable movements in exchange rates.
A Portfolio may write covered call options on foreign currencies. A call option
written on a foreign currency by a Portfolio is "covered" if the Portfolio owns
the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other foreign currency held in
its portfolio. A call option is also covered if the Portfolio has a call on the
same foreign currency and in the same principal amount as the call written if
the exercise price of the call held (i) is equal to or less than the exercise
price of the call written or (ii) is greater than the exercise price of the call
written, and if the difference is maintained by the Portfolio in cash or
high-grade liquid assets in a segregated account with the Fund's custodian.
A Portfolio may also write call options on foreign currencies for cross-hedging
purposes that may not be deemed to be covered. A call option on a foreign
currency is for cross-hedging purposes if it is not covered but is designed to
provide a hedge against a decline due to an adverse change in the exchange rate
in the U.S. dollar value of a security which the Portfolio owns or has the right
to acquire and which is denominated in the currency underlying the option. In
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.
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A put option gives the holder the right, upon payment of a premium, to deliver a
specified amount of a security to the writer of the option on or before a fixed
date at a predetermined price. A call option gives the holder the right, upon
payment of a premium, to call upon the writer to deliver a specified amount of a
security on or before a fixed date at a predetermined price.
A put option written by a Portfolio is "covered" if the Portfolio (i) maintains
cash not available for investment or other liquid assets with a value equal to
the exercise price in a segregated account with its custodian or (ii) holds a
put on the same security and in the same principal amount as the put written and
the exercise price of the put held is equal to or greater than the exercise
price of the put written. The premium paid by the buyer of an option will
reflect, among other things, the relationship of the exercise price to the
market price and the volatility of the underlying security, the remaining term
of the option, supply and demand and interest rates. A call option written by a
Portfolio is "covered" if the Portfolio owns the underlying security covered by
the call or has an absolute and immediate right to acquire that security without
additional cash consideration (or has segregated additional cash consideration
with its custodian) upon conversion or exchange of other securities held in its
portfolio. A call option is also deemed to be covered if the Portfolio holds a
call on the same security and in the same principal amount as the call written
and the exercise price of the call held (i) is equal to or less than the
exercise price of the call written or (ii) is greater than the exercise price of
the call written if the difference is maintained by the Portfolio in cash and
high- grade liquid assets in a segregated account with its custodian.
A Portfolio collateralizes its obligation under a written call option for
cross-hedging purposes by segregating with its custodian cash or other liquid
assets in an amount not less than the market value of the underlying security,
marked-to- market daily. A Portfolio would write a call option for cross-hedging
purposes, instead of writing a covered call option, when the premium to be
received from the cross-hedge transaction would exceed that which would be
received from writing a covered call option and the Portfolio's Sub- Adviser
believes that writing the option would achieve the desired hedge.
If a put or call option written by a Portfolio was exercised, the Portfolio
would be obligated to buy or sell the underlying security at the exercise price.
Writing a put option involves the risk of a decrease in the market value of the
underlying security, in which case the option could be exercised and the
underlying security would then be sold by the option holder to the Portfolio at
a higher price than its current market value. 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.
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Effecting a closing transaction in the case of a written call option will permit
a Portfolio to write another call option on the underlying security with either
a different exercise price or expiration date or both or, in the case of a
written put option, will permit a Portfolio to write another put option to the
extent that the exercise price thereof is secured by deposited high-grade liquid
assets. Also, effecting a closing transaction will permit the cash or proceeds
from the concurrent sale of any securities subject to the option to be used for
other portfolio investments. If a Portfolio desires to sell a particular
security on which the Portfolio has written a call option, the Portfolio will
effect a closing transaction prior to or concurrent with the sale of the
security.
A Portfolio may realize a profit from a closing transaction if the price of the
purchase transaction is less than the premium received from writing the option
or the price received from a sale transaction is more than the premium paid to
buy the option; a Portfolio may realize a loss from a closing transaction if the
price of the purchase transaction is less than the premium paid to buy the
option. Because increases in the market of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the repurchase of a call option is likely to be offset in whole or in part
by appreciation of the underlying security owned by the Portfolio.
An option position may be closed out only where there exists a secondary market
for an option of the same series. If a secondary market does not exist, it might
not be possible to effect closing transactions in particular options with the
result that a Portfolio would have to exercise the options in order to realize
any profit. If a Portfolio is unable to effect a closing purchase transaction in
a secondary market, it will not be able to sell the underlying security until
the option expires or the Portfolio delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market may include the
following: (i) there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by a national securities exchange on which the
option is traded ("Exchange") on opening or closing transactions or both, (iii)
trading halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities, (iv) unusual
or unforeseen circumstances may interrupt normal operations on an Exchange, (v)
the facilities of an Exchange or the Options Clearing Corporation ("OCC") may
not at all times be adequate to handle current trading volume, or (vi) one or
more Exchanges could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or 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
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the premium received. If the market price of the underlying security declines or
otherwise is below the exercise price, the Portfolio may elect to close the
position or take delivery of the security at the exercise price and a
Portfolio's return will be the premium received from the put options minus the
amount by which the market price of the security is below the exercise price.
A Portfolio may buy put options to attempt to hedge against a decline in the
value of its securities. By using put options in this way, a Portfolio will
reduce any profit it might otherwise have realized in the underlying security by
the amount of the premium paid for the put option and by transaction costs.
A Portfolio may buy call options to attempt to hedge against an increase in the
price of securities that the Portfolio may buy in the future. The premium paid
for the call option plus any transaction costs will reduce the benefit, if any,
realized by a Portfolio upon exercise of the option, and, unless the price of
the underlying security rises sufficiently, the option may expire worthless to
the Portfolio.
In purchasing an option, a Portfolio would be in a position to realize a gain
if, during the option period, the price of the underlying security increased (in
the case of a call) or decreased (in the case of a put) by an amount in excess
of the premium paid and would realize a loss if the price of the underlying
security did not increase (in the case of a call) or decrease (in the case of a
put) during the period by more than the amount of the premium. If a put or call
option brought by a Portfolio were permitted to expire without being sold or
exercised, the Portfolio would lose the amount of the premium.
Although they entitle the holder to buy equity securities, warrants on and
options to purchase equity securities do not entitle the holder to dividends or
voting rights with respect to the underlying securities, nor do they represent
any rights in the assets of the issuer of those securities.
INTEREST RATE SWAPS AND SWAP-RELATED PRODUCTS. In order to attempt to protect
the value of a Portfolio's investments from interest rate or currency exchange
rate fluctuations, a Portfolio may enter into interest rate swaps, and may buy
or sell interest rate caps and floors. A Portfolio expects to enter into these
transactions primarily to attempt to preserve a return or spread on a particular
investment or portion of its portfolio. A Portfolio also may enter into these
transactions to attempt to protect against any increase in the price of
securities the Portfolio may consider buying at a later date. A Portfolio does
not intend to use these transactions as a speculative investment. Interest rate
swaps involve the exchange by a Portfolio with another party of their respective
commitments to pay or receive 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
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such a transaction, a Portfolio will have contractual remedies pursuant to the
agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. The Sub-Advisers have determined
that, as a result, the swap market has become relatively liquid. Caps and floors
are more recent innovations for which standardized documentation has not yet
been developed and, accordingly, they are less liquid than swaps. To the extent
a Portfolio sells (I.E., writes) caps and floors, it will segregate with the
custodian cash or other liquid assets having an aggregate net asset value at
least equal to the full amount, accrued on a daily basis, of the Portfolio's
obligations with respect to any caps or floors.
Interest rate swap transactions are subject to limitations set forth in each
Portfolio's policies. These transactions may in some instances involve the
delivery of securities or other underlying assets by a Portfolio or its
counterparty to collateralize obligations under the swap. Under the
documentation currently used in those markets, the risk of loss with respect to
interest rate swaps is limited to the net amount of the interest payments that a
Portfolio is contractually obligated to make. If the other party to an interest
rate swap that is not collateralized defaults, a Portfolio would risk the loss
of the net amount of the payments that the Portfolio contractually is entitled
to receive. A Portfolio may buy and sell (I.E., write) caps and floors without
limitation, subject to the segregated account requirement described above.
In addition to the instruments, strategies and risks described in this Statement
of Additional Information and in the Prospectus, there may be additional
opportunities in connection with options, futures contracts, forward currency
contracts, and other hedging techniques, that become available as each
Portfolio's Sub- Adviser develops new techniques, as regulatory authorities
broaden the range of permitted transactions and as new instruments and
techniques are developed. A Sub-Adviser may use these opportunities to the
extent they are consistent with each Portfolio's respective investment objective
and are permitted by each Portfolio's respective investment limitations and
applicable regulatory requirements.
SPECIAL INVESTMENT CONSIDERATIONS AND RISKS. The successful use of the
investment practices described above with respect to futures contracts, options
on futures contracts, forward contracts, options on securities and on foreign
currencies, and swaps and swap-related products draws upon skills and experience
which are different from those needed to select 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
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Fund's custodian bank to ensure that the Portfolio will be able to meet its
obligations under these instruments. Assets held in a segregated account
generally may not be disposed of for so long as the Portfolio maintains the
positions giving rise to the segregation requirement. Segregation of a large
percentage of the Portfolio's assets could impede implementation of the
Portfolio's investment policies or the Portfolio's ability to meet redemption
requests or other current obligations.
ADDITIONAL RISKS OF OPTIONS ON FOREIGN CURRENCIES, FORWARD CONTRACTS AND FOREIGN
INSTRUMENTS. Unlike transactions entered into by a Portfolio in futures
contracts, options on foreign currencies and forward contracts are not traded on
contract markets regulated by the CFTC or (with the exception of certain foreign
currency options) by the SEC. To the contrary, such instruments are traded
through financial institutions acting as market-makers, although foreign
currency options are also traded OTC. In an OTC trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the buyer of an option cannot lose more than the amount of the premium
plus related transaction costs, this entire amount could be lost. Moreover, an
option writer and a buyer or seller of futures or forward contracts could lose
amounts substantially in excess of any premium received or initial margin or
collateral posted due to the potential additional margin and collateral
requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
are available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the OCC, thereby reducing the risk of counterparty
default. Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the OTC market,
potentially permitting a Portfolio to liquidate open positions at a profit prior
to exercise or expiration, or to limit losses in the event of adverse market
movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
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 OTC 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
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or step coupon securities. Zero coupon and step coupon bonds are issued and
traded at a discount from their face amounts. They do not entitle the holder to
any periodic payment of interest prior to maturity or prior to a specified date
when the securities begin paying current interest. The discount from the face
amount or par value depends on the time remaining until cash payments begin,
prevailing interest rates, liquidity of the security and the perceived credit
quality of the issuer. Pay-in-kind securities may pay all or a portion of their
interest or dividends in the form of additional securities. Because they do not
pay current income, the price of pay-in- kind securities can be very volatile
when interest rates change.
Current Federal income tax law requires holders of zero coupon securities and
step coupon securities to report the portion of the original issue discount on
such securities that accrues that year as interest income, even though the
holders receive no cash payments of interest during the year. In order to
qualify as a "regulated investment company" under the Internal Revenue Code,
each Portfolio must distribute its investment company taxable income, including
the original issue discount accrued on zero coupon or step coupon bonds. Because
a Portfolio will not receive cash payments on a current basis in respect of
accrued original-issue discount on zero coupon bonds or step coupon bonds during
the period before interest payments begin, in some years a Portfolio may have to
distribute cash obtained from other sources in order to satisfy the distribution
requirements under the Code. A Portfolio might obtain such cash from selling
other portfolio holdings. These actions are likely to reduce the assets to which
a Portfolio's expenses could be allocated and to reduce the rate of return for
the Portfolio. In some circumstances, such sales might be necessary in order to
satisfy cash distribution requirements even though investment considerations
might otherwise make it undesirable for the Portfolio to sell the securities at
the time.
Generally, the market prices of zero coupon, step coupon and pay-in-kind
securities are more volatile than the prices of securities that pay interest
periodically and in cash and are likely to respond to changes in interest rates
to a greater degree than other types of debt securities having similar
maturities and credit quality.
/DIAMOND/ WARRANTS AND RIGHTS
Subject to its investment limitations, a Portfolio may invest in warrants and
rights. Warrants are, in effect, longer-term call options. They give the holder
the right to purchase a given number of shares of a particular company at
specified prices, usually higher than the market price at the time of issuance,
for a period of years or to perpetuity. The purchaser of a warrant expects the
market price of the security will exceed the 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
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securities, such as Government National Mortgage Association ("GNMA")
certificates, are backed by the full faith and credit of the U.S. Treasury while
others, such as Federal Home Loan Mortgage Corporation ("Freddie Mac")
certificates, are not.
Mortgage-backed securities represent interests in a pool of mortgages. Principal
and interest payments made on the mortgages in the underlying mortgage pool are
passed through to the Portfolio. Unscheduled prepayments of principal shorten
the securities' weighted average life and may lower their total return. The
value of these securities also may change because of changes in the market's
perception of the creditworthiness of the federal agency or private institution
that issued them. In addition, the mortgage securities market in general may be
adversely affected by changes in governmental regulation or tax policies.
/DIAMOND/ ASSET-BACKED SECURITIES
Asset-backed securities represent interests in pools of consumer loans
(generally unrelated to mortgage loans) and most often are structured as
pass-through securities. Interest and principal payments ultimately depend on
payment of the underlying loans by individuals, although the securities may be
supported by letters of credit or other credit enhancements. The underlying
assets (E.G., loans) are subject to prepayments which shorten the securities'
weighted average life and may lower their returns. If the credit support or
enhancement is exhausted, losses or delays in payment may result if the required
payments of principal and interest are not made. The value of these securities
also may change because of changes in the market's perception of the
creditworthiness of the servicing agent for the pool, the originator of the
pool, or the financial institution providing the credit support or enhancement.
A Portfolio will invest its assets in asset-backed securities subject to any
limitations set forth in its investment policies or restrictions.
/DIAMOND/ PASS-THROUGH SECURITIES
Subject to a Portfolio's investment restrictions and policies, a Portfolio may
invest its net assets in various types of pass-through securities, such as
mortgage-backed securities, asset-backed securities and participation interests.
A pass- through security is a share or certificate of interest in a pool of debt
obligations that have been repackaged by an intermediary, such as a bank or
broker-dealer. The purchaser receives an undivided interest in the underlying
pool of securities. The issuers of the underlying securities make interest and
principal payments to the intermediary which are passed through to purchasers,
such as the Portfolio. The most common type of pass-through securities are
mortgage-backed securities. GNMA Certificates are mortgage-backed securities
that evidence an undivided interest in a pool of mortgage 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
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timely payment of principal and interest, but it is not backed by the full faith
and credit of the U.S. Government.
/DIAMOND/ OTHER INCOME PRODUCING
SECURITIES
Subject to each Portfolio's investment restrictions and policies, other types of
income producing securities that a Portfolio may purchase include, but are not
limited to, the following types of securities:
VARIABLE AND FLOATING RATE OBLIGATIONS. These types of securities are
relatively long- term instruments that often carry demand features
permitting the holder to demand payment of principal at any time or at
specified intervals prior to maturity.
STANDBY COMMITMENTS. These instruments, which are similar to a put, give
a Portfolio the option to obligate a broker, dealer or bank to repurchase
a security held by the Portfolio at a specified price.
TENDER OPTION BONDS. Tender option bonds are relatively long-term bonds
that are coupled with the agreement of a third party (such as a broker,
dealer or bank) to grant the holders of such securities the option to
tender the securities to the institution at periodic intervals.
INVERSE FLOATERS. Inverse floaters are instruments whose interest bears
an inverse relationship to the interest rate on another security. A
Portfolio will not invest more than 5% of its assets in inverse floaters.
See "Debt Securities And Fixed-Income Investing," in the Fund's 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 Securities Act of 1933 ("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
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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 their 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.
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 SEC 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.
36
<PAGE>
/DIAMOND/ BANK AND THRIFT OBLIGATIONS
Bank and thrift obligations in which a Portfolio may invest are limited to
dollar-denominated certificates of deposit, time deposits and bankers'
acceptances issued by bank or thrift institutions. Certificates of deposit are
short-term, unsecured, negotiable obligations of commercial banks and thrift
institutions. Time deposits are non-negotiable deposits maintained in bank or
thrift institutions for specified periods of time at stated interest rates.
Bankers' acceptances are negotiable time drafts drawn on commercial banks
usually in connection with international transactions.
Bank and thrift obligations in which the Portfolio invests may be, but are not
required to be, issued by institutions that are insured by the Federal Deposit
Insurance Corporation (the "FDIC"). Bank and thrift institutions organized under
Federal law are supervised and examined by Federal authorities and are required
to be insured by the FDIC. Institutions organized under state law are supervised
and examined by state banking authorities but are insured by the FDIC only if
they so elect. State institutions insured by the FDIC are subject to Federal
examination and to a substantial body of Federal law regulation. As a result of
Federal and state laws and regulations, federally insured bank and thrift
institutions are, among other things, generally required to maintain specified
levels of reserves and are subject to other supervision and regulation designed
to promote financial soundness.
Obligations of foreign branches of domestic banks and of United Kingdom branches
of foreign banks may be general obligations of the parent bank in addition to
the issuing branch, or may be limited by the terms of a specific obligation and
governmental regulation. Such obligations are subject to different risks than
are those of domestic banks or domestic branches of foreign banks. These risks
include foreign economic and political developments, foreign governmental
restrictions that may adversely affect payment of principal and interest on the
obligations, foreign exchange controls and foreign withholding and other taxes
on interest income. Foreign branches of domestic banks and United Kingdom
branches of foreign banks are not necessarily subject to the same or similar
regulatory requirements that apply to domestic banks, such as mandatory reserve
requirements, loan limitations and accounting, auditing and financial
recordkeeping requirements. In addition, less information may be publicly
available about a foreign branch of a domestic bank or about a foreign bank than
about a domestic bank. Certificates of deposit issued by wholly-owned Canadian
subsidiaries of domestic banks are guaranteed as to repayment of principal and
interest (but not as to sovereign risk) by the domestic parent bank.
Obligations of domestic branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by governmental regulation as well as
governmental action in the country in which the foreign bank has its head
office. A domestic branch of a foreign bank with assets in excess of $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.
37
<PAGE>
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 - December, 1990); Trustee of IDEX Series
Fund, former Trustee of IDEX Fund, IDEX II Series Fund and IDEX Fund 3.
RUSSELL A. KIMBALL, JR., DIRECTOR (DOB 8/17/44), 1160 Gulf Boulevard, Clearwater
Beach, Florida 34630. General Manager, Sheraton Sand Key Resort (resort
hotel), Clearwater, Florida (1975 - present).
JOHN R. KENNEY (1, 2) CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT (DOB 2/8/
38). Chairman of the Board of Directors (1982 - present), Chief Executive
Officer (1982 - present), President (1978 - 1987 and December, 1992 -
present), Director (1978 - present), Western Reserve Life Assurance Co. of
Ohio; Chairman of the Board of Directors (September, 1996 - present), WRL
Investment Management, Inc. (investment adviser), Largo, Florida; Chairman of
the Board of Directors (September, 1996 - present), WRL Investment Services,
Inc., Largo, Florida; Chairman of the Board of Directors (February, 1997 -
present) AEGON Asset Management 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; Director, President and Chief
Executive Officer (February, 1997 - present) AEGON Asset Management 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.
38
<PAGE>
REBECCA A. FERRELL (1, 2) SECRETARY, VICE PRESIDENT AND COUNSEL (DOB 12/10/60).
Vice President and Associate General Counsel (March, 1997 - present),
Assistant Vice President and Counsel (June, 1995 - March, 1997), Attorney
(August, 1993 - June, 1995), Western Reserve Life Assurance Co. of Ohio; Vice
President and Associate General Counsel (February, 1997 - present) AEGON
Asset Management Services, Inc., Largo, Florida; Secretary, Vice President
and Counsel of IDEX Series Fund (September, 1996 - present); 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); 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.
Director's Fees Paid - Year Ended December 31, 1996
<TABLE>
<CAPTION>
PORTFOLIO AMOUNT PAID
- ---------------------------------- -------------
<S> <C>
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
Growth & Income(3) 508
Balanced 547
Bond 1,216
Short-to-Intermediate Government 182
Money Market 330
</TABLE>
- ----------------
(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.
39
<PAGE>
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 $9,500 0 $34,000
Charles C. Harris, Director 9,500 0 34,000
Russell A. Kimball, Jr., Director 9,000 0 9,000
<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 April 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.
WRL Investment Management, Inc. ("WRL Management") serves as the investment
adviser to each Portfolio of the Fund pursuant to an Investment Advisory
Agreement dated January 1, 1997 with the Fund. The Investment Adviser is a
direct, wholly-owned subsidiary of WRL, 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
each 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
40
<PAGE>
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 43-46.
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):
Advisory Fees
<TABLE>
<CAPTION>
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)(7) 26,485 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(5) 2,462,304 1,746,022 1,180,759
Growth & Income(1)(6) 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.
(5) Prior to May 1, 1997, this Portfolio was named the Equity-Income Portfolio.
(6) Prior to May 1, 1997, this Portfolio was named the Utility Portfolio.
(7) Subject to shareholder approval, which will be sought on or about June 16,
1997, Meridian will receive monthly compensation from the Investment Adviser
at the annual rate of 0.40% of average daily net assets.
</FN>
</TABLE>
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
41
<PAGE>
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 1933 Act and the securities laws of any states or
territories, subsequent to the effectiveness of the initial registration
statement under the 1933 Act; 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, WRL, 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):
PORTFOLIO EXPENSES PAID BY INVESTMENT ADVISER
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
Portfolio 1996 1995 1994
- ---------------------------------- -------- -------- ---------
<S> <C> <C> <C>
Aggressive Growth(1) -0- $ -0- $28,885
Emerging Growth -0- -0- -0-
Global(2) -0- -0- -0-
Growth -0- -0- -0-
C.A.S.E. Growth(3) 73,269 23,832 N/A
Value Equity(5) 13,672 N/A N/A
Global Sector(5) -0- N/A N/A
Tactical Asset Allocation(4) -0- -0- N/A
Strategic Total Return(6) -0- -0- -0-
Growth & Income(1)(7) -0- 14,417 40,148
Balanced -0- -0- 28,629
Bond -0- -0- -0-
Short-to-Intermediate Government -0- -0- -0-
Money Market -0- -0- -0-
<FN>
- ----------------
(1) Portfolio commenced operations on March 1, 1994.
(2) 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.
(3) Portfolio commenced operations on May 1, 1995.
(4) Portfolio commenced operations on January 3, 1995.
(5) Portfolio commenced operations May 1, 1996.
(6) Prior to May 1, 1997, this Portfolio was named the Equity-Income Portfolio.
(7) Prior to May 1, 1997, this Portfolio was named the Utility Portfolio.
</FN>
</TABLE>
Service Agreement. Effective January 1, 1997, the Fund entered into an
Administrative Services and Transfer Agency Agreement ("Services Agreement")
with WRL Investment Services, Inc. ("WRL Services"), an affiliate of WRL
Management and WRL, to furnish the Fund with administrative services to assist
the Fund in carrying out certain of its functions and
42
<PAGE>
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 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 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
43
<PAGE>
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, as of March 31, 1997, has
approximately $6.4 billion under management.
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC. ("Van Kampen") serves as Sub-
Adviser to the Emerging Growth Portfolio.
Van Kampen, located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181, is
an indirect wholly-owned subsidiary of VK/AC Holding, Inc. ("VK/AC Holding").
VK/AC Holding is a wholly-owned subsidiary of MSAM Holdings II, Inc., which, in
turn, is a wholly-owned subsidiary of Morgan Stanley Group, Inc. It is
anticipated that in mid-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, Penthouse, 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.
44
<PAGE>
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, 1997.
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
Investment manages portfolios for individuals and institutional clients
worldwide. Dean Investment provides a full range of investment advisory services
and currently has $3.8 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
Growth & 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.
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 $21 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
45
<PAGE>
Dec. 31, 1996, GEIM and GEIC together managed assets in excess of $56.9 billion.
GE Investments provides investment management services to external organizations
and to certain of its affiliates.
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(1) $ 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(3) 41,966 2,759 N/A
NWQ Value Equity(5) 48,943 N/A N/A
Meridian Global Sector(5)
Meridian(8) 7,223 N/A N/A
INVESCO(8) 9,631 N/A N/A
Dean Investment Tactical Asset Allocation(2) 654,218 216,922 N/A
Luther King Strategic Total Return(6) 1,231,152 873,011 590,528
Federated Growth & Income(1)(7) 150,006 85,906 22,369
AIMI Short-to-Intermediate 74,340 63,067 66,959
Government
AIMI Balanced(1) 157,709 94,669 19,275
J.P. Morgan Money Market
JP Morgan(9) 111,216 N/A N/A
Janus(9) 70,041 211,178(4) 176,549(4)
<FN>
- ----------------
(1) Portfolio commenced operations March 1, 1994.
(2) Portfolio commenced operations January 3, 1995.
(3) Portfolio commenced operations May 1, 1995.
(4) Fees paid to Janus, the Portfolio's previous Sub-Adviser.
(5) Portfolio commenced operations May 1, 1996.
(6) Prior to May 1, 1997, this Portfolio was named the Equity-Income Portfolio.
(7) Prior to May 1, 1997, this Portfolio was named the Utility Portfolio.
(8) Prior to March 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. Subject to shareholder approval, which will be sought on or
about June 16, 1997, Meridian will receive monthly compensation from the
Investment Adviser at the annual rate of 0.40% of average daily net assets.
(9) 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>
/DIAMOND/ 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
46
<PAGE>
exclusion, the turnover rate for a Portfolio is calculated by dividing (a) the
lesser of purchases or sales of portfolio securities for the fiscal year by (b)
the monthly average of portfolio securities owned by the Portfolio during the
fiscal year.
The 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):
PORTFOLIO TURNOVER RATES
YEAR ENDED DECEMBER 31
--------------------------------
PORTFOLIO 1996 1995 1994
- ---------------------------------- ------- ------- -------
Aggressive Growth(1) 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(3) 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(3)(6) 49.32% 52.59% 53.50%
Growth & Income(1)(7) 68.53% 78.34% 36.13%
Balanced(1) 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
- ----------------
(1) Portfolio commenced operations March 1, 1994.
(2) Portfolio commenced operations January 3, 1995.
(3) Portfolio commenced operations May 1, 1995.
(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.
(6) Prior to May 1, 1997, this Portfolio was named the Equity-Income Portfolio.
(7) Prior to May 1, 1997, this Portfolio was named the Utility Portfolio.
There was a significant increase in the turnover rate for the year ended
December 31, 1996 for the Bond Portfolio because the Portfolio's Sub-Adviser
determined that the direction of interest rates was becoming increasingly
unclear; so the Portfolio was positioned more conservatively. Specifically, the
Portfolio's average maturity was reduced to more closely resemble that of the
Lehman Brothers Government/Corporate Bond Index.
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, Growth & 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
47
<PAGE>
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 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
48
<PAGE>
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 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 Conduct Rules of the National Association of Securities
Dealers, Inc.
COMMISSIONS PAID BY THE PORTFOLIOS
<TABLE>
<CAPTION>
AGGREGATE COMMISSIONS
YEAR ENDED DECEMBER 31
----------------------------------------------------
Portfolio 1996 1995 1994 1996
- ---------------------- ----------- ---------------- ----------- -----------
<S> <C> <C> <C> <C>
Aggressive Growth(2) $ 337,449 $ 240,067 $ 76,028 $329,194
Emerging Growth 415,717 542,420 317,287 N/A
Global 1,269,275 712,827(3) 241,051 N/A
Growth 720,978 1,577,115 1,466,443 N/A
C.A.S.E. Growth(4) 97,761 8,662 N/A N/A
Tactical Asset
Allocation(5) 344,847 208,950 N/A N/A
Strategic
Total Return(8) 398,594 316,489 354,400 N/A
Growth &
Income(2)(9) 58,921 52,921 40,095 N/A
Balanced(2) 80,218 90,724 43,311 N/A
Global Sector
Portfolio(7) 17,933 N/A N/A N/A
Value Equity
Portfolio(7) 63,204 N/A N/A N/A
<CAPTION>
AFFILIATED BROKERAGE COMMISSIONS
YEAR ENDED DECEMBER 31
----------------------------------------------------------
PORTFOLIO % 1995 % 1994 %
- ---------------------- --------- -------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Aggressive Growth(2) 97.55%(1) $240,067 100%(1) $75,128 98.82%(1)
Emerging Growth N/A N/A N/A N/A N/A
Global N/A N/A N/A N/A N/A
Growth N/A N/A /less than/1% 2,796 /less than/1%
C.A.S.E. Growth(4) N/A N/A N/A N/A N/A
Tactical Asset
Allocation(5) N/A N/A N/A N/A N/A
Strategic
Total Return(8) N/A N/A N/A N/A N/A
Growth &
Income(2)(9) N/A N/A N/A N/A N/A
Balanced(2) N/A 1,040 1.15%(6) 8,700 20.09%(6)
Global Sector
Portfolio(7) N/A N/A N/A N/A N/A
Value Equity
Portfolio(7) N/A N/A N/A N/A N/A
<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 96.53%, 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, 1995 and for the period March
1, 1994 to December 31, 1994 was 1.15% and 20.09%, respectively.
(7) Portfolio commenced operations May 1, 1996.
(8) Prior to May 1, 1997, this Portfolio was known as Equity-Income Portfolio.
(9) Prior to May 1, 1997, this Portfolio was known as Utility Portfolio.
</FN>
</TABLE>
The Aggressive Growth Portfolio paid all of its affiliated brokerage commissions
to Alger, Inc., the Growth Portfolio paid all of its affiliated brokerage
commissions to DST Securites, Inc. and the Balanced Portfolio paid all of its
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.
49
<PAGE>
/DIAMOND/ 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.
/DIAMOND/ CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief description of how performance is calculated.
The following sections describe how performance data is calculated in greater
detail.
/DIAMOND/ TOTAL RETURN
Total return quotations for each of the Portfolios are computed by finding the
average annual compounded rates of return over the relevant periods that would
equate the initial amount invested to the ending redeemable value, according to
the following equation:
P (1+T)n = ERV
Where: P = a hypothetical initial payment
of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value (at
the end of the applicable
period of a hypothetical $1,000
payment made at the begin
ning of the applicable period)
The total return quotation calculations for a Portfolio reflect the deduction of
a proportionate
50
<PAGE>
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 [ (----- + 1)6 - 1]
cd
Where: a = dividends and interest earned dur
ing the period by the Portfolio
b = expenses accrued for the period
(net of reimbursement)
c = the average daily number of shares
outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per
share on the last day of the period
The yield of the Bond Portfolio and the Short-to- Intermediate Government
Portfolio as computed above for the thirty day period ended December 31, 1996
was 5.48% and 5.16%, 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 4.83% and was equivalent to a compound effective yield of
4.95%. The current yield for the Money Market Portfolio is an annualization,
without compounding, of the portfolio rate of return, and is computed by
determining the net change in the value of a hypothetical pre-existing account
in the Portfolio having a balance of one share at the beginning of a seven
calendar day period for which yield is to be quoted, dividing the net change by
the value of the account at the beginning of the period to obtain the base
period return, and annualizing the results (I.E., multiplying the base period
return by 365/7). The net change in the value of the account reflects the value
of additional shares purchased with dividends declared on the original shares
and any such additional shares, but does not include 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
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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.
/DIAMOND/TAXES
Shares of the Portfolios are offered only to the Separate Accounts that fund the
Policies and Annuity Contracts. See the respective prospectuses for the Policies
and Annuity Contracts for a discussion of the special taxation of insurance
companies with respect to the Separate Accounts and of the Policies, the Annuity
Contracts and the holders thereof.
Each Portfolio has qualified (except the U.S. Equity Portfolio and International
Equity Portfolio which intend to qualify), and expects to continue to qualify,
for treatment as a regulated investment company ("RIC") under the Internal
Revenue Code of 1986, as amended (the "Code"). In order to qualify for that
treatment, a Portfolio must distribute to its Policyholders for each taxable
year at least 90% of its investment company taxable income (consisting generally
of net investment income, net short-term capital gain, and net gains from
certain foreign currency transactions) ("Distribution Requirement") and must
meet several additional requirements. These requirements include the following:
(1) the Portfolio must derive at least 90% of its gross income each taxable year
from dividends, interest, payments with respect to securities loans, and gains
from the sale or other disposition of securities or foreign currencies, or other
income (including gains from options, futures or forward contracts) derived with
respect to its business of investing in securities or those currencies ("Income
Requirement"); (2) the Portfolio must derive less than 30% of its gross income
each taxable year from the sale or other disposition of securities, or any of
the following, that were held for less than three months - options, futures or
forward contracts (other than those on foreign currencies), or foreign
currencies (or options, futures or forward contracts thereon) that are not
directly related to the Portfolio's principal business of investing in
securities (or options and futures with respect thereto) ("Short-Short
Limitation"); (3) at the close of each quarter of the Portfolio's taxable year,
at least 50% of the value of its total assets must be represented by cash and
cash items, U.S. Government securities, securities of other RICs, and other
securities that, with respect to any one issuer, do not exceed 5% of the value
of the Portfolio's total assets and that do not represent more than 10% of the
outstanding voting securities of the issuer; and (4) at the close of each
quarter of the Portfolio's taxable year, not more than 25% of the value of its
total assets may be invested in securities (other than U.S. Government
securities or the securities of other RICs) of any one issuer.
As noted in the Prospectus, each Portfolio must, and intends to, comply with the
diversification requirements imposed by section 817(h) of the Code and the
regulations thereunder. These requirements, which are in addition to the
diversification requirements mentioned above, place certain limitations on the
proportion of each Portfolio's assets that may be represented by any single
investment (which includes all securities of the same issuer). For purposes of
section 817(h), all securities of the same issuer, all 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
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in connection with variable annuity contracts and/or variable life insurance
policies.
The use of hedging strategies, such as writing (selling) and purchasing options
and futures contracts and entering into forward contracts, involves complex
rules that will determine for income tax purposes the character and timing of
recognition of the income received in connection therewith by the Portfolios.
Income from the disposition of foreign currencies (except certain gains
therefrom that may be excluded by future regulations), and income from
transactions in options, futures, and forward contracts derived by a Portfolio
with respect to its business of investing in securities or foreign currencies,
will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short- Short Limitation
if they are held for less than three months. Income from the disposition of
foreign currencies, and options, futures, and forward contracts on foreign
currencies, that are not directly related to a Portfolio's principal business of
investing in securities (or options and futures with respect to securities) also
will be subject to the Short-Short Limitation if they are held for less than
three months.
If a Portfolio satisfies certain requirements, any increase in value on a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Portfolio satisfies
the Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that Limitation. A
Portfolio will consider whether it should seek to qualify for this treatment for
its hedging transactions. To the extent a Portfolio does not qualify for this
treatment, it may be forced to defer the closing out of certain options and
futures contracts beyond the time when it otherwise would be advantageous to do
so, in order for the Portfolio to qualify as a RIC.
Dividends and interest received by each Portfolio may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and foreign countries generally do not impose taxes on capital gains in
respect of investments by foreign investors.
A Portfolio may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation that, in general, meets either of the
following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, a Portfolio will be subject to
Federal income tax on a portion of any "excess distribution" received on the
stock of a PFIC or of any gain on disposition of that stock (collectively "PFIC
income"), plus interest thereon, even if the Portfolio distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC income
will be included in a Portfolio's investment company taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders. If a Portfolio invests in a PFIC and elects to treat the
PFIC as a "qualified electing fund," then in lieu of the foregoing tax and
interest obligations, the Portfolio will be required to include in income each
year its pro rata share of the qualified electing fund's annual ordinary
earnings and net capital gain (the excess of net long-term capital gain over net
short-term capital loss), even if they are not distributed to the Portfolio;
those amounts would be subject to the Distribution Requirement. In most
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.
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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; Growth & 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; 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.
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
- ----------------
* 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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PROSPECTUS
WRL SERIES FUND, INC.
C.A.S.E. QUALITY GROWTH PORTFOLIO
C.A.S.E. GROWTH & INCOME PORTFOLIO
C.A.S.E. GROWTH PORTFOLIO
[WRL LOGO] 201 Highland Avenue [C.A.S.E. LOGO]
Largo, Florida 33770
Telephone: (800) 851-9777
(813) 585-6565
WRL Series Fund, Inc. (the "Fund") is a diversified, open-end management
investment company consisting of separate series or investment portfolios. This
Prospectus pertains only to the C.A.S.E. Quality Growth Portfolio, C.A.S.E.
Growth & Income Portfolio and C.A.S.E. Growth Portfolio of the Fund
(collectively, the "Portfolios").
The primary investment objective of the C.A.S.E. Quality Growth Portfolio
is to seek preservation and growth of capital by investing in common stocks of
large, well-managed, well-priced companies with defined markets and financial
strategies which provide the basis for sound future confidence. The investment
objective of the C.A.S.E. Growth & Income Portfolio is to seek high current
income and moderate growth through investments in common stocks of well-priced,
well-managed, large, stable and growing companies. This Portfolio seeks to
invest in companies that make a policy of paying above-market dividends while
their internal growth rates exceed the rate of inflation. The investment
objective of the C.A.S.E. Growth Portfolio is capital growth through investments
in common stocks of small to medium-sized companies. This Portfolio will
generally invest in smaller, less well-established companies, with limited
product lines and financial resources. This Portfolio, however, seeks to invest
in such companies with above-market growth characteristics in several investment
classifications including sales, earnings, returns and institutional support.
There can be, of course, no assurance that the Portfolios will achieve their
objectives.
Shares of the Fund are sold only to the separate accounts (the "Separate
Accounts") of Western Reserve Life Assurance Co. of Ohio ("WRL"), PFL Life
Insurance Company ("PFL"), and AUSA Life Insurance Company, Inc. ("AUSA") (WRL,
PFL, and AUSA together, the "Life Companies") to fund the benefits under certain
individual variable life insurance policies (the "Policies") and individual and
group variable annuity contracts (the "Annuity Contracts"). The Life Companies
are affiliates. The Separate Accounts, which may or may not be registered with
the Securities and Exchange Commission, invest in shares of one or more of the
Portfolios in accordance with the allocation instructions received from holders
of the Policies and the Annuity Contracts, (collectively, the "Policyholders").
Such allocation rights are further described in the prospectuses or disclosure
documents for the Policies and the Annuity Contracts.
WRL Investment Management, Inc. ("WRL Management") and C.A.S.E. Management,
Inc. serve as the investment adviser ("Investment Adviser") and the sub-adviser
("Sub-Adviser"), respectively, to the Portfolios. See "The Investment Adviser"
and "The Sub-Adviser."
This Prospectus sets forth concisely the information about the Portfolios
that prospective investors ought to know before investing. Investors should read
this Prospectus and retain it for future reference.
Additional information about the Fund, the Portfolios and other portfolios
of the Fund has been filed with the Securities and Exchange Commission and is
available upon request without charge by calling or writing the Fund. The
Statement of Additional Information ("SAI") pertaining to the Portfolios bears
the same date as this Prospectus and is incorporated by reference into this
Prospectus in its entirety.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, A BANK OR OTHER FINANCIAL INSTITUTION, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
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.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Prospectus Dated May 1, 1997
<PAGE>
WRL SERIES FUND, INC.
C.A.S.E. QUALITY PORTFOLIO
C.A.S.E. GROWTH & INCOME PORTFOLIO
C.A.S.E. GROWTH PORTFOLIO
201 Highland Avenue
Largo, Florida 33770
Telephone: (800) 851-9777
(813) 585-6565
<TABLE>
<S> <C>
FINANCIAL HIGHLIGHTS .......................................... 1
THE C.A.S.E. QUALITY GROWTH PORTFOLIO, C.A.S.E. GROWTH & INCOME
PORTFOLIO AND C.A.S.E. GROWTH PORTFOLIO AND THE FUND ......... 3
MANAGEMENT OF THE FUND ....................................... 10
DIVIDENDS AND DISTRIBUTIONS ................................. 14
TAXES ......................................................... 14
PURCHASE AND REDEMPTION OF SHARES ........................... 15
VALUATION OF SHARES .......................................... 15
THE FUND AND ITS SHARES ....................................... 15
PERFORMANCE INFORMATION ....................................... 16
GENERAL INFORMATION .......................................... 17
</TABLE>
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FINANCIAL HIGHLIGHTS
The information contained 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, using average shares outstanding throughout each year.
The total return of the Portfolio reflects the advisory fee and all other
Portfolio expenses and includes reinvestment of dividends and capital gains; it
does not reflect the charges against the corresponding sub-accounts or the
charges and deductions under the applicable Annuity Contract; including these
charges would reduce total return figures for all periods shown.The Annual
Report contains additional information for these Portfolios. A copy of the SAI
and Annual Report may be obtained without charge upon request. A voluntary fee
waiver and expense reimbursement applied during the period shown below. (See
"Management of the Fund-The Investment Adviser," page 10.)
C.A.S.E. QUALITY GROWTH PORTFOLIO*
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995(c)
-------- -------
<S> <C> <C>
Net asset value, beginning of period ................................... 10.84 $ 10.00
Income from operations:
Net income (loss) .................................................... .07 .14
Net realized and unrealized gain (loss) on investments ............... 1.83 1.50
------- -------
Total income (loss) from operations ................................. 1.90 1.64
------- -------
Distributions:
Dividends from net investment income ................................. (.06) (.14)
Dividends in excess of net investment income ........................ (.03) .00
Distributions from net realized gains on investments ............... (.36) (.66)
Distributions in excess of net realized gains on investments ......... .00 .00
------- -------
Total distributions ................................................. (.45) (.80)
------- -------
Net asset value, end of period ......................................... $ 12.29 $ 10.84
======= =======
Total Return (a) ....................................................... 17.54% 13.61%
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................... $ 1,853 $ 1,150
Ratio of expenses to average net assets (b) .......................... 1.50% 1.00%
Ratio of net investment income (loss) to average net assets (b) ...... 0.61% 1.28%
Ratio of commissions paid to number of shares ........................ 6.18% N/A
Portfolio turnover rate (a) .......................................... 185.87% 119.63%
</TABLE>
- ----------------
* See Notes to Financial Highlights on p. 2.
1
<PAGE>
C.A.S.E. GROWTH & INCOME PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995(c)
---------- ----------
<S> <C> <C>
Net asset value, beginning of period ................................... $ 11.28 $10.00
Income from operations:
Net investment income (loss) ......................................... .20 .21
Net realized and unrealized gain (loss) on investments ............... 1.98 1.38
------- ------
Total income loss from operations ................................... 2.18 1.59
------- ------
Distributions:
Dividends from net investment income ................................. (.12) (.21)
Dividends in excess of net investment income ......................... .00 .00
Distributions from net realized gains on investments ................. (.55) (.10)
Distributions in excess of net realized gains on investments ......... .00 .00
------- ------
Total distributions ................................................. (.67) (.31)
------- ------
Net asset value, end of period ......................................... $ 12.79 $11.28
======= ======
Total return (a) ....................................................... 19.22% 14.80%
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................... $ 2,044 $1,083
Ratio of expenses to average net assets (b) .......................... 1.50% 1.00%
Ratio of net investment income (loss) to average net assets (b) ...... 1.62% 1.94%
Ratio of commissions paid to number of shares ........................ 6.15% N/A
Portfolio turnover rate (a) .......................................... 189.22% 72.73%
</TABLE>
C.A.S.E. GROWTH PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995(c)
---------- ----------
<S> <C> <C>
Net asset value, beginning of period ................................... $ 11.66 $ 10.00
Income from operations:
Net investment income (loss) ......................................... .12 .12
Net realized and unrealized gain (loss) on investments ............... 1.92 2.49
------- -------
Total income (loss) from operations ................................. 2.04 2.61
------- -------
Distributions:
Dividends from net investment income ................................. (.05) (.12)
Dividends in excess of net investment income ........................ .00 .00
Distributions from net realized gains on investments ................. (.23) (.83)
Distributions in excess of net realized gains on investments ......... .00 .00
------- -------
Total distributions ................................................. (.28) (.95)
------- -------
Net asset value, end of period ......................................... $ 13.42 $ 11.66
======= =======
Total return (a) ....................................................... 17.50% 20.65%
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................... $26,560 $ 2,578
Ratio of expenses to average net assets (b) .......................... 1.00% 1.00%
Ratio of net investment income (loss) to average net assets (b) ...... 0.94% 1.02%
Ratio of commissions paid to number of shares ........................ 6.04% N/A
Portfolio turnover rate (a) .......................................... 160.27% 121.62%
</TABLE>
- ----------------
NOTES TO FINANCIAL HIGHLIGHTS
(a) For periods of less than one year the total return and portfolio turnover
rate are not annualized.
(b) Ratio is annualized and net of advisory fee waiver for the year ended
December 31, 1996, and for the period ended December 31, 1995, for which
period the annualized ratio of expenses to average net assets would have
been 3.56% and 5.91%, respectively, for the C.A.S.E. Quality Growth
Portfolio; 3.34% and 6.17%, respectively, for the C.A.S.E. Growth & Income
Portfolio; and 1.64% and 4.15%, respectively, for the C.A.S.E. Growth
Portfolio, absent the advisory fee waiver by WRL (the Fund's Investment
Adviser prior to January 1, 1997).
(c) The inception of this Portfolio was May 1, 1995.
2
<PAGE>
THE C.A.S.E. QUALITY GROWTH PORTFOLIO, C.A.S.E. GROWTH & INCOME PORTFOLIO
AND C.A.S.E. GROWTH PORTFOLIO AND THE FUND
The Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The C.A.S.E. Quality Growth Portfolio, C.A.S.E. Growth & Income Portfolio
and C.A.S.E. Growth Portfolio are series of the Fund. The Fund consists of
several series, or separate investment portfolios, which offer shares for
investment by the Separate Account. This Prospectus describes only the C.A.S.E.
Quality Growth, C.A.S.E. Growth & Income and C.A.S.E. Growth Portfolios.
A particular portfolio of the Fund may not be available under the Policy or
Annuity Contract you have chosen or may not be available in your state due to
certain state insurance law considerations. The prospectus or disclosure
document for the particular Policy or Annuity Contract you have chosen will
indicate the portfolios that are generally available under the applicable
Contract and should be read in conjunction with this Prospectus.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS
The Portfolios' investment objectives and, unless otherwise noted, their
investment policies and techniques, may be changed by the Board of Directors of
the Fund without shareholder or Contract Owner approval. A change in the
investment objectives or policies of a Portfolio may result in that Portfolio
having an investment objective or policies different from that which a Contract
Owner deemed appropriate at the time of investment.
Each Portfolio invests mainly in common stock and other equity securities
in search of growth, or a combination of growth and income (total return). Their
performance depends heavily on stock market conditions in the U.S. and abroad,
and can also be affected by changes in interest rates or other economic
conditions. Accordingly, the Portfolios are not by themselves a balanced
investment plan.
C.A.S.E. QUALITY GROWTH PORTFOLIO
The primary investment objective of the C.A.S.E. Quality Growth Portfolio
is preservation and growth of capital.
The C.A.S.E. Quality Growth Portfolio seeks long-term appreciation
principally through investment in common stocks of large, well-managed,
well-priced companies with defined markets and financial strategies which
provide the basis for sound future confidence. Stocks of such companies usually
are listed on the New York or American Exchanges. The investments the
Sub-Adviser seeks will, in the opinion of the Sub-Adviser, be under-valued based
upon a broad range of comparative, fundamental values for similar long-term
investments. The large cap stocks which this Portfolio seeks will generally be
less volatile than smaller or mid-capitalization stocks. For these purposes, the
Sub-Adviser considers "large cap" stocks to be stocks issued by companies with
market capitalization at least equal to $1 billion. The Sub-Adviser considers
"mid-capitalization" stocks to be stocks issued by companies with market
capitalization of between $350 million and $3 billion. (Companies with market
capitalization from $1 billion to $3 billion may be classified by the
Sub-Adviser as either medium cap or as large cap, depending upon the
Sub-Adviser's evaluation of the liquidity of trading in the company's stock.)
Companies with larger capitalization frequently have broad markets and product
lines. The dividend component of the Portfolio's investments should be similar
or slightly less than the average for the market in the identical period. There
can be no assurance that the Portfolio's objectives will be achieved because
there are no certainties of the prevailing market or economic conditions with
which the Portfolio will be confronted.
Although the Portfolio's assets will be invested primarily in common stocks
at most times, the Portfolio may increase its cash position when the Sub-Adviser
is unable to locate investment opportunities with desirable risk/reward
characteristics. The Portfolio may invest in government securities, high grade
commercial paper, corporate bonds and debentures, warrants, preferred stocks or
certificates of deposit of commercial banks or other debt securities when the
Sub-Adviser perceives an opportunity for capital growth from such securities, or
so that the Portfolio may receive a return on its uninvested cash. See the SAI
for further descriptions of such securities. In the latter case,
3
<PAGE>
investment income may increase and may constitute a larger portion of the return
on the Portfolio's investments, and the Portfolio may not participate in market
advances or declines to the extent it would if the Portfolio were fully invested
in common stocks. The Portfolio may invest up to 15% of its assets in securities
of issuers in a single industry. The Portfolio does not currently intend to
invest more than 5% of its assets in non-investment grade debt securities. See
the SAI for further information concerning such securities and bond ratings.
The C.A.S.E. Quality Growth Portfolio may invest up to 25% of its net
assets at the time of purchase in the securities of foreign issuers and
obligors, as described below and in the SAI. (See "Certain Portfolio Practices
and Techniques-Foreign Investments and Special Risks," page 7.) The Portfolio
also may invest in repurchase agreements and reverse repurchase agreements. (See
"Certain Portfolio Practices and Techniques-Repurchase and Reverse Repurchase
Agreements," page 6.)
C.A.S.E. GROWTH & INCOME PORTFOLIO
The investment objective of the C.A.S.E. Growth & Income Portfolio is to
seek high current income and moderate growth through investments in well-priced,
well-managed, large, stable and growing companies.
Current income of the Portfolio will vary. It is anticipated that the
current income realized by this Portfolio will, however, generally be relatively
higher than the current income realized by C.A.S.E. Quality Growth Portfolio or
C.A.S.E. Growth Portfolio. The Portfolio invests primarily in common stocks of
companies believed by the Sub-Adviser to have potential for above-average growth
in several fundamental and conditional and market comparative categories,
including sales, earnings (year over year and month over month), market relative
to return-on-equity, market relative cash flow, institutional and/or insider
ownership changes, and price earnings ratios. The Portfolio seeks to invest in
companies that make a policy of paying above market dividends, and also have
positive internal growth rates and demonstrated capital appreciation over time
that exceed the rate of inflation during the period measured. The Portfolio will
generally invest 90% of its assets in dividend paying stocks.
Total return consists of current income, including dividends, capital
appreciation, and interest and discount accrual. The Portfolio's ability to
achieve its total return objective of both high current income and moderate
growth is a function of the Sub-Adviser's stock selections as well as market and
economic conditions.
Although the Portfolio's assets will be invested primarily in common stocks
at most times, the Portfolio may increase its cash position when the Sub-Adviser
is unable to locate investment opportunities with desirable risk/reward
characteristics. The Portfolio may invest in government securities, high grade
commercial paper, corporate bonds and debentures, warrants, preferred stocks or
certificates of deposit of commercial banks or other debt securities when the
Sub-Adviser perceives an opportunity for capital growth from such securities, or
so that the Portfolio may receive a return on its uninvested cash. See the SAI
for further descriptions of such securities. In the latter case, investment
income may increase and may constitute a larger portion of the return on the
Portfolio's investments, and the Portfolio may not participate in market
advances or declines to the extent it would if the Portfolio were fully invested
in common stocks. The Portfolio may invest up to 15% of its assets in securities
of issuers in a single industry. The Portfolio does not currently hold or intend
to invest more than 5% of its assets in non-investment grade debt securities.
See the SAI for further information concerning such securities and bond ratings.
The C.A.S.E. Growth & Income Portfolio may invest up to 25% of its net
assets at the time of purchase in the securities of foreign issuers and
obligors, as described below and in the SAI. (See "Certain Portfolio Practices
and Techniques-Foreign Investments and Special Risks," page 7.) The Portfolio
also may invest in repurchase agreements and reverse repurchase agreements. (See
"Certain Portfolio Practices and Techniques-Repurchase and Reverse Repurchase
Agreements," page 6.)
4
<PAGE>
C.A.S.E. GROWTH PORTFOLIO
The C.A.S.E. Growth Portfolio's objective is capital growth through
investments in common stocks of small to medium-sized companies. For these
purposes, the Sub-Adviser considers "small cap" stocks to be stocks issued by
companies with market capitalization of between $50 million and $500 million. As
noted above, the Sub-Adviser considers "mid-capitalization" stocks to be stocks
issued by companies with market capitalization of between $350 million and $3
billion. (Companies with market capitalization from $350 million to $500 million
may be classified by the Sub-Adviser as either small cap or medium cap,
depending upon the Sub-Adviser's evaluation of the liquidity of trading in the
company's stock.) This Portfolio will generally invest in smaller, less
well-established companies, with limited product lines and financial resources.
The Portfolio seeks, however, to invest in such companies with above-market
growth characteristics in several investment classifications including sales,
earnings, returns and institutional support. Income derived is incidental to the
Portfolio's investment objective.
The Portfolio seeks to invest substantially all of its assets in common
stocks when the portfolio manager believes that the relevant market environment
favors profitable investing in those securities. Common stock investments are
selected from industries and companies that the portfolio manager believes are
experiencing favorable demand for their products and services, and which operate
in a favorable competitive environment and regulatory climate. The Portfolio
invests in common stocks traded on recognized securities exchanges and in the
over-the-counter market. The Portfolio generally intends to invest in medium to
small sized companies which exhibit sustainable above-market characteristics in
sales, earnings, rates of return, insider and institutional buying. The
Sub-Adviser intends to be aggressive in its efforts to increase shareholders'
capital by investing primarily in companies which are likely to benefit from the
comparatively strong conditional and fundamental circumstances uncovered by the
Sub-Adviser's analysis. The Portfolio will invest in securities of companies
that appear to be under-valued from several vantage points and which, in the
opinion of the Sub-Adviser, demonstrate the characteristics necessary for
significant future growth. As a result of these investment policies, the market
prices of many of the securities purchased by the Portfolio may fluctuate
widely; any income received by the Portfolio from these securities will be
incidental. Investors should be aware that whenever the securities markets
become volatile, secondary growth securities such as those in which the
Portfolio will invest have historically become even more so. The Sub-Adviser
nonetheless believes that small to middle capitalization securities in emerging
markets often have sales and earnings growth rates which exceed more developed
companies. Such growth rates may in turn be reflected in more rapid share price
appreciation.
Although it is the policy of the Portfolio to purchase and hold securities
for long-term capital growth, changes in the Portfolio will generally be made
whenever the Sub-Adviser believes they are advisable, typically either as a
result of securities having reached a price objective or by reason of
developments not foreseen at the time of the investment decision. Since
investment changes ordinarily will be made without reference to the length of
time a security has been held, a significant number of short-term transactions
may result. The rate of portfolio turnover will not be a limiting factor when
changes are deemed to be appropriate. However, certain tax rules may restrict
the Portfolio's ability to sell securities in some circumstances when the
security has been held for an insufficient length of time. Increased portfolio
turnover necessarily results in correspondingly higher brokerage costs for the
Portfolio which are ultimately borne by the shareholders and Contract Owners.
Although the assets of the Portfolio are ordinarily invested in common
stocks at most times, the Portfolio may increase its cash position when the
Sub-Adviser is unable to locate investment opportunities with desirable
risk/reward characteristics. The Portfolio may invest in government securities,
corporate bonds and debentures, high-grade commercial paper, preferred stocks,
certificates of deposits or other securities of U.S. issuers when the
Sub-Adviser perceives an opportunity for capital growth from such securities, or
so that the Portfolio may receive a competitive return on its uninvested cash.
The Portfolio's investments in debt securities will be made in securities of
U.S. and foreign companies, the U.S. Government, foreign governments, and U.S.
and foreign
5
<PAGE>
governmental agencies and instrumentalities and other governmental entities. The
Portfolio may invest up to 15% of its assets in securities of issuers in a
single industry. The Portfolio does not presently intend to invest more than 5%
of its assets in debt securities rated less than investment grade. When the
Portfolio invests in such securities, investment income may increase and may
constitute a larger portion of the return on the Portfolio's investments, and
the Portfolio may not participate in market advances or declines to the extent
that it would if it were fully invested.
The C.A.S.E. Growth Portfolio may invest up to 25% of its net assets at the
time of purchase in the securities of foreign issuers and obligors, as described
below and in the SAI. (See "Certain Portfolio Practices and Techniques-Foreign
Investments and Special Risks," page 7.) The Portfolio also may invest in
repurchase agreements and reverse repurchase agreements. (See "Certain Portfolio
Practices and Techniques-Repurchase and Reverse Repurchase Agreements," below.)
CERTAIN PORTFOLIO POLICIES AND TECHNIQUES; RISK FACTORS
FUTURES CONTRACTS, RELATED OPTIONS AND OTHER HEDGING STRATEGIES. Subject to
certain limitations, each Portfolio may engage in hedging strategies involving
futures contracts and related options, forward currency contracts, and interest
rate swaps, caps and floors. A put option gives the holder the right, upon
payment of a premium, to deliver a specified amount of a security to the writer
of the option on or before a fixed date at a predetermined price. A call option
gives the holder the right, upon payment of a premium, to call upon the writer
to deliver a specified amount of a security on or before a fixed date at a
predetermined price. A Portfolio may engage in hedging strategies to attempt to
reduce the overall level of investment risk that normally would be expected to
be associated with the Portfolio's securities, and to attempt to protect the
Portfolio against market movements that might adversely affect the value of the
Portfolio's securities or the price of securities that the Portfolio is
considering purchasing. There can be no assurance, however, that the use of
these instruments by a Portfolio will assist it in achieving its investment
objective. Generally, the use of hedging strategies involves investment risks
and transaction costs to which the Portfolio would not be subject absent the use
of these strategies. If the Sub-Adviser engages in a hedging transaction
intended to protect a Portfolio against potential adverse movements in the
securities, foreign currency or interest rate markets using these instruments,
and such markets do not move in a direction adverse to the Portfolio, the
Portfolio could be left in a less favorable position than if such hedging
strategy had not been used. The use of hedging strategies involves special
risks, which include: 1) the risk that interest rates, securities prices and
currency markets will not move in the directions anticipated; 2) imperfect
correlation between the price of the hedging instruments and movements in the
prices of the securities or currencies underlying the hedging transaction; 3)
the fact that skills needed to use these strategies are different from those
needed to select portfolio securities; 4) the possible absence of a liquid
secondary market for any particular instrument at any time; and 5) the possible
need to defer closing out certain hedged positions to avoid adverse tax
consequences. Further information on these instruments, hedging strategies and
risk considerations relating to them is set forth in the SAI.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS. A Portfolio may invest in
repurchase and reverse repurchase agreements. A repurchase agreement involves
the purchase of a security by a Portfolio and a simultaneous agreement
(generally by a bank or dealer) to repurchase that security back from the
Portfolio at a specified price and date or upon demand. This technique offers a
method of earning income on idle cash. The repurchase agreement is effectively
secured by the value of the underlying security. A risk associated with
repurchase agreements is the failure of the seller to repurchase the securities
as agreed, which may cause a Portfolio to suffer a loss if the market value of
such securities declines before they can be liquidated on the open market. In
the event of bankruptcy or insolvency of the seller, a Portfolio may encounter
delays and incur costs in liquidating the underlying security. Repurchase
agreements not terminable within seven days are considered illiquid securities
and are subject to the limit stated below.
When a Portfolio invests in a reverse repurchase agreement, it sells a
portfolio security to another party, such as a bank or broker-dealer, in return
for cash, and agrees to buy the security back at a future date and price.
Reverse repurchase agreements may be used to provide cash to satisfy
6
<PAGE>
unusually heavy redemption requests or for other temporary or emergency purposes
without the necessity of selling portfolio securities or to earn additional
income on portfolio securities, such as Treasury bills and notes. Reverse
repurchase agreements may expose a Portfolio to greater fluctuations in the
value of its assets.
ILLIQUID SECURITIES. A Portfolio may invest up to 15% of its net assets in
securities that are considered illiquid because of the absence of a readily
available market or due to legal or contractual restrictions on resale. However,
certain restricted securities that are not registered for sale to the general
public but that can be resold to institutional investors ("Rule 144A
Securities") may not be considered illiquid, provided that a dealer or
institutional trading market exists. The institutional trading market is
relatively new and liquidity of a Portfolio's investments could be impaired if
such trading does not further develop or declines. The Sub-Adviser will
determine the liquidity of Rule 144A Securities under guidelines approved by the
Board of Directors of the Fund.
WHEN-ISSUED SECURITIES. A Portfolio may purchase new issues of U.S.
Government securities on a "when-issued" basis. However, a Portfolio does not
intend to invest more than 20% of its total assets in when-issued securities.
Because actual payment for and delivery of when-issued securities generally take
place 15 to 45 days after the purchase date, a Portfolio that purchases
when-issued securities bears the risk that interest rates and the security's
value at the time of delivery may have changed prior to delivery of the
when-issued security.
SPECIAL SITUATIONS. The Portfolios may invest in "special situations" from
time to time. A special situation arises when, in the opinion of the portfolio
manager, the securities of a particular issuer will be recognized and appreciate
in value due to a specific development with respect to that issuer. Developments
creating a special situation might include, among others, a new product or
process, a management change, a technological breakthrough, or other
extraordinary corporate event, or differences in market supply of and demand for
the security. Investment in special situations may carry an additional risk of
loss in the event that the anticipated development does not occur or does not
attract the expected attention. The impact of this strategy on a Portfolio will
depend on a Portfolio's size and the extent of the holdings of the special
situation issuer relative to its total assets.
LENDING AND BORROWING. Each Portfolio may lend its portfolio securities to
qualified institutional buyers for the purpose of realizing additional income.
Such loans must be continuously secured by liquid assets at least equal to the
market value of the securities loaned and may not together with any other
outstanding loans exceed 25% of a Portfolio's total assets. Securities lending
may involve some credit risk to a Portfolio if the borrower defaults and the
Portfolio is delayed or prevented from recovering the collateral or is otherwise
required to cover a transaction in the security loaned. To secure borrowings, a
Portfolio may not mortgage or pledge its securities in amounts that exceed 15%
of its net assets, at the time the loan or borrowing is made. If portfolio
securities are loaned, collateral values will be continuously maintained at no
less than 100% by marking-to-market daily. If a material event is to be voted
upon affecting a Portfolio's investment in securities which are on loan, the
Portfolio will take such action as may be appropriate in order to vote its
shares.
The Portfolios may also borrow money from banks. Any such loans or
borrowings are expected to be short-term in nature and used for temporary or
emergency purposes, such as to provide cash for redemptions, and will not exceed
25% of a Portfolio's total assets at the time the loan or borrowing is made.
FOREIGN INVESTMENTS AND SPECIAL RISKS. The Portfolios may each invest up
to 25% of net assets at the time of purchase in the securities of foreign
issuers and obligors.
If appropriate and available, the Sub-Adviser may purchase foreign
securities through dollar-denominated American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary Receipts
("GDRs") and other types of receipts or shares evidencing ownership of the
underlying foreign securities. While ADRs are dollar-denominated receipts that
are issued by domestic banks and traded in the United States, EDRs are typically
issued by European banks, and
7
<PAGE>
GDRs may be issued by either domestic or foreign banks. In addition, the
Portfolios may invest indirectly in foreign securities through foreign
investment funds or trusts (including passive foreign investment companies).
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:
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 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 is denominated may affect
the value of the ADR.
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.
CURRENCY TRADING COSTS. A Portfolio incurs costs in converting foreign
currencies into U.S. dollars, and vice versa.
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.
LESS INFORMATION AVAILABLE. There is generally less public information
available about foreign companies.
MORE DIFFICULT BUSINESS NEGOTIATIONS. A Portfolio may find it difficult to
enforce obligations in foreign countries or to negotiate favorable brokerage
commission rates.
REDUCED LIQUIDITY/INCREASED VOLATILITY. Some foreign securities are less
liquid and their prices more volatile, than securities of comparable U.S.
companies.
SETTLEMENT DELAYS. Settling foreign securities may take longer than
settlements in the U.S.
HIGHER CUSTODY CHARGES. Custodianship of shares may cost more for foreign
securities than it does for U.S. securities.
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.
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
8
<PAGE>
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 are subject to some of the same risks as direct investments in foreign
securities, including the currency risk discussed above. The regulatory
requirements with respect to ADRs that are issued in sponsored and unsponsored
programs are generally similar but the issuers of unsponsored ADRs are not
obligated to disclose material information in the U.S., and, therefore, such
information may not be reflected in the market value of the ADRs.
A Portfolio may also enter into foreign currency exchange contracts to
shift exposure to currency exchange rate changes from one foreign currency to
another. This technique is known as cross-hedging. For example, if the
Sub-Adviser believed that a particular currency may decline relative to the U.S.
dollar, a Portfolio could enter into a contract to sell that currency (up to the
value of the Portfolio's assets denominated in that currency) in exchange for
another currency that the Sub-Adviser expects to remain stable or to appreciate
relative to the U.S. dollar. As a non-fundamental operating policy, a Portfolio
will not enter into currency exchange contracts if, as a result, more than 10%
of its assets would be committed to the consummation of cross-hedge contracts,
and will instruct its custodian bank to set aside high-grade, liquid assets to
cover the Portfolio's purchase obligations under this type of contract.
Generally, the use of hedging strategies involves investment risks and
transaction costs to which a Portfolio would not be subject absent the use of
these strategies. If the Sub-Adviser engages in a hedging transaction intended
to protect a Portfolio against potential adverse movements in the securities,
foreign currency or interest rate markets, and such markets do not move in a
direction adverse to the Portfolio, the Portfolio could be left in a less
favorable position than if such hedging strategy had not been used. The use of
hedging strategies involves special risks, which include: 1) the risk that
interest rates, securities prices and currency markets will not move in the
directions anticipated; 2) imperfect correlation between the price of the
hedging instruments and movements in the prices of the securities or currencies
underlying the hedging transaction; 3) the fact that the skills needed to use
these strategies are different from those needed to select portfolio securities;
4) the possible absence of a liquid secondary market for any particular hedging
instrument at any time; and 5) the possible need to defer closing out certain
hedged positions to avoid adverse tax consequences. See the SAI for further
information concerning these risks. The Sub-Adviser will bear the costs of any
separately identifiable expenses incurred in connection with consultation of
experts.
OTHER INVESTMENT POLICIES AND RESTRICTIONS
The Portfolios are subject to other investment policies and restrictions
which are described in the SAI, some of which are fundamental policies of the
Portfolios and as such may not be changed without the approval of the
shareholders of the Portfolios.
PORTFOLIO TURNOVER
A portfolio turnover rate is, in general, the percentage computed by taking
the lesser of purchases or sales of portfolio securities (excluding certain
short-term securities) for a year and dividing it by the monthly average of the
market value of such securities during the year. The Portfolios may engage
frequently in short-term trading. High turnover and short-term trading involve
correspondingly greater commission expenses and transaction costs for the
Portfolios. The Sub-Adviser is unable to predict precisely the future turnover
rate of the Portfolios. However, the annual portfolio turnover rate for the
C.A.S.E. Quality Growth Portfolio is expected to range between 75% and 100%; the
annual portfolio turnover rate for the C.A.S.E. Growth & Income Portfolio is
expected to range between 75% and 100%; and the annual portfolio turnover rate
for the C.A.S.E. Growth Portfolio is expected to range between 150% and 200%
annually. Turnover rates may vary based on market volatility and economic
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conditions. The rate of portfolio turnover will not be a limiting factor when
changes in a Portfolio's holdings are deemed appropriate by the Sub-Adviser. See
"Portfolio Transactions and Brokerage" in the SAI.
MANAGEMENT OF THE FUND
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. There are currently five Directors, three of
whom are not "interested persons" of the Fund within the meaning of that term
under the 1940 Act. The Board meets regularly four times each year and at other
times as necessary. By virtue of the functions performed by WRL Management as
Investment Adviser and C.A.S.E. Management, Inc. as Sub-Adviser, the Fund
requires no employees other than its executive officers, none of whom devotes
full time to the affairs of the Fund. These officers are employees of WRL
Management and receive no compensation from the Fund. The SAI contains the names
of and general background information regarding each Director and executive
officer of the Fund.
THE INVESTMENT ADVISER
WRL Management, located at 201 Highland Avenue, Largo, Florida 33770-2597,
serves as the Fund's Investment Adviser. The Investment Adviser is a direct,
wholly-owned subsidiary of WRL, which is wholly-owned by First AUSA Life
Insurance Company, a stock life insurance company, which is wholly-owned by
AEGON USA, Inc. ("AEGON"). AEGON is a financial services holding company whose
primary emphasis is on life and health insurance and annuity and investment
products. AEGON is a wholly-owned indirect subsidiary of AEGON nv, a Netherlands
corporation, which is a publicly traded international insurance group. The
Investment Adviser has served as the investment adviser to the Fund since
January 1, 1997. Prior to this date, WRL served as investment adviser to each
Portfolio.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Adviser is responsible for managing the Portfolios in accordance
with the Portfolios' stated investment objectives and policies. As compensation
for its services to the Portfolios, the Investment Adviser receives monthly
compensation at the annual rate of 0.80% of the average daily net assets of each
of the Portfolios.
The Investment Adviser is responsible for furnishing continuous advice and
recommendations to the Fund as to the acquisition, holding or disposition of any
or all of the securities or other assets which the Portfolios may own or
contemplate acquiring from time to time; to cause its officers to attend
meetings and furnish oral or written reports, as the Fund may reasonably
require, in order to keep the Board of Directors and appropriate officers of the
Fund fully informed as to the conditions of each investment portfolio of the
Portfolios, the investment recommendations of the Investment Adviser, and the
investment considerations which have given rise to those recommendations; to
supervise the purchase and sale of securities of the Portfolios as directed by
the appropriate officers of the Fund; and to maintain all books and records
required to be maintained by the Investment Adviser pursuant to the 1940 Act and
the rules and regulations promulgated thereunder with respect to transactions on
behalf of the Fund.
The Investment Adviser has voluntarily undertaken, until at least April 30,
1998, to pay expenses on behalf of the C.A.S.E. Quality Growth Portfolio and the
C.A.S.E. Growth & Income Portfolio to the extent normal operating expenses
(including investment advisory fees but excluding interest, taxes, brokerage
fees, commissions, and extraordinary charges) exceed 1.50% of a Portfolio's
average daily net assets. (Prior to May 1, 1996, the Investment Adviser had
voluntarily undertaken to pay expenses on behalf of the C.A.S.E. Quality Growth
Portfolio and the C.A.S.E. Growth & Income Portfolio to the extent normal
operating expenses exceeded 1.00% of average daily net assets.) In addition, the
Investment Adviser has voluntarily undertaken, until at least April 30, 1998, to
pay expenses on behalf of the C.A.S.E. Growth Portfolio to the extent normal
operating expenses (including investment advisory fees but excluding interest,
taxes, brokerage fees, commissions and extraordinary charges) exceed 1.00% of
the Portfolio's average daily net assets. For the year ended December 31, 1996,
and for the period from May 1, 1995 through December 31, 1995, the Fund's
previous investment adviser, WRL, paid expenses on behalf of the C.A.S.E.
Quality Growth Portfolio in the amounts of $34,335 and $23,966, respectively; on
behalf of the C.A.S.E. Growth & Income Portfolio in the amounts of $33,658 and
$23,049, respectively; and on behalf of C.A.S.E. Growth
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Portfolio in the amounts of $73,269 and $23,832, respectively. For the fiscal
years ended December 31, 1996 and for the period from May 1, 1995 through
December 31, 1995, the actual expenses for the C.A.S.E. Quality Growth Portfolio
were 3.56% and 5.91% of average daily net assets, respectively; for the C.A.S.E.
Growth and Income Portfolio were 3.34% and 6.17% of average daily net assets,
respectively; and for the C.A.S.E. Growth Portfolio were 1.64% and 4.15% of
average daily net assets, respectively. The Investment Adviser is not obligated
to continue any voluntary expense limitation beyond April 30, 1988.
In addition to the Investment Adviser's responsibilities discussed above,
the Investment Adviser's advisory agreement with the Fund (the "Advisory
Agreement") contemplates that the Investment Adviser, in connection with the
performance of its responsibilities under the Advisory Agreement, will enter
into sub-advisory agreements ("Sub-Advisory-Agreements") with Sub-Advisers to
provide each Portfolio with portfolio management. Under current law, every
Sub-Advisory Agreement must be submitted to and approved by shareholders of a
Portfolio before the Sub-Adviser can provide investment advice to that
Portfolio. For example, if a new Sub-Adviser were retained, shareholders would
be required to approve the Sub-Advisory agreement with that Sub-Adviser.
Similarly, if a Sub-Advisory Agreement were amended in any material respect,
such amendment would generally be deemed to result in a new contract for which
shareholder approval would also be required. Moreover, in most instances when
there is a change of control of a Sub-Adviser, shareholder approval is required.
The Fund's Board of Directors has determined that shareholders of each
Portfolio have, in effect, elected to have the Investment Adviser select one or
more Sub-Advisers best suited to achieve the Portfolio's investment objectives.
The Board believes that part of a shareholder's investment decision is a
determination to have those selections made by the Investment Adviser, a
professional management organization with personnel having substantial
experience in making such evaluations, selections and terminations.
Under applicable law, the Fund is not generally required to hold annual
shareholders' meetings, and does not generally hold such meetings, unless
legally required to do so, in order to avoid the attendant costs. The Fund is
currently required to call a meeting of shareholders of a Portfolio whenever it
decides to employ new or additional Sub-Advisers, or to approve a new
Sub-Advisory Agreement after an "assignment", or due to a material change in
Sub-Advisory Agreement terms, with respect to such Portfolio. Given the nature
of the Fund's operations and shareholders' reasons for investing in various of
the Portfolios, such expenses are considered to provide little if any benefit to
shareholders. For these reasons, the Fund and the Investment Adviser have
applied to the SEC for an exemption from the provisions of the 1940 Act to
permit the Fund and the Investment Adviser, subject to certain conditions, to
enter into, materially amend, and terminate, and to permit Sub-Advisers to act
pursuant to, Sub-Advisory Agreements without shareholder approval (the "Proposed
Sub-Advisory Arrangement").
If the SEC exemption is granted, certain conditions would apply. The
conditions are intended to ensure that shareholders receive adequate disclosure
about the Sub-Advisers or a decision by the Investment Adviser and the Fund's
Board of Directors to appoint a new Sub-Adviser or to change materially the
terms of a Sub-Advisory Agreement. In addition, before a Portfolio could rely on
the exemption, the Proposed Sub-Advisory Arrangement must be approved by a
majority of the outstanding voting securities of the Portfolio. The Fund's Board
of Directors and the Investment Adviser intend to ask shareholders of the
Portfolios to approve the Proposed Sub-Advisory Arrangement at a future date.
DISTRIBUTION PLAN AND DISTRIBUTION AGREEMENT
Effective January 1, 1997, the Fund 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.
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The expenses the Fund may pay pursuant to the Distribution Plan shall
include, but are not necessarily limited to, the following: cost of printing and
mailing Fund prospectuses and statements of additional information, and any
supplements thereto to prospective investors; costs relating to development and
preparation of Fund advertisements, sales literature and brokers' and other
promotional materials describing and/or relating to the Fund; expenses in
connection with presentation of seminars and sales meetings describing the Fund;
development of consumer-oriented sales materials describing the Fund; and
expenses attributable to "distribution-related services" provided to the Fund
(E.G., salaries and benefits, office expenses, equipment expenses (I.E.,
computers, software, office equipment, etc.), training expenses, travel costs,
printing costs, supply expenses, programming time and data center expenses, each
as they relate to the promotion of the sale of Fund shares).
Under the Distribution Plan, the Fund, on behalf of the Portfolios, is
authorized to pay to various service providers, as direct payment for expenses
incurred in connection with the distribution of a Portfolio's shares, amounts
equal to actual expenses associated with distributing such Portfolio's shares,
up to a maximum rate of 0.15% on an annualized basis of the average daily net
assets. This fee is measured and accrued daily and paid monthly.
ISI will submit to the Fund's Board for approval annual distribution
expenses with respect to each Portfolio. ISI allocates to each Portfolio
distribution expenses specifically attributable to the distribution of shares of
such Portfolio. Distribution expenses not specifically attributable to the
distribution of shares of a particular Portfolio are allocated among the
Portfolios, based upon the ratio of net asset value of each Portfolio to the net
asset value of all Portfolios, or such other factors as ISI deems fair and are
approved by the Fund's Board.
ISI has determined it will not seek payment by the Fund of distribution
expenses with respect to any Portfolio during the fiscal year ending December
31, 1997. Prior to ISI seeking reimbursement, Policyowners will be notified in
advance.
ADMINISTRATIVE AND TRANSFER AGENCY SERVICES
Effective January 1, 1997, the Fund entered into an Administrative Services
and Transfer Agency Agreement with WRL Investment Services, Inc. ("WRL
Services"), an affiliate of WRL Management and WRL, to furnish the Fund with
administrative services to assist the Fund in carrying out certain of its
functions and operations. Under this Agreement, WRL Services shall furnish to
each Portfolio, subject to the overall supervision of the Board, supervisory,
administrative, and transfer agency services, including recordkeeping and
reporting. WRL Services is reimbursed by the Fund monthly on a cost incurred
basis. Prior to January 1, 1997, WRL performed these services in connection with
its serving as the Fund's investment adviser.
THE SUB-ADVISER
C.A.S.E. Management, Inc., located at 2255 Glades Road, Suite 221-A, Boca
Raton, Florida 33431, serves as the Sub-Adviser to the Portfolios. C.A.S.E.
Management, Inc. is a registered investment advisory firm and a wholly-owned
subsidiary of C.A.S.E. Inc. C.A.S.E. Inc. is indirectly controlled by William
Edward Lange, president and chief executive officer of the Sub-Adviser. The
Sub-Adviser provides investment management services to financial institutions,
high net worth individuals, and other professional money managers. The
Sub-Adviser has not previously managed a registered investment company.
Informally, the Sub-Adviser's Board members confer on a continuous basis,
gathering economic sector, industry and stock specific information from the
Sub-Adviser's research and management resources. Each of the Sub-Adviser's Board
members are individually responsible for the analytical coverage of one or two
of the market's eight economic sectors. The Sub-Adviser's "sector specialists"
are encouraged to maintain contact with counterpart sector specialists from
leading outside research organizations. The information gathered for
consideration by the Board's sector specialists also includes objective forms of
research from various governmental agencies, stock exchanges and financial
capitols. Formally, the Sub-Adviser's Board meets monthly to formulate overall
strategic investment positions. The Board then formally reviews its current
investment focus towards every
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stock, industry, and economic sector owned in its overall stock population. When
stocks are sold or removed from the Sub-Adviser's overall population, it is
generally because their investment characteristics have deteriorated to a point
deemed to be unfavorable by the sector specialist or the full membership of the
Board. Stocks which appear to have above-market characteristics may also be
added to the Sub-Adviser's overall population, and to a Portfolio (if otherwise
consistent with the Portfolio's investment objective and restrictions) by the
sector specialist or the collective vote of the Sub-Adviser's Board members,
anytime during the month, or during the Sub-Adviser's formal month-end Board
meeting.
The Sub-Adviser provides investment advisory assistance and portfolio
management advice to the Investment Adviser for each Portfolio. Subject to
review and supervision by the Investment Adviser and the Board of Directors of
the Fund, the Sub-Adviser is responsible for the actual management of the
Portfolios and for making decisions to buy, sell or hold any particular
security, and it places orders to buy or sell securities on behalf of the
Portfolios. The Sub-Adviser bears all of its expenses in connection with the
performance of its services, such as compensating and furnishing office space
for its officers and employees connected with investment and economic research,
trading and investment management of the Portfolios.
The Sub-Adviser's investment philosophies reflect fundamental research,
both qualitative and quantitative. It utilizes industry analysts, direct field
investigations, and market relative comparative measures in evaluating
prospective and current investments of the Portfolios. These comparative
measures include, but are not limited to, insider ownership and changes thereto,
institutional ownership and changes thereto, earnings projections and
predictability, return on equity, price/earnings ratios during various measuring
periods, and price to book value. Investment selections are also influenced by
the cyclical aspects of the economy, monetary flows, policies of the Federal
Reserve, and the Sub-Adviser's proprietary comparative analysis methods. The
Sub-Adviser conducts a detailed review of each Portfolio's investments on a
monthly basis, based on comparative and other research categories. The scope of
its research is obtained from governmental agencies, analyst driven research
departments and stock exchanges.
In undertaking its research and conducting its analysis of current and
potential investments for the Portfolios, the Sub-Adviser utilizes complex
proprietary computer-based programs developed by the Sub-Adviser's parent,
C.A.S.E., Inc. These programs are available to the Sub-Adviser by license from
its parent. The Sub-Adviser believes that time and cost efficiencies associated
with these programs permit it to maintain current information on over 4,000
stocks listed on the major North American exchanges in fifty-seven industries
and eight economic sectors and to evaluate this information on a market
comparative basis using over 30 different strategic and econometric models.
For its services, the Sub-Adviser receives monthly compensation from the
Investment Adviser at the annual rate of 0.40% of the average daily net assets
of the Portfolios.
The Sub-Adviser is also responsible for selecting the broker-dealers who
execute the portfolio transactions for the Portfolios. The Sub-Adviser is
authorized to consider sales of the Contracts described in the accompanying
prospectus by a broker-dealer as a factor in the selection of broker-dealers to
execute portfolio transactions. In placing portfolio business with all dealers,
the Sub-Adviser seeks best execution of each transaction and all brokerage
placement must be consistent with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. In addition, the Sub-Adviser may
occasionally place portfolio business with broker-dealers affiliated with the
Investment Adviser or the Sub-Adviser; in such event, the Sub-Adviser always
will seek best execution.
PERSONAL SECURITIES TRANSACTIONS
The Fund permits "Access Persons" as defined by Rule 17j-1 under the 1940
Act to engage in personal securities transactions, subject to the terms of the
Code of Ethics and Insider Trading Policy ("Ethics Policy") that has been
adopted by the Board of Directors of the Fund. Access Persons are required to
follow the guidelines established by this Ethics Policy in connection with all
personal securities transactions and are subject to certain prohibitions on
personal trading. The Fund's Sub-Advisers, pursuant to Rule 17j-1 and other
applicable laws, and pursuant to the terms of the Ethics
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Policy, must adopt and enforce their own Codes of Ethics and Insider Trading
Policies appropriate to their operations. Each Sub-Adviser is required to report
to the Board of Directors on a quarterly basis with respect to the
administration and enforcement of such Ethics Policy, including any violations
thereof which may potentially affect the Fund.
DIVIDENDS AND DISTRIBUTIONS
The Portfolios intend to distribute substantially all of the net investment
income, if any. Dividends from investment income, if any, of the Portfolios
normally are declared and paid semi-annually in additional shares of the
Portfolios at net asset value. Distributions of net realized capital gains from
security transactions and net gains from foreign currency transactions, if any,
normally are declared and paid in additional shares of the Portfolios at the end
of the fiscal year.
TAXES
Each Portfolio has qualified and expects to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended ("Code"). As such, a Portfolio is not subject to Federal income
tax on that part of its investment company taxable income (consisting generally
of net investment income, net gains from certain foreign currency transactions,
and net short-term capital gain, if any) and any net capital gain (the excess of
net long-term capital gain over net short-term capital loss) that it distributes
to its shareholders. It is each Portfolio's intention to distribute all such
income and gains.
Shares of each Portfolio are offered only to the Separate Account (which is
an insurance company separate account that funds the Contracts). Under the Code,
no tax is imposed on an insurance company with respect to income of a qualifying
separate account properly allocable to the value of eligible variable annuity
contracts. For a discussion of the taxation of life insurance companies and the
Separate Account, as well as the tax treatment of the Contracts and the Contract
Owners thereof, see "Federal Tax Matters" included in the respective
prospectuses for the Contracts.
Each Portfolio intends to comply with the diversification requirements
imposed by section 817(h) of the Code and the regulations thereunder. These
requirements are in addition to the diversification requirements imposed on each
Portfolio by Subchapter M and the 1940 Act. These requirements place certain
limitations on the assets of each separate account that may be invested in
securities of a single issuer, and, because section 817(h) and the regulations
thereunder treat each Portfolio's assets as assets of the related separate
account, these limitations also apply to each Portfolio's assets that may be
invested in securities of a single issuer. Specifically, the regulations provide
that, except as permitted by the "safe harbor" described below, as of the end of
each calendar quarter or within 30 days thereafter no more than 55% of the
Portfolio's total assets may be represented by any one investment, no more than
70% by any two investments, no more than 80% by any three investments, and no
more than 90% by any four investments.
Section 817(h) provides, as a safe harbor, that a separate account will be
treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities, and
securities of other regulated investment companies. For purposes of section
817(h), all securities of the same issuer, all interests in the same real
property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or instrumentality
is treated as a separate issuer, while the securities of a particular foreign
government and its agencies, instrumentalities, and political subdivisions all
will be considered securities issued by the same issuer. Failure of a Portfolio
to satisfy the section 817(h) requirements would result in taxation of the
Separate Account, WRL, the Contracts, and tax consequences to the Contract
Owners thereof, other than as described in the prospectus for the Contracts.
The foregoing is only a summary of some of the important Federal income tax
considerations generally affecting a Portfolio and its shareholders; see the SAI
for a more detailed discussion. Prospective investors are urged to consult their
tax advisors.
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PURCHASE AND REDEMPTION OF SHARES
Shares of a Portfolio are sold and redeemed at their net asset value next
determined after receipt of a purchase order or notice of redemption in proper
form. Shares are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain sales and other charges may
apply to the Contracts. Such charges are described in the respective
prospectuses for the Contracts.
VALUATION OF SHARES
A Portfolio's net asset value per share is ordinarily determined, once
daily, as of the close of the regular session of business on the New York Stock
Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day the
Exchange is open.
Net asset value of a Portfolio share is computed by dividing the value of
the net assets of each Portfolio by the total number of shares outstanding in
each Portfolio.
Except for money market instruments maturing in 60 days or less, securities
held by the Portfolios are valued at market value. Securities for which market
values are not readily available are valued at fair value as determined in good
faith by the Advisers under the supervision of the Fund's Board of Directors.
Money market instruments maturing in 60 days or less are valued on the amortized
cost basis. (See the SAI for details.)
THE FUND AND ITS SHARES
The Fund was incorporated under the laws of the State of Maryland on August
21, 1985 and is registered with the SEC as a diversified, open-end, management
investment company.
The Fund offers shares of the Portfolios for purchase by the Separate
Accounts 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 shares of all portfolios of the Fund
are sold to these various separate accounts established to receive and invest
premiums received under variable life insurance policies and purchase payments
received under variable annuity contracts, it is conceivable that, in the
future, it may become disadvantageous for such variable life insurance separate
accounts and variable annuity separate accounts to invest in the Fund
simultaneously. Neither the Life Companies nor the Fund currently foresees any
such disadvantages or conflicts, either to variable life insurance policyowners
or to variable annuity contractowners. After being notified by one or more of
the Life Companies of a potential or existing conflict, the Fund's Board of
Directors will determine if a material conflict exists and what action, if any,
should be taken in response thereto. Such action could include the sale of
shares of the Portfolios by the Separate Account or of shares of other Fund
portfolios by one or more of the Other Separate Accounts, which could have
adverse consequences. Material conflicts could result from, for example, (1)
changes in state insurance laws, (2) changes in Federal income tax laws, or (3)
differences in voting instructions between those given by variable life
insurance policyowners and those given by variable annuity contractowners. If
the Board of Directors were to conclude that separate funds should be
established for variable life and variable annuity separate accounts, the
affected Life Companies will bear the attendant expenses, but variable life
insurance policyowners and variable annuity contractowners would no longer have
the economies of scale typically resulting from a larger combined fund.
The Fund offers a separate class of common stock for each portfolio. All
shares of the Portfolios and of each of the other portfolios have equal voting
rights, except that only shares of a particular portfolio will be entitled to
vote on matters concerning only that portfolio. Each issued and outstanding
share of a Portfolio is entitled to one vote and to participate equally in
dividends and distributions declared by that Portfolio and, upon liquidation or
dissolution, to participate equally in the net assets of such Portfolio
remaining after satisfaction of outstanding liabilities. The shares of each
Portfolio, when issued, will be fully paid and nonassessable, have no
preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights and the holders
of more than 50% of the shares of the Fund voting for the election of directors
can elect all of
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the directors of the Fund if they choose to do so, and in such event holders of
the remaining shares would not be able to elect any directors.
Only the Separate Account and the Other Separate Accounts of the Life
Companies may hold shares of portfolios of the Fund and are entitled to exercise
the rights directly as described above. If and to the extent required by law,
WRL will vote the Portfolios' shares, and the Life Companies will vote the
shares of the Fund's other portfolios in the Other Separate Accounts, including
shares which are not attributable to Contract Owners and holders of the
Policies, respectively, at meetings of the Fund in accordance with instructions
received from Contract Owners and holders of the Policies, respectively, having
voting interests in the corresponding sub-accounts of the Separate Account and
the Other Separate Accounts. Except as required by the 1940 Act, the Fund does
not hold regular or special shareholder meetings. If the 1940 Act or any
regulation thereunder should be amended or if present interpretation thereof
should change, and as a result it is determined that the Life Companies are
permitted to vote Fund shares in their own right, they may elect to do so. The
rights of Contract Owners and holders of the Policies are described in more
detail in the prospectuses or disclosure document for the Contract and the
Policies, respectively.
PERFORMANCE INFORMATION
The Fund may, from time to time, include quotations of a Portfolio's total
return or yield in connection with the total return for the corresponding
sub-account of the Separate Account in advertisements, sales literature or
reports to Contract Owners or to prospective investors. Total return and yield
quotations for a Portfolio reflect only the performance of a hypothetical
investment in the Portfolio during the particular time period shown as
calculated based on the historical performance of the Portfolio during that
period. SUCH QUOTATIONS DO NOT IN ANY WAY INDICATE OR PROJECT FUTURE
PERFORMANCE. Quotations of total return and yield will not reflect charges or
deductions against the Separate Account or charges and deductions against the
Contracts. Where relevant, the prospectus for the Contracts contains additional
performance information.
The total return of a Portfolio refers to the average annual percentage
change in value of an investment in the Portfolio held for various periods of
time, including, but not limited to, one year, five years, ten years and since
the Portfolio began operations, as of a stated ending date. When a Portfolio has
been in operation for these periods, the total return for such periods will be
provided if performance information is quoted. Total return quotations for a
Portfolio are expressed as average annual compound rates of return for each of
the periods quoted, reflect the deduction of a proportionate share of a
Portfolio's investment advisory fees and Portfolio expenses, and assume that all
dividends and capital gains distributions during the period are reinvested in
the Portfolio when made.
The Fund may, from time to time, disclose in advertisements, sales
literature and reports to Contract Owners or to prospective investors, total
returns for a Portfolio for periods in addition to those required to be
presented, or disclose other nonstandardized data such as cumulative total
returns, actual year-by-year returns, or any combination thereof.
The Fund may also, from time to time, compare performance information for a
Portfolio in advertisements, sales literature and reports to Contract Owners or
to prospective investors to: (1) the Standard & Poor's Index of 500 Common
Stocks, the Dow Jones Industrial Average or other widely recognized indices; (2)
other mutual funds whose performance is reported by Lipper Analytical Services,
Inc., ("Lipper"), Variable Annuity Research & Data Service ("VARDS") and
Morningstar, Inc. ("Morningstar") or reported by other services, companies,
individuals or other industry or financial publications of general interest,
such as FORBES, MONEY, THE WALL STREET JOURNAL, BUSINESS WEEK, BARRON'S,
KIPLINGER'S PERSONAL FINANCE and FORTUNE, which rank and/or rate mutual funds by
overall performance or other criteria; and (3) the Consumer Price Index. Lipper,
VARDS and Morningstar are widely quoted independent research firms which rank
mutual funds according to overall performance, investment objective, and assets.
Unmanaged indices may assume the reinvestment of dividends but usually do not
reflect any "deduction" for the expense of operating or managing a fund.
(See the SAI for more information about the Portfolios' performance.)
16
<PAGE>
GENERAL INFORMATION
REPORTS TO POLICYHOLDERS
The fiscal year of the Portfolios ends on December 31 of each year. The
Fund will send to the Portfolios' Policyholders, at least semi-annually, reports
showing the Portfolios' compositions and other information. An annual report,
containing financial statements audited by the Fund's independent accountants,
will be sent to Policyholders each year.
CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111 acts as Custodian and Dividend Disbursing Agent of the Portfolios' assets.
ADDITIONAL INFORMATION
The telephone number or the address of the Fund appearing on the first page
of this Prospectus should be used for requests for additional information.
17
<PAGE>
WRL SERIES FUND, INC.
C.A.S.E. QUALITY GROWTH PORTFOLIO
C.A.S.E. GROWTH & INCOME PORTFOLIO
C.A.S.E. GROWTH PORTFOLIO
OFFICE OF THE FUND:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, Florida 33770-2597
(800) 851-9777
(813) 585-6565
INVESTMENT ADVISER:
WRL Investment Management, Inc.
201 Highland Avenue
Largo, FL 33770-2597
SUB-ADVISER:
C.A.S.E. Management, Inc.
2255 Glades Road
Suite 221-A
Boca Raton, FL 33431
CUSTODIAN:
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
INDEPENDENT ACCOUNTANTS:
Price Waterhouse LLP
1055 Broadway
Kansas City, MO 64105
TRANSFER AGENT:
WRL Investment Services, Inc.
201 Highland Avenue
Largo, FL 33770
DISTRIBUTOR:
InterSecurities, Inc.
201 Highland Avenue
Largo, FL 33770-2597
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF
ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES OR AN OFFER TO ANY PERSON IN ANY STATE OR JURISDICTION OF THE
UNITED STATES OR ANY COUNTRY WHERE SUCH OFFER WOULD BE UNLAWFUL.
WRL00069-05/97
18
<PAGE>
WRL SERIES FUND, INC.
C.A.S.E. QUALITY GROWTH PORTFOLIO
C.A.S.E. GROWTH & INCOME PORTFOLIO
C.A.S.E. GROWTH PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the Prospectus for the
C.A.S.E. Quality Growth Portfolio, C.A.S.E. Growth & Income Portfolio and
C.A.S.E. Growth Portfolio of the WRL Series Fund, Inc. (the "Fund"). A copy of
the Prospectus may be obtained from the Fund by writing the Fund at 201 Highland
Avenue, Largo, Florida 33770 or by calling the Fund at (800) 851-9777.
WRL INVESTMENT MANAGEMENT, INC.
Investment Adviser
C.A.S.E. MANAGEMENT, INC.
Sub-Adviser
The date of the Prospectus to which this Statement of Additional
Information relates and the date of this Statement of Additional Information is
May 1, 1997.
WRL00073-5/97
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE
OF ADDITIONAL INFORMATION TO PAGE IN PROSPECTUS
------------------------- ---------------------
<S> <C> <C>
Investment Objective and Policies 1 3
Investment Restrictions 1 9
Repurchase and Reverse Repurchase
Agreements 2 6
Lending of Portfolio Securities 3 7
Foreign Securities 3 7
Non-Investment Grade Debt Securities 4 4
Investments in Futures, Options and Other
Derivative Instruments 4 6
Management of the Fund 15 10
Directors and Officers 15 10
The Investment Adviser 17 10
The Sub-Adviser 20 12
Portfolio Transactions and Brokerage 20 13
Portfolio Turnover 20 9
Placement of Portfolio Brokerage 21 13
Purchase and Redemption of Shares 23 15
Offering of the Shares and Determination of
Offering Price 23 15
Net Asset Valuation 23 15
Investment Experience Information 23 16
Calculation of Performance Related Information 23 16
Total Return 23 16
Yield Quotations 24 16
Taxes 24 14
Capital Stock of the Fund 26 15
Registration Statement 26 N/A
Financial Statements 26 17
Other Information 26 17
Appendix A - Description of Portfolio Securities A-1 6
Appendix B - Description of Selected Corporate
Bond and Commercial Paper Ratings B-1 3
</TABLE>
i
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the C.A.S.E. Quality Growth Portfolio,
C.A.S.E. Growth & Income Portfolio and C.A.S.E. Growth Portfolio (the
"Portfolios") of the Fund are described in the Portfolios' Prospectus. Shares of
the Portfolios are sold only to the WRL Series Annuity Account, a separate,
segregated asset account (the "Separate Account") of Western Reserve Life
Assurance Co. of Ohio ("WRL") to fund the benefits under certain variable
annuity contracts (the "Contracts").
As indicated in the Prospectus, the Portfolios' investment objectives and,
unless otherwise noted, its investment policies and techniques may be changed by
the Board of Directors of the Fund without approval of the owners of the
Contracts (collectively, "Contract Owners"). A change in the investment
objectives or policies of a Portfolio may result in the Portfolios having
investment objectives or policies different from those which a Contract Owner
deemed appropriate at the time of investment.
As indicated in the Prospectus, each Portfolio is subject to certain
fundamental policies and restrictions which may not be changed without the
approval of the holders of a majority of the outstanding voting shares of the
Portfolio. "Majority" for this purpose and under the Investment Company Act of
1940, as amended (the "1940 Act") means the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares of a
Portfolio are represented or (ii) more than 50% of the outstanding shares of a
Portfolio. A complete statement of all such fundamental policies is set forth
below.
INVESTMENT RESTRICTIONS - ALL PORTFOLIOS
A Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than cash items and "Government securities"
as defined in the 1940 Act) if immediately after and as a result of such
purchase (a) the value of the holdings of the Portfolio in the securities of
such issuer exceeds 5% of the value of the Portfolio's total assets, or (b) the
Portfolio owns more than 10% of the outstanding voting securities of any one
class of securities of such issuer;
2. Invest more than 15% of the value of the Portfolio's assets in any
particular industry (other than Government securities);
3. Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this restriction
shall not prevent the Portfolio from purchasing or selling options, futures
contracts, caps, floors and other derivative instruments, engaging in swap
transactions or investing in securities or other instruments backed by physical
commodities);
4. Invest directly in real estate or interests in real estate, including
limited partnership interests; however, the Portfolio may own debt or equity
securities issued by companies engaged in those businesses;
5. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of portfolio securities of the Portfolio; and
6. Lend any security or make any other loan if, as a result, more than 25%
of its total assets would be lent to other parties (but this limitation does not
apply to purchases of commercial paper, debt securities or to repurchase
agreements).
Furthermore, the Portfolios have adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Contract Owner approval:
(A) A Portfolio may not, as a matter of non-fundamental policy: (i) enter
into any futures contracts or options on futures contracts for purposes other
than bona fide hedging transactions within the meaning of Commodity Futures
Trading Commission regulations if the aggregate initial margin deposits and
premiums required to establish positions in futures contracts and related
options that do not fall within the definition of bona fide hedging transactions
would exceed 5% of the fair market value
1
<PAGE>
of the Portfolio's net assets, after taking into account unrealized profits and
losses on such contracts it has entered into and (ii) enter into any futures
contracts or options on futures contracts if the aggregate amount of the
Portfolio's commitments under outstanding futures contracts positions and
options on futures contracts would exceed the market value of its total assets.
(B) A Portfolio may not mortgage or pledge any securities owned or held by
the Portfolio in amounts that exceed, in the aggregate, 15% of the Portfolio's
net assets, provided that this limitation does not apply to reverse repurchase
agreements or in the case of assets deposited to provide margin or guarantee
positions in options, futures contracts, swaps, forward contracts or other
derivative instruments or the segregation of assets in connection with such
transactions;
(C) A Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities sold
short, and provided that transactions in options, futures contracts, swaps,
forward contracts and other derivative instruments are not deemed to constitute
selling securities short;
(D) A Portfolio may not purchase securities on margin, except that a
Portfolio may obtain such short-term credits as are necessary for the clearance
of transactions, and provided that margin payments and other deposits made in
connection with transactions in options, futures contracts, swaps, forward
contracts, and other derivative instruments shall not be deemed to constitute
purchasing securities on margin;
(E) A Portfolio may borrow money only for temporary or emergency purposes
(not for leveraging or investment) in an amount not exceeding 25% of the value
of the Portfolio's total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that exceed 25% of the value of the
Portfolio's total assets by reason of a decline in net assets will be reduced
within three business days to the extent necessary to comply with the 25%
restriction. This policy shall not prohibit reverse repurchase agreements or
deposits of assets to provide margin or guarantee positions in connection with
transactions in options, future contracts, swaps, forward contracts, or other
derivative instruments or the segregation of assets in connection with such
transactions;
(F) A Portfolio may not invest more than 15% of its net assets in illiquid
securities. This does not include securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933 or other securities for which the
Board of Directors or the Sub-Adviser has made a determination of liquidity, as
permitted under the 1940 Act;
(G) A Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Restrictions (i) and (ii) do not apply to
money market funds or to securities received as dividends, through offers to
exchange, or as a result of reorganization, consolidation, or merger. If the
Portfolio invests in a money market fund, the Investment Adviser will reduce its
advisory fee by the amount of any investment advisory or administrative service
fees paid to the investment manager of the money market fund;
(H) A Portfolio may not invest more than 25% of its net assets at the time
of purchase in the securities of foreign issuers and obligors;
(I) A Portfolio may not invest in companies for the purpose of exercising
control or management; and
(J) A Portfolio may not issue senior securities, except as permitted by the
1940 Act.
Except with respect to borrowing money, if a percentage limitation set
forth above is complied with at the time of the investment, a subsequent change
in the percentage resulting from any change in value or of a Portfolio's net
assets will not result in a violation of such restriction. State laws and
regulations may impose additional limitations on borrowings, lending, and the
use of options, futures, and other derivative instruments. In addition, such
laws and regulations may require the Portfolios' investments in foreign
securities to meet additional diversification and other requirements.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
In a repurchase agreement, a Portfolio purchases a security and
simultaneously commits to resell that security to the seller at an agreed upon
price on an agreed upon date within a number of days
2
<PAGE>
(usually not more than seven) from the date of purchase. The resale price
reflects the purchase price plus an agreed upon incremental amount that is
unrelated to the coupon rate or maturity of the purchased security. A repurchase
agreement involves the obligation of the seller to pay the agreed upon price,
which obligation is in effect secured by the value (at least equal to the amount
of the agreed upon resale price and marked-to-market daily) of the underlying
security. A Portfolio may engage in a repurchase agreement with respect to any
security in which it is authorized to invest. While it does not presently appear
possible to eliminate all risks from these transactions (particularly the
possibility of a decline in the market value of the underlying securities, as
well as delays and costs to a Portfolio in connection with bankruptcy or
insolvency proceedings), it is the policy of each Portfolio to limit repurchase
agreements to those parties whose creditworthiness has been reviewed and found
satisfactory by the Sub-Adviser.
In a reverse repurchase agreement, a Portfolio sells a portfolio security
to another party, such as a bank or broker-dealer, in return for cash and agrees
to repurchase the instrument at a particular price and time. While a reverse
repurchase agreement is outstanding, a Portfolio will maintain cash and
appropriate liquid assets in a segregated custodial account to cover its
obligation under the agreement. A Portfolio will enter into reverse repurchase
agreements only with parties that the Sub-Adviser deems creditworthy.
LENDING OF PORTFOLIO SECURITIES
Each of the Portfolios may lend its portfolio securities subject to the
restrictions stated in this Statement of Additional Information. Under
applicable regulatory requirements (which are subject to change), the following
conditions apply to securities loans: (a) the loan must be continuously secured
by liquid assets maintained on a current basis in an amount at least equal to
the market value of the securities loaned; (b) each of the Portfolios must
receive any dividends or interest paid by the issuer on such securities; (c)
each of the Portfolios must have the right to call the loan and obtain the
securities loaned at any time upon notice of not more than five business days,
including the right to call the loan to permit voting of the securities; and (d)
each of the Portfolios must receive either interest from the investment of
collateral or a fixed fee from the borrower. Securities loaned by a Portfolio
remain subject to fluctuations in market value. A Portfolio may pay reasonable
finders, custodian and administrative fees in connection with a loan. Securities
lending, as with other extensions of credit, involves the risk that the borrower
may default. Although securities loans will be fully collateralized at all
times, a Portfolio may experience delays in, or be prevented from, recovering
the collateral. During the period that the Portfolio seeks to enforce its rights
against the borrower, the collateral and the securities loaned remain subject to
fluctuations in market value. A Portfolio may also incur expenses in enforcing
its rights. If a Portfolio has sold a loaned security, it may not be able to
settle the sale of the security and may incur potential liability to the buyer
of the security on loan for its costs to cover the purchase.
FOREIGN SECURITIES
Subject to the limitations set forth above, the Portfolios may purchase
certain foreign securities. Investments in foreign securities, particularly
those of non-governmental issuers, involve considerations which are not
ordinarily associated with investing in domestic issuers. These considerations
include changes in currency rates, currency exchange control regulations, the
possibility of expropriation, the unavailability of financial information or the
difficulty of interpreting financial information prepared under foreign
accounting standards, less liquidity and more volatility in foreign securities
markets, the impact of political, social or diplomatic developments, and the
difficulty of assessing economic trends in foreign countries. It is possible
that market quotations for foreign securities will not be readily available. In
such event, these securities shall be valued at fair market value as determined
in good faith by the Sub-Adviser under the supervision of the Board of
Directors. If it should become necessary, a Portfolio could encounter greater
difficulties in invoking legal processes abroad than would be the case in the
United States. Transaction costs with respect to foreign securities may be
higher. The Investment Adviser and the Sub-Adviser will consider these and other
factors before investing in foreign securities. The Portfolios will not
concentrate their investments in any particular foreign country.
3
<PAGE>
To the extent a Portfolio invests directly in foreign securities, a
Portfolio will engage in foreign exchange transactions. The foreign currency
exchange market is subject to little government regulation, and such
transactions generally occur directly between parties rather than on an exchange
or in an organized market. This means that a Portfolio is subject to the full
risk of default by a counterparty in such a transaction. Because such
transactions often take place between different time zones, a Portfolio may be
required to complete a currency exchange transaction at a time outside of normal
business hours in the counterparty's location, making prompt settlement of such
transaction impossible. This exposes a Portfolio to an increased risk that the
counterparty will be unable to settle the transaction. Although the counterparty
in such transactions is often a bank or other financial institution, currency
transactions are generally NOT covered by insurance otherwise applicable to such
institutions. For a more detailed explanation regarding the special risks of
investing in foreign securities, see "Foreign Investments and Special Risks" in
the Prospectus.
NON-INVESTMENT GRADE DEBT SECURITIES
A Portfolio may, but does not currently invest, or intend to invest, in
debt securities below the four highest grades ("lower grade debt securities") as
determined by Moody's Investors Service, Inc. ("Moody's") (Baa) or Standard &
Poor's ("S&P") (BBB). The Portfolios do not currently intend to invest more than
5% of their assets in non-investment grade securities. Before investing in any
lower-grade debt securities, the Sub-Adviser will determine that such
investments meet the Portfolio's investment objectives and that the lower-grade
debt securities' ratings are supported by an internal credit review, which the
Sub-Adviser will conduct in each such instance. Lower-grade debt securities
usually have moderate to poor protection of principal and interest payments,
have certain speculative characteristics (see Appendix B for a description of
the ratings), and involve greater risk of default or price declines due to
changes in the issuer's creditworthiness than investment-grade debt securities.
Because the market for lower-grade debt securities may be thinner and less
active than for investment grade debt securities, there may be market price
volatility for these securities and limited liquidity in the resale market.
Market prices for lower-grade debt securities may decline significantly in
periods of general economic difficulty or rising interest rates. Through
portfolio diversification and credit analysis, investment risk can be reduced,
although there can be no assurance that losses will not occur.
The quality limitation set forth in the Portfolios' investment policies is
determined immediately after the Portfolio's acquisition of a given security.
Accordingly, any later change in ratings will not be considered when determining
whether an investment complies with the Portfolio's investment policies.
INVESTMENTS IN FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS
FUTURES CONTRACTS. Each Portfolio may enter into contracts for the purchase
or sale for future delivery of fixed-income securities, foreign currencies or
contracts based on financial indices including interest rates or indices of U.S.
Government or foreign government securities or equity or fixed-income securities
("futures contracts"). U.S. futures contracts are traded on exchanges that have
been designated "contract markets" by the Commodity Futures Trading Commission
("CFTC") and must be executed through a futures commission merchant ("FCM"), or
brokerage firm, which is a member of the relevant contract market. Through their
clearing corporations, the exchanges guarantee performance of the contracts as
between the clearing members of the exchange. Since all transactions in the
futures market are made through a member of, and are offset or fulfilled through
a clearinghouse associated with, the exchange on which the contracts are traded,
a Portfolio will incur brokerage fees when it buys or sells futures contract.
When a Portfolio buys or sells a futures contract, it incurs a contractual
obligation to receive or deliver the underlying instrument (or a cash payment
based on the difference between the underlying instrument's closing price and
the price at which the contract was entered into) at a specified price on a
specified date. Transactions in futures contracts will not be made for
speculation and will not be made other than to seek to hedge against potential
changes in interest or currency exchange rates or the price of a security or a
securities index which might correlate with or otherwise adversely affect either
the value of a Portfolio's securities or the prices of securities which the
Portfolio is considering buying at a later date.
4
<PAGE>
The buyer or seller of a futures contract is not required to deliver or pay
for the underlying instrument unless the contract is held until the delivery
date. However, both the buyer and seller are required to deposit "initial
margin" for the benefit of a FCM when the contract is entered into. Initial
margin deposits are equal to a percentage of the contract's value, as set by the
exchange on which the contract is traded, and may be maintained in cash or
certain high-grade liquid assets. If the value of either party's position
declines, that party will be required to make additional "variation margin"
payments with a FCM to settle the change in value on a daily basis. The party
that has a gain may be entitled to receive all or a portion of this amount.
Initial and variation margin payments are similar to good faith deposits or
performance bonds, unlike margin extended by a securities broker, and initial
and variation margin payments do not constitute purchasing securities on margin
for purposes of the Portfolio's investment limitations. In the event of the
bankruptcy of an FCM that holds margin on behalf of a Portfolio, the Portfolio
may be entitled to return of margin owed to the Portfolio only in proportion to
the amount received by the FCM's other customers. The Sub-Adviser will attempt
to minimize the risk by careful monitoring of the creditworthiness of the FCM's
with which the Portfolios do business and by depositing margin payments in a
segregated account with the custodian when practical or otherwise required by
law.
Although a Portfolio would hold cash and liquid assets in a segregated
account with a value sufficient to cover the Portfolio's open futures
obligations, the segregated assets would be available to the Portfolio
immediately upon closing out the futures position, while settlement of
securities transactions could take several days. However, because the
Portfolio's cash that may otherwise be invested would be held uninvested or
invested in high-grade liquid assets so long as the futures position remains
open, the Portfolio's return could be diminished due to the opportunity cost of
foregoing other potential investments.
The acquisition or sale of a futures contract may occur, for example, when
a Portfolio holds or is considering purchasing equity securities and seeks to
protect itself from fluctuations in prices without buying or selling those
securities. For example, if prices were expected to decrease, a Portfolio might
sell equity index futures contracts, thereby hoping to offset a potential
decline in the value of equity securities in the Portfolio by a corresponding
increase in the value of the futures contract position held by the Portfolio and
thereby preventing the Portfolio's net asset value from declining as much as it
otherwise would have. The Portfolio also could seek to protect against potential
price declines by selling portfolio securities and investing in money market
instruments. However, since the futures market is more liquid than the cash
market, the use of futures contracts as an investment technique allows the
Portfolio to maintain a defensive position without having to sell portfolio
securities.
Similarly, when prices of equity securities are expected to increase,
futures contracts may be bought to attempt to hedge against the possibility of
having to buy equity securities at higher prices. This technique is sometimes
known as an anticipatory hedge. Since the fluctuations in the value of futures
contracts should be similar to those of equity securities, a Portfolio could
take advantage of the potential rise in the value of equity securities without
buying them until the market has stabilized. At that time, the futures contracts
could be liquidated and the Portfolio could buy equity securities on the cash
market. To the extent a Portfolio enters into futures contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Portfolio's obligations with respect to futures contracts will consist of
high-grade liquid assets from its portfolio in an amount equal to the difference
between the contract price and the aggregate value of the initial and variation
margin payments made by the Portfolio with respect to the futures contracts.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are 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
5
<PAGE>
market could be reduced and prices in the futures market distorted. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of the foregoing
distortions, a correct forecast of general price trends by the Sub-Adviser still
may not result in a successful use of futures contracts.
Futures contracts entail risks. Although the Sub-Adviser believes that use
of such contracts can benefit the Portfolios, if the Sub-Adviser's investment
judgment is incorrect, a Portfolio's overall performance could be worse than if
the Portfolio had not entered into futures contracts. For example, if a
Portfolio has attempted to hedge against the effects of a possible decrease in
prices of securities held by the Portfolio and prices increase instead, the
Portfolio may lose part or all of the benefit of the increased value of these
securities because of offsetting losses in the Portfolio's futures positions. In
addition, if the Portfolio has insufficient cash, it may have to sell securities
from its portfolio to meet daily variation margin requirements. Those sales may,
but will not necessarily, be at increased prices which reflect the rising market
and may occur at a time when the sales are disadvantageous to the Portfolio.
The prices of futures contracts depend primarily on the value of their
underlying instruments. Because there are a limited number of types of futures
contracts, it is possible that the standardized futures contracts available to a
Portfolio will not match exactly the Portfolio's current or potential
investments. A Portfolio may buy and sell futures contracts based on underlying
instruments with different characteristics from the securities in which it
typically invests - for example, by hedging investments in portfolio securities
with a futures contract based on a broad index of securities - which involves a
risk that the futures position will not correlate precisely with the performance
of the Portfolio's investments.
Futures prices can also diverge from the prices of their underlying
instruments, even if the underlying instruments correlate with a Portfolio's
investments. Futures prices are affected by such factors as current and
anticipated short-term interest rates, changes in volatility of the underlying
instruments, and the time remaining until expiration of the contract. Those
factors may affect securities prices differently from futures prices. Imperfect
correlations between a Portfolio's investments and its futures positions may
also result from differing levels of demand in the futures markets and the
securities markets, from structural differences in how futures and securities
are traded, and from imposition of daily price fluctuation limits for futures
contracts. A Portfolio may buy or sell futures contracts with a greater or
lesser value than the securities it wishes to hedge or is considering purchasing
in order to attempt to compensate for differences in historical volatility
between the futures contract and the securities, although this may not be
successful in all cases. If price changes in a Portfolio's futures positions are
poorly correlated with its other investments, its futures positions may fail to
produce desired gains or result in losses that are not offset by the gains in
the Portfolio's other investments.
Because futures contracts are generally settled within a day from the date
they are closed out, compared with longer settlement periods 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.
6
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Although futures contracts by their terms call for the delivery or
acquisition of the underlying commodities or a cash payment based on the value
of the underlying commodities, in most cases the contractual obligation is
offset before the delivery date of the contract by buying, in the case of a
contractual obligation to sell, or selling, in the case of a contractual
obligation to buy, an identical futures contract on a commodities exchange. Such
a transaction cancels the obligation to make or take delivery of the
commodities.
Each of the Portfolios intend to comply with guidelines of eligibility for
exclusion from the definition of the term "commodity pool operator" with the
CFTC and the National Futures Association, which regulate trading in the futures
markets. Such guidelines presently require that to the extent that a Portfolio
enters into futures contracts or options on a futures position that are not for
bona fide hedging purposes (as defined by the CFTC), the aggregate initial
margin and premiums on these positions (excluding the amount by which options
are "in-the-money") may not exceed 5% of the Portfolio's net assets.
OPTIONS ON FUTURES CONTRACTS. A Portfolio may buy and write options on
futures contracts only for hedging purposes. An option on a futures contract
gives the Portfolio the right (but not the obligation) to buy or sell a futures
contract at a specified price on or before a specified date. The purchase and
writing of options on futures contracts is similar in some respects to the
purchase and writing of options on individual securities. See "Options on
Securities" below. Transactions in options on futures contracts will not be made
for speculation and will not be made other than to attempt to hedge against
potential changes in interest rates or currency exchange rates or the price of a
security or a securities index which might correlate with or otherwise adversely
affect either the value of the Portfolio's securities or the prices of
securities which the Portfolio is considering buying at a later date.
The purchase of a call option on a futures contract may or may not be less
risky than ownership of the futures contract or the underlying instrument,
depending on the pricing of the option compared to either the price of the
futures contract upon which it is based or the price of the underlying
instrument. As with the purchase of futures contracts, when a Portfolio is not
fully invested it may buy a call option on a futures contract to attempt to
hedge against a market advance.
The writing of a call option on a futures contract may constitute a partial
hedge against declining prices of the security or foreign currency which is
deliverable under, or of the index comprising, the futures contract. If the
futures price at the expiration of the option is below the exercise price, the
Portfolio will retain the full amount of the option premium which provides a
partial hedge against any decline that may have occurred in the Portfolio's
holdings. The writing of a put option on a futures contract may constitute a
partial hedge against increasing prices of the security or foreign currency
which is deliverable under, or of the index comprising, the futures contract. If
the futures price at expiration of the option is higher than the exercise price,
the Portfolio will retain the full amount of the option premium which provides a
partial hedge against any increase in the price of securities which the
Portfolio is considering buying. If a call or put option a Portfolio has written
is exercised, the Portfolio will incur a loss which will be reduced by the
amount of the premium it received. Depending on the degree of correlation
between change in the value of its portfolio securities and changes in the value
of the futures positions, a Portfolio's losses from existing options on futures
may to some extent be reduced or increased by changes in the value of portfolio
securities.
The purchase of a put option on a futures contract is similar in some
respect to the purchase of protective put options on portfolio securities. For
example, a Portfolio may buy a put option on a futures contract to attempt to
hedge the Portfolio's securities against the risk of falling prices.
The amount of risk a Portfolio assumes when it buys an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the options bought.
FORWARD CONTRACTS. Each Portfolio may enter into forward foreign currency
exchange contracts ("forward currency contracts") to attempt to minimize the
risk to the Portfolio from adverse changes in
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the relationship between the U.S. dollar and other currencies. A forward
currency contract is an obligation to buy or sell an amount of a specified
currency for an agreed price (which may be in U.S. dollars or a foreign
currency) at a future date which is individually negotiated between currency
traders and their customers. A Portfolio may invest in forward currency
contracts with stated contract values of up to the value of the Portfolio's
assets.
A Portfolio may exchange foreign currencies for U.S. dollars and for other
foreign currencies in the normal course of business and may buy and sell
currencies through forward currency contracts in order to fix a price for
securities it has agreed to buy or sell. A Portfolio may enter into a forward
currency contract, for example, when it enters into a contract to buy or sell a
security denominated in a foreign currency in order to "lock in" the U.S. dollar
price of the security ("transaction hedge").
Additionally, when the Sub-Adviser believes that a foreign currency in
which portfolio securities are denominated may suffer a substantial decline
against the U.S. dollar, the Portfolio may enter into a forward currency
contract to sell an amount of that foreign currency (or a proxy currency whose
performance is expected to replicate the performance of that currency) for U.S.
dollars approximating the value of some or all of the portfolio securities
denominated in that currency (not exceeding the value of the Portfolio's assets
denominated in that currency) or by participating in options or futures
contracts with respect to the currency, or, when the Sub-Adviser believes that
the U.S. dollar may suffer a substantial decline against a foreign currency, the
Portfolios may enter into a forward currency contract to buy that foreign
currency for a fixed U.S. dollar amount ("position hedge"). This type of hedge
seeks to minimize the effect of currency appreciation as well as depreciation,
but does not protect against a decline in the security's value relative to other
securities denominated in the foreign currency.
A Portfolio also may enter into a forward currency contract with respect to
a currency where the Portfolio is considering the purchase of investments
denominated in that currency but has not yet done so ("anticipatory hedge").
In any of the above circumstances a Portfolio may, alternatively, enter
into a forward currency contract with respect to a different foreign currency
when the Sub-Adviser believes that the U.S. dollar value of that currency will
correlate with the U.S. dollar value of the currency in which portfolio
securities of, or being considered for purchase by, the Portfolio are
denominated ("cross-hedge"). For example, if the Sub-Adviser believes that a
particular foreign currency may decline relative to the U.S. dollar, a Portfolio
could enter into a contract to sell that currency or a proxy currency (up to the
value of the Portfolio's assets denominated in that currency) in exchange for
another currency that the Sub-Adviser expects to remain stable or to appreciate
relative to the U.S. dollar. Shifting the Portfolio's currency exposure from one
foreign currency to another removes the Portfolio's opportunity to profit from
increases in the value of the original currency and involves a risk of increased
losses to the Portfolio if the Sub-Adviser's projection of future exchange rates
is inaccurate.
A Portfolio also may enter into forward contracts to buy or sell at a later
date instruments in which a Portfolio may invest directly or on financial
indices based on those instruments. The market for those types of forward
contracts is developing and it is not currently possible to identify instruments
on which forward contracts might be created in the future.
Forward contracts are currently considered illiquid. Accordingly, the
Fund's custodian will place cash or high-grade liquid assets in a segregated
account of a Portfolio having a value equal to the aggregate amount of the
Portfolio's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the securities placed in the
segregated account declines, additional cash or high-grade liquid assets will be
placed in the account on a daily basis so that the value of the account will be
equal to the amount of the Portfolio's commitments with respect to such
contracts. As an alternative to maintaining all or part of the segregated
account, a Portfolio may 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.
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While forward contracts are not currently regulated by the CFTC, the CFTC
may in the future assert authority to regulate forward contracts. In such event
a Portfolio's ability to utilize forward contracts in the manner set forth in
the Prospectus may be restricted. Forward contracts will reduce the potential
gain from a positive change in the relationship between the U.S. dollar and
foreign currencies. Unforeseen changes in currency prices may result in poorer
overall performance for a Portfolio than if it had not entered into such
contracts. The use of foreign currency forward contracts will not eliminate
fluctuations in the underlying U.S. dollar equivalent value of the proceeds of
or rates of return on the Portfolio's foreign currency denominated portfolio
securities.
The matching of the increase in value of a forward contract and the decline
in the U.S. dollar equivalent value of the foreign currency denominated asset
that is the subject of the hedging transaction generally will not be precise. In
addition, a Portfolio may not always be able to enter into forward contracts at
attractive prices and accordingly may be limited in its ability to use these
contracts in seeking to hedge the Portfolio's assets.
Also, with regard to a Portfolio's use of cross-hedging transactions, there
can be no assurance that historical correlations between the movement of certain
foreign currencies relative to the U.S. dollar will continue. Thus, at any time
poor correlation may exist between movements in the exchange rates of the
foreign currencies underlying a Portfolio's cross-hedges and the movements in
the exchange rates of the foreign currencies in which the Portfolio's assets
that are subject of the cross-hedging transaction are denominated.
OPTIONS ON FOREIGN CURRENCIES. A Portfolio may buy put and call options and
may write covered put and call options on foreign currencies for hedging
purposes in a manner similar to that in which futures contracts or forward
contracts on foreign currencies may be utilized. For example, a decline in the
U.S. dollar value of a foreign currency in which portfolio securities are
denominated will reduce the U.S. dollar value of such securities, even if their
value in the foreign currency remains constant. In order to protect against such
diminutions in the value of portfolio securities, a Portfolio may buy put
options on the foreign currency. If the value of the currency declines, the
Portfolio will have the right to sell such currency for a fixed amount in U.S.
dollars and will thereby offset, in whole or in part, the adverse effect on its
portfolio which otherwise would have resulted.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a Portfolio may buy call options thereon. The purchase
of such options could offset, at least partially, the effects of the adverse
movements in exchange rates. The purchase of an option on a foreign currency may
constitute an effective hedge against fluctuations in exchange rates, although,
in the event of exchange rate movements adverse to a Portfolio's option
position, the Portfolio could sustain losses on transactions in foreign currency
options which would require that the Portfolio lose a portion or all of the
benefits of advantageous changes in those rates. In addition, in the case of
other types of options, the benefit to a Portfolio from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs.
Each of the Portfolios may write options on foreign currencies for the same
types of hedging purposes. For example, in attempting to hedge against a
potential decline in the U.S. dollar value of foreign currency denominated
securities due to adverse fluctuations in exchange rates, a Portfolio could,
instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most likely not be
exercised and the diminution in value of portfolio securities will be offset by
the amount of the premium received.
Similarly, instead of purchasing a call option to attempt to hedge against
a potential increase in the U.S. dollar cost of securities to be acquired, a
Portfolio could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the Portfolio 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
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occur, the option may be exercised and the Portfolio would be required to buy or
sell the underlying currency at a loss which may not be offset by the amount of
the premium. Through the writing of options on foreign currencies, a Portfolio
also may lose all or a portion of the benefits which might otherwise have been
obtained from favorable movements in exchange rates.
Each of the Portfolios may write covered call options on foreign
currencies. A call option written on a foreign currency by a Portfolio is
"covered" if the Portfolio owns the underlying foreign currency covered by the
call or has an absolute and immediate right to acquire that foreign currency
without additional cash consideration (or for additional cash consideration held
in a segregated account by its custodian) upon conversion or exchange of other
foreign currency held in its portfolio. A call option is also covered if the
Portfolio has a call on the same foreign currency and in the same principal
amount as the call written if the exercise price of the call held (i) is equal
to or less than the exercise price of the call written or (ii) is greater than
the exercise price of the call written, and if the difference is maintained by
the Portfolio in cash or high-grade liquid assets in a segregated account with
the Fund's custodian.
Each of the Portfolios may also write call options on foreign currencies
for cross-hedging purposes that may not be deemed to be covered. A call option
on a foreign currency is for cross-hedging purposes if it is not covered but is
designed to provide a hedge against a decline due to an adverse change in the
exchange rate in the U.S. dollar value of a security which the Portfolio owns or
has the right to acquire and which is denominated in the currency underlying the
option. In such circumstances, the Portfolio collateralizes the option by
maintaining, in a segregated account with the Fund's custodian, cash or
high-grade liquid assets in an amount not less than the value of the underlying
foreign currency in U.S. dollars marked-to-market daily.
A Portfolio may buy or write options in privately negotiated transactions
on the types of securities and indices based on the types of securities in which
the Portfolio is permitted to invest directly. A Portfolio will effect such
transactions only with investment dealers and other financial institutions (such
as commercial banks or savings and loan institutions) deemed creditworthy, and
only pursuant to procedures adopted by the Sub-Adviser for monitoring the
creditworthiness of those entities. To the extent that an option bought or
written by a Portfolio in a negotiated transaction is illiquid, the value of an
option bought or the amount of the Portfolio's obligations under an option
written by the Portfolio, as the case may be, will be subject to the Portfolio's
limitation on illiquid investments. In the case of illiquid options, it may not
be possible for the Portfolio to effect an offsetting transaction at the time
when the Sub-Adviser believes it would be advantageous for the Portfolio to do
so.
OPTIONS ON SECURITIES. In an effort to reduce fluctuations in net asset
value, a Portfolio may write covered put and call options and may buy put and
call options and warrants on securities that are traded on United States and
foreign securities exchanges and over-the-counter. A Portfolio also may write
call options that are not covered for cross-hedging purposes. A Portfolio may
write and buy options on the same types of securities that the Portfolio could
buy directly and may buy options on financial indices as described above with
respect to futures contracts. There are no specific limitations on the
Portfolio's writing and buying options on securities.
A put option gives the holder the right, upon payment of a premium, to
deliver a specified amount of a security to the writer of the option on or
before a fixed date at a predetermined price. A call option gives the holder the
right, upon payment of a premium, to call upon the writer to deliver a specified
amount of a security on or before a fixed date at a predetermined price.
A put option written by a Portfolio is "covered" if the Portfolio (i)
maintains cash not available for investment or high-grade liquid assets with a
value equal to the exercise price in a segregated account with its custodian or
(ii) holds a put on the same security and in the same principal amount as the
put written and the exercise price of the put held is equal to or greater than
the exercise price of the put 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.
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A call option written by a Portfolio is "covered" if the Portfolio owns the
underlying security covered by the call or has an absolute and immediate right
to acquire that security without additional cash consideration (or has
segregated additional cash consideration with its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also deemed
to be covered if the Portfolio holds a call on the same security and in the same
principal amount as the call written and the exercise price of the call held (i)
is equal to or less than the exercise price of the call written or (ii) is
greater than the exercise price of the call written if the difference is
maintained by the Portfolio in cash and high-grade liquid assets in a segregated
account with its custodian.
A Portfolio collateralizes its obligation under a written call option for
cross-hedging purposes by maintaining in a segregated account with its custodian
cash or high-grade liquid assets in an amount not less than the market value of
the underlying security, marked-to-market daily. A Portfolio would write a call
option for cross-hedging purposes, instead of writing a covered call option,
when the premium to be received from the cross-hedge transaction would exceed
that which would be received from writing a covered call option and the
Sub-Adviser believes that writing the option would achieve the desired hedge.
If a put or call option written by a Portfolio was exercised, the Portfolio
would be obligated to buy or sell the underlying security at the exercise price.
Writing a put option involves the risk of a decrease in the market value of the
underlying security, in which case the option could be exercised and the
underlying security would then be sold by the option holder to the Portfolio at
a higher price than its current market value. Writing a call option involves the
risk of an increase in the market value of the underlying security, in which
case the option could be exercised and the underlying security would then be
sold by the Portfolio to the option holder at a lower price than its current
market value. Those risks could be reduced by entering into an offsetting
transaction. The Portfolio retains the premium received from writing a put or
call option whether or not the option is exercised.
The writer of an option may have no control when the underlying security
must be sold, in the case of a call option, or bought, in the case of a put
option, since with regard to certain options, the writer may be assigned an
exercise notice at any time prior to the termination of the obligation. Whether
or not an option expires unexercised, the writer retains the amount of the
premium. This amount, of course, may, in the case of a covered call option, be
offset by a decline in the market value of the underlying security during the
option period. If a call option is exercised, the writer experiences a profit or
loss from the sale of the underlying security. If a put option is exercised, the
writer must fulfill the obligation to buy the underlying security.
The writer of an option that wishes to terminate its obligation may effect
a "closing purchase transaction". This is accomplished by buying an option of
the same series as the option previously written. The effect of the purchase is
that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the holder
of an option may liquidate its position by effecting a "closing sale
transaction". This is accomplished by selling an option of the same series as
the option previously bought. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit a Portfolio to write another call option on the underlying security with
either a different exercise price or expiration date or both or, in the case of
a written put option, will permit a Portfolio to write another put option to the
extent that the exercise price thereof is secured by deposited high-grade liquid
assets. Also, effecting a closing transaction will permit the cash or proceeds
from the concurrent sale of any securities subject to the option to be used for
other portfolio investments. If a Portfolio desires to sell a particular
security on which the Portfolio has written a call option, the Portfolio will
effect a closing transaction prior to or concurrent with the sale of the
security.
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
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more than the premium paid to buy the option; a Portfolio may realize a loss
from a closing transaction if the price of the purchase transaction is more than
the premium received from writing the option or the price received from a sale
transaction is less than the premium paid to buy the option. Because increases
in the market of a call option will generally reflect increases in the market
price of the underlying security, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security owned by the Portfolio.
An option position may be closed out only where there exists a secondary
market for an option of the same series. If a secondary market does not exist,
it might not be possible to effect closing transactions in particular options
with the result that a Portfolio would have to exercise the options in order to
realize any profit. If a Portfolio is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or the Portfolio delivers the underlying
security upon exercise. Reasons for the absence of a liquid secondary market may
include the following: (i) there may be insufficient trading interest in certain
options, (ii) restrictions may be imposed by a national securities exchange on
which the option is traded ("Exchange") on opening or closing transactions or
both, (iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options or underlying securities,
(iv) unusual or unforeseen circumstances may interrupt normal operations on an
Exchange, (v) the facilities of an Exchange or the Options Clearing Corporation
("OCC") may not at all times be adequate to handle current trading volume, or
(vi) one or more Exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that Exchange (or in that class or series of options) would cease to exist,
although outstanding options on that Exchange that had been issued by the OCC as
a result of trades on that Exchange would continue to be exercisable in
accordance with their terms.
Each of the Portfolios may write options in connection with buy-and-write
transactions; that is, a Portfolio may buy a security and then write a call
option against that security. The exercise price of the call a Portfolio
determines to write will depend upon the expected price movement of the
underlying security. The exercise price of a call option may be below
("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the
current value of the underlying security at the time the option is written.
Buy-and-write transactions using in-the-money call options may be used when it
is expected that the price of the underlying security will remain flat or
decline moderately during the option period. Buy-and-write transactions using
at-the-money call options may be used when it is expected that the price of the
underlying security will remain fixed or advance moderately during the option
period. Buy-and-write transactions using out-of-the-money call options may be
used when it is expected that the premiums received from writing the call option
plus the appreciation in the market price of the underlying security up to the
exercise price will be greater than the appreciation in the price of the
underlying security alone. If the call options are exercised in such
transactions, a Portfolio's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
Portfolio's purchase price of the security and the exercise price. If the
options are not exercised and the price of the underlying security declines, the
amount of such decline will be offset by the amount of premium received.
The writing of covered put options is similar in terms of risk and return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Portfolio's gain will be limited to the
premium received. If the market price of the underlying security declines or
otherwise is below the exercise price, the Portfolio may elect to close the
position or take delivery of the security at the exercise price and the
Portfolio's return will be the premium received from the put options minus the
amount by which the market price of the security is below the exercise price.
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.
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A Portfolio may buy call options to attempt to hedge against an increase in
the price of securities that the Portfolio may buy in the future. The premium
paid for the call option plus any transaction costs will reduce the benefit, if
any, realized by a Portfolio upon exercise of the option, and, unless the price
of the underlying security rises sufficiently, the option may expire worthless
to the Portfolio.
In purchasing an option, a Portfolio would be in a position to realize a
gain if, during the option period, the price of the underlying security
increased (in the case of a call) or decreased (in the case of a put) by an
amount in excess of the premium paid and would realize a loss if the price of
the underlying security did not increase (in the case of a call) or decrease (in
the case of a put) during the period by more than the amount of the premium. If
a put or call option brought by a Portfolio were permitted to expire without
being sold or exercised, the Portfolio would lose the amount of the premium.
Although they entitle the holder to buy equity securities, warrants on and
options to purchase equity securities do not entitle the holder to dividends or
voting rights with respect to the underlying securities, nor do they represent
any rights in the assets of the issuer of those securities.
INTEREST RATE SWAPS AND SWAP-RELATED PRODUCTS. In order to attempt to
protect the value of a Portfolio's investments from interest rate or currency
exchange rate fluctuations, the Portfolio may enter into interest rate swaps,
and may buy or sell interest rate caps and floors. The Portfolio expects to
enter into these transactions primarily to attempt to preserve a return or
spread on a particular investment or portion of its portfolio. A Portfolio also
may enter into these transactions to attempt to protect against any increase in
the price of securities the Portfolios may consider buying at a later date. The
Portfolio does not intend to use these transactions as a speculative investment.
Interest rate swaps involve the exchange by a Portfolio with another party of
their respective commitments to pay or receive interest, E.G., an exchange of
floating rate payments for fixed rate payments. The exchange commitments can
involve payments to be made in the same currency or in different currencies. The
purchase of an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive payments of
interest on a contractually based principal amount from the party selling the
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a contractually based
principal amount from the party selling the interest rate floor.
Swap and swap-related products are specialized over-the-counter instruments
and their use involves risks specific to the markets in which they are entered
into. A Portfolio will usually enter into interest rate swaps on a net basis,
I.E., the two payment streams are netted out, with the Portfolio receiving or
paying, as the case may be, only the net amount of the two payments. The net
amount of the excess, if any, of the Portfolio's obligations over its
entitlements with respect to each interest rate swap will be calculated on a
daily basis and an amount of cash or high-grade liquid assets having an
aggregate net asset value of at least equal to the accrued excess will be
maintained in a segregated account by the Fund's custodian. If a Portfolio
enters into an interest rate swap on other than a net basis, the Portfolio would
maintain a segregated account in the full amount accrued on a daily basis of the
Portfolio's obligations with respect to the swap. A Portfolio will not enter
into any interest rate swap, cap or floor transaction unless the unsecured
senior debt or the claims-paying ability of the other party thereto is rated in
one of the three highest rating categories of at least one nationally recognized
statistical rating organization at the time of entering into such transaction.
The Sub-Adviser will monitor the creditworthiness of all counterparties on an
ongoing basis. If there is a default by the other party to such a transaction,
the Portfolio will have contractual remedies pursuant to the agreements related
to the transaction.
The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. The Sub-Adviser has determined that,
as a result, the swap market has become relatively liquid. Caps and floors are
more recent innovations for which standardized documentation has not yet been
developed and, accordingly, they are less liquid than swaps. To the extent a
Portfolio sells (I.E., writes) caps and floors, it will maintain in a segregated
account cash or high-grade liquid
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assets having an aggregate net asset value at least equal to the full amount,
accrued on a daily basis, of the Portfolio's obligations with respect to any
caps or floors.
There is no limit on the amount of interest rate swap transactions that may
be entered into by a Portfolio; although a Portfolio does not presently intend
to engage in such transactions in excess of 5% of its total assets. These
transactions may in some instances involve the delivery of securities or other
underlying assets by a Portfolio or its counterparty to collateralize
obligations under the swap. Under the documentation currently used in those
markets, the risk of loss with respect to interest rate swaps is limited to the
net amount of the interest payments that a Portfolio is contractually obligated
to make. If the other party to an interest rate swap that is not collateralized
defaults, a Portfolio would risk the loss of the net amount of the payments that
the Portfolio contractually is entitled to receive. The Portfolio may buy and
sell (I.E., write) caps and floors without limitation, subject to the segregated
account requirement described above.
In addition to the instruments, strategies and risks described in this
Statement of Additional Information and in the Prospectus, there may be
additional opportunities in connection with options, futures contracts, forward
currency contracts and other hedging techniques, that become available as the
Sub-Adviser develops new techniques, as regulatory authorities broaden the range
of permitted transactions and as new instruments and techniques are developed.
The Sub-Adviser may use these opportunities to the extent they are consistent
with the each Portfolio's respective investment objectives and are permitted by
each Portfolio's respective investment limitations and applicable regulatory
requirements.
SPECIAL INVESTMENT CONSIDERATIONS AND RISKS. The successful use of the
investment practices described above with respect to futures contracts, options
on futures contracts, forward contracts, options on securities and on foreign
currencies, and swaps and swap-related products draws upon skills and experience
which are different from those needed to select the other instruments in which
Portfolios invest. Should interest or exchange rates or the prices of securities
or financial indices move in an unexpected manner, a Portfolio may not achieve
the desired benefits of futures, options, swaps and forwards or may realize
losses and thus be in a worse position than if such strategies had not been
used. Unlike many exchange-traded futures contracts and options on futures
contracts, there are no daily price fluctuation limits with respect to options
on currencies, forward contracts and other negotiated or over-the-counter
instruments, and adverse market movements could therefore continue to an
unlimited extent over a period of time. In addition, the correlation between
movements in the price of the securities and currencies hedged or used for cover
will not be perfect and could produce unanticipated losses.
A Portfolio's ability to dispose of its positions in the foregoing
instruments will depend on the availability of liquid markets in the
instruments. Markets in a number of the instruments are relatively new and still
developing, and it is impossible to predict the amount of trading interest that
may exist in those instruments in the future. Particular risks exist with
respect to the use of each of the foregoing instruments and could result in such
adverse consequences to a Portfolio as the possible loss of the entire premium
paid for an option bought by the Portfolio, the inability of the Portfolio, as
the writer of a covered call option, to benefit from the appreciation of the
underlying securities above the exercise price of the option and the possible
need to defer closing out positions in certain instruments to avoid adverse tax
consequences. As a result, no assurance can be given that a Portfolio will be
able to use those instruments effectively for the purposes set forth above.
In connection with certain of its hedging transactions, a Portfolio must
place assets in a segregated account with the Fund's Custodian bank to ensure
that the Portfolio will be able to meet its obligations under these instruments.
Assets held in a segregated account generally may not be disposed of for so long
as the Portfolio maintains the positions giving rise to the segregation
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.
14
<PAGE>
ADDITIONAL RISKS OF OPTIONS ON FOREIGN CURRENCIES, FORWARD CONTRACTS AND
FOREIGN INSTRUMENTS. Unlike transactions entered into by a Portfolio in futures
contracts, options on foreign currencies and forward contracts are not traded on
contract markets regulated by the CFTC or (with the exception of certain foreign
currency options) by the SEC. To the contrary, such instruments are traded
through financial institutions acting as market-makers, although foreign
currency options are also traded on certain national securities exchanges, such
as the Philadelphia Stock Exchange and the Chicago Board Options Exchange,
subject to SEC regulation. Similarly, options on currencies may be traded
over-the-counter. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the buyer of an option cannot lose more than the amount of the premium
plus related transaction costs, this entire amount could be lost. Moreover, an
option writer and a buyer or seller of futures or forward contracts could lose
amounts substantially in excess of any premium received or initial margin or
collateral posted due to the potential additional margin and collateral
requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges are available with respect to such transactions. In particular, all
foreign currency option positions entered into on a national securities exchange
are cleared and guaranteed by the OCC, thereby reducing the risk of counterparty
default. Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the over-the-counter
market, potentially permitting a Portfolio to liquidate open positions at a
profit prior to exercise or expiration, or to limit losses in the event of
adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign government restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions on exercise.
In addition, options on U.S. Government securities, futures contracts,
options on futures contracts, forward contracts and options on foreign
currencies may be traded on foreign exchanges and over-the-counter in foreign
countries. Such transactions are subject to the risk of governmental actions
affecting trading in or the prices of foreign currencies or securities. The
value of such positions also could be adversely affected by (i) other complex
foreign political and economic factors, (ii) lesser availability than in the
United States of data on which to make trading decisions, (iii) delays in a
Portfolio's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) low trading volume.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below:
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
15
<PAGE>
engineers), Largo, Florida (1963 - present); Trustee of IDEX Series Fund
(September, 1996 - present); former Trustee of IDEX Fund, IDEX II Series Fund
and IDEX Fund 3; Rear Admiral (Ret.) U.S. Navy Reserve, Civil Engineer Corps.
CHARLES C. HARRIS, DIRECTOR (DOB 7/15/30), 35 Winston Drive, Clearwater, Florida
34616. Retired (1988 - present); Senior Vice-President, Treasurer (1966 -
1988), Western Reserve Life Assurance Co. of Ohio; Vice President, Treasurer,
(1968 - 1988), Director (1968 - 1987), Pioneer Western Corporation; Vice
President of the Fund (1986 to December, 1990); Trustee of IDEX Series Fund
(September, 1996 - present); former Trustee of IDEX Fund, IDEX II Series Fund
and IDEX Fund 3.
RUSSELL A. KIMBALL, JR., DIRECTOR (DOB 8/17/44), 1160 Gulf Boulevard, Clearwater
Beach, Florida 34630. General Manager, Sheraton Sand Key Resort (resort hotel),
Clearwater, Florida (1975 - present).
JOHN R. KENNEY (1)(2), CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT (DOB
2/8/38). Chairman of the Board of Directors (1987 - present), Chief Executive
Officer (1982 - present) President (1978 - 1987 and December, 1992 - present),
Director (1978 - present), Western Reserve Life Assurance Co. of Ohio; Chairman
of the Board of Directors (September, 1996 - present), WRL Investment
Management, Inc. (investment adviser), Largo, Florida; Chairman of the Board of
Directors (September, 1996 - present), WRL Investment Services, Inc., Largo,
Florida; Chairman of the Board of Directors (February, 1997 - present) AEGON
Asset Management Services, Inc., Largo, Florida; Chairman of the Board of
Directors and Chief Executive Officer (1988 - February, 1991), President (1988
- 1989), Director (1976 - February, 1991), Executive Vice President (1972 -
1988), Pioneer Western Corporation (financial services), Largo, Florida;
President and Director (1985 - September, 1990) and Director (December, 1990 -
present); Idex Management, Inc. (investment adviser), Largo, Florida; Trustee
(1987 - September, 1996) Chairman (December, 1989 - September, 1990 and
November, 1990 - September, 1996) and President and Chief Executive Officer
(November, 1986 - September, 1990), IDEX Fund, IDEX II Series Fund and IDEX
Fund 3 (investment companies), and Trustee and Chairman (September, 1996 -
present) of IDEX Series Fund, all of Largo, Florida.
G. JOHN HURLEY (1)(2), DIRECTOR AND EXECUTIVE VICE PRESIDENT (DOB 9/12/48).
Executive Vice President (June, 1993 - present), Chief Operating Officer
(March, 1994 - 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; Director, President and Chief
Executive Officer (February, 1997 - present) AEGON Asset Management 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).
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
- February, 1991), Pioneer Western Corporation (financial services), Largo,
Florida.
REBECCA A. FERRELL (1)(2), SECRETARY, VICE PRESIDENT AND COUNSEL (DOB 12/10/60).
Vice President and Associate General Counsel (March, 1997 - present), Assistant
Vice President and Counsel (June, 1995 - March, 1997) Attorney (August, 1993 -
June, 1995), Western Reserve Life Assurance Co. of Ohio; Vice President and
Associate General Counsel (February, 1997 - present) AEGON Asset Management
Services, Inc., Largo, Florida; Secretary and Assistant Vice President
- ----------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of the
Investment Adviser.
16
<PAGE>
(March, 1994 - September, 1995), Secretary, Vice President and Counsel
(September, 1995 - September, 1996) of IDEX Fund, IDEX II Series Fund and IDEX
Fund 3; Secretary, Vice President and Counsel (September, 1996 - present) of
IDEX Series Fund; Attorney (September, 1992 - August, 1993), 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 the
Investment Adviser.
The Fund pays no salaries or compensation to any of its officers, all of
whom are employees of WRL. The Fund pays an annual fee of $6,000 to each
Director who is not affiliated with the Investment Adviser or the Sub-Adviser
("disinterested Director"). Each Director also receives $500, plus expenses, per
each regular and special Board meeting attended. For the year ended December 31,
1996, the C.A.S.E. Quality Growth Portfolio's, C.A.S.E. Growth & Income
Portfolio's and C.A.S.E. Growth Portfolio's share of Directors' fees and
expenses paid by the Fund were $6, $5, and $123, respectively.
The following table provides compensation amounts paid to disinterested
Directors of the Fund for the fiscal year ended December 31, 1996.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR RETIREMENT TOTAL COMPENSATION PAID TO
AGGREGATE COMPENSATION BENEFITS ACCRUED AS DIRECTORS FROM WRL SERIES
NAME OF PERSON, POSITION FROM WRL SERIES FUND, INC. PART OF FUND EXPENSE* FUND, INC., AND IDEX SERIES FUND
- ------------------------ -------------------------- --------------------- --------------------------------
<S> <C> <C> <C>
Peter R. Brown, Director $9,500 $0 $34,000
Charles C. Harris, Director $9,500 $0 $34,000
Russell A. Kimball, Jr.,
Director $9,000 $0 $ 9,000
</TABLE>
- ----------------
* The Plan became effective January 1, 1996.
Commencing on January 1, 1996, a non-qualified deferred compensation plan
(the "Plan") became available to directors who are not interested persons of the
Fund. Under the Plan, compensation may be deferred that would otherwise be
payable by the Fund, or IDEX Series Fund, to a disinterested Director or
Trustee on a current basis for services rendered as director (IDEX Fund and IDEX
Fund 3 were merged with, and into, the Growth Portfolio of IDEX II Series Fund
on September 20, 1996, at which time IDEX II Series Fund was renamed IDEX Series
Fund). Deferred compensation amounts will accumulate based on the value of Class
A shares of a portfolio of IDEX Series Fund (without imposition of sales
charge), as elected by the directors. It is not anticipated that the Plan will
have any impact on the Fund.
As of April 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
Contracts indirectly invested in the Fund. The Board of Directors has
established an Audit Committee consisting of Messrs. Brown, Harris and Kimball.
THE INVESTMENT ADVISER
The information that follows supplements the information provided about the
Investment Adviser under the caption "Management of the Fund - The Investment
Adviser" in the Prospectus.
WRL Investment Management, Inc. ("WRL Management") serves as the investment
adviser to each Portfolio of the Fund pursuant to an Investment Advisory
Agreement dated January 1, 1997 with the Fund. The Investment Adviser is a
direct, wholly-owned subsidiary of WRL, which is wholly-owned
17
<PAGE>
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 Portfolios and has responsibility
for making decisions to buy, sell or hold any particular security. The
Investment Adviser also is obligated to provide all the office space,
facilities, equipment and personnel necessary to perform its duties under the
Agreement. For further information about the management of the Portfolios, SEE
"The Sub-Adviser", page 20.
ADVISORY FEE. The method of computing the investment advisory fee is
described in the Prospectus. For the period from May 1, 1995 (commencement of
operations) to December 31, 1995 and for the year ended December 31, 1996, the
Investment Adviser was paid fees for its services on behalf of the C.A.S.E.
Quality Growth Portfolio in the amount of $3,871 and $12,683, respectively; the
C.A.S.E. Growth & Income Portfolio in the amount of $3,453 and $13,903,
respectively; and the C.A.S.E. Growth Portfolio in the amount of $5,519 and
$83,931, respectively.
PAYMENT OF EXPENSES. Under the terms of the Investment Advisory Agreement,
the Investment Adviser is responsible for providing investment advisory services
and furnishing office space for officers and employees of the Investment Adviser
connected with investment management of the Portfolios. Each Portfolio pays: all
expenses incurred in connection with the formation and organization of a
Portfolio, including the preparation (and filing, when necessay) of the
Portfolio's contracts, plans and documents, conducting meetings of organizers,
directors and shareholders; of preparing and filing the post-effective amendment
to the Fund's registration statement effecting registration of the Portfolio and
its shares under the 1940 Act and the 1933 Act and all other matters relating to
the formation and organization of a Portfolio and the preparation for offering
its shares; expenses in connection with ongoing registration or qualification
requirements under Federal and state securities laws; investment advisory fees;
pricing costs (including the daily calculations of net asset value); brokerage
commissions and all other expenses in connection with execution of portfolio
transactions, including interest; all federal, state and local taxes (including
stamp, excise, income and franchise taxes) and the preparation and filing of all
returns and reports in connection therewith; any compensation, fees, or
reimbursements which the Fund pays to its Directors who are not "interested
persons," as that phrase is defined in the 1940 Act, of the Fund or WRL
Management; compensation of the Fund's custodian, administrative and transfer
agent, registrar and dividend disbursing agent; legal, accounting and printing
expenses; other administrative, clerical, recordkeeping and bookkeeping
expenses; auditing fees; certain insurance premiums; services for shareholders
(including allocable telephone and personnel expenses); costs of certificates
and the expenses of delivering such certificates to the purchaser of shares
relating thereto; expenses of local representation in Maryland; fees and/or
expenses payable pursuant to any plan of distribution adopted with respect to
the Fund in accordance with Rule 12b-1 under the 1940 Act; expenses of
shareholders' meeting and of preparing, printing, and
18
<PAGE>
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 to the extent normal operating
expenses (including investment advisory fees but excluding interest, taxes,
brokerage fees, commissions, and extraordinary charges) exceed certain
percentages of the Portfolios' average daily net assets. The expense limitations
are described in the Prospectus for the Portfolios.
SERVICE AGREEMENT. Effective January 1, 1997, the Fund has entered into an
Administrative Services and Transfer Agency Agreement ("Services Agreement")
with WRL Investment Services, Inc. ("WRL Services"), an affiliate of WRL
Management and WRL, to furnish the Fund with administrative services to assist
the Fund in carrying out certain of its functions and operations. The Service
Agreement was approved by the Fund's Board of Directors, including a majority of
Directors who are not "interested persons" of the Fund (as defined in the 1940
Act) on October 3, 1996. Under this Agreement, WRL Services shall furnish to
each Portfolio, subject to the overall supervision of the Fund's Board,
supervisory, administrative, and transfer agency services, including
recordkeeping and reporting. WRL Services is reimbursed by the Fund monthly on a
cost incurred basis.
DISTRIBUTION AGREEMENT. Effective January 1, 1997, the Fund adopted a
distribution plan (the "Distribution Plan") pursuant to Rule 12b-1 under the
1940 Act, as amended. Pursuant to the Plan, the Fund 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 prospectuses and statements of
additional information to potential investors; developing and preparing Fund
advertisements, sales literature and other promotional materials; holding
seminars and sales meetings designed to promote distribution of Fund shares; the
development of consumer-oriented sales materials describing and/or relating to
the Fund; and expenses attributable to "distribution-related services" provided
to the Fund, which include such expenses 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.
19
<PAGE>
It is anticipated that benefits provided by the Distribution Plan may
include lower fixed costs as a percentage of assets as Fund assets increase
through the growth of the Fund due to enhanced marketing efforts.
ISI has determined that it will not seek payment by the Fund of
distribution expenses with respect to any portfolio during the fiscal year
ending December 31, 1997. Prior to ISI seeking reimbursement, Policyowners will
be notified in advance.
THE SUB-ADVISER
This discussion supplements the information provided about the Sub-Adviser
under the caption "Management of the Fund - The Sub-Adviser" in the Prospectus.
C.A.S.E. Management, Inc. (the "Sub-Adviser") serves as the Sub-Adviser for
the Portfolios pursuant to a Sub-Advisory Agreement dated January 1, 1997
between WRL Management and the Sub-Adviser and on behalf of the Portfolios. The
Sub-Advisory Agreement was approved by the Board of Directors of the Fund,
including a majority of the Directors who were not "interested persons" of the
Fund (as defined in the 1940 Act), on October 3, 1996 and by the shareholders of
each Portfolio of the Fund on December 16, 1996. The Sub-Advisory Agreement
provides that it will continue in effect for an initial term ending January 1,
1999, and from year to year thereafter, if approved annually (a) by the Board of
Directors of the Fund or by a majority of the outstanding shares of the
Portfolios, and (b) by a majority of the Directors who are not parties to such
Agreement or "interested persons" (as defined in the 1940 Act) of any such
party. The Sub-Advisory Agreement may be terminated without penalty on 60 days'
written notice at the option of either party or by the vote of the shareholders
of the Portfolios and terminate automatically in the event of assignment (within
the meaning of the 1940 Act) or termination of the Investment Advisory
Agreement.
Pursuant to the Sub-Advisory Agreement, the Sub-Adviser provides investment
advisory assistance and portfolio management advice to the Investment Adviser
with respect to the Portfolios. Subject to review by the Investment Adviser and
the Board of Directors of the Fund, the Sub-Adviser is responsible for the
actual management of the Portfolios and for making decisions to buy, sell or
hold any particular security. The Sub-Adviser provides the portfolio managers
for the Portfolios. Such managers consider analyses from various sources, make
the necessary decisions and effect transactions accordingly. The Sub-Adviser
bears all of its expenses in connection with the performance of its services
under the Sub-Advisory Agreement, such as compensating and furnishing office
space for its officers and employees connected with investment and economic
research, trading and investment management of the Portfolios. The method of
computing the Sub-Adviser's fee is set forth in the Prospectus. For the year
ended December 31, 1996 and for the period May 1, 1995 (commencement of
operations) to December 31, 1995, the Sub-Adviser was paid fees for the C.A.S.E.
Quality Growth Portfolio in the amounts of $6,342 and $1,895 respectively; the
C.A.S.E. Growth & Income Portfolio in the amounts of $6,951 and $1,726
respectively; and the C.A.S.E. Growth Portfolio in the amounts of $41,966 and
$2,759 respectively.
The Sub-Adviser, located at 2255 Glades Road, Suite 221-A, Boca Raton,
Florida 33431, is a registered investment advisory firm and a wholly-owned
subsidiary of C.A.S.E., Inc. The Sub-Adviser provides investment management
services to financial institutions, high net worth individuals, and other
professional money managers.
PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TURNOVER
The information that follows supplements the information provided about
portfolio turnover under the caption "The C.A.S.E. Quality Growth Portfolio,
C.A.S.E. Growth & Income Portfolio and C.A.S.E. Growth Portfolio and the Fund -
Portfolio Turnover" in the Prospectus. In computing the portfolio turnover rate
for each Portfolio, securities whose maturities or expiration dates at the time
of acquisition are one year or less are excluded. Subject to this exclusion, the
turnover rate for a Portfolio is calculated by dividing (a) the lesser of
purchases or sales of portfolio securities for the fiscal year by
20
<PAGE>
(b) the monthly average of portfolio securities owned by the Portfolio during
the fiscal year. For the fiscal year ended December 31, 1996, and for the period
May 1, 1995 to December 31, 1995 the Portfolio turnover rates were 185.87% and
119.63% respectively, for the C.A.S.E. Quality Growth Portfolio; 189.22% and
72.73% respectively, for the C.A.S.E. Growth & Income Portfolio; and 160.27% and
121.62% respectively for the C.A.S.E. Growth Portfolio. The Portfolio rates are
substantially higher for the fiscal year ended December 31, 1996 than for the
period May 1, 1995 to December 31, 1995 because 1996 was the first full year of
operation for the Portfolios.
There are no fixed limitations regarding the portfolio turnover of the
Portfolios. Portfolio turnover rates are expected to fluctuate under constantly
changing economic conditions and market circumstances. Securities initially
satisfying the basic policies and objectives of each Portfolio may be disposed
of when they are no longer deemed suitable.
PLACEMENT OF PORTFOLIO BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Sub-Adviser is primarily responsible for placement of the Portfolios' securities
transactions. In placing orders, it is the policy of the Portfolios to obtain
the most favorable net results, taking into account various factors, including
price, dealer spread or commissions, if any, size of the transaction and
difficulty of execution. While the Sub-Adviser generally will seek reasonably
competitive spreads or commissions, the Portfolios will not necessarily be
paying the lowest spread or commission available. The Portfolios do not have any
obligation to deal with any broker, dealer or group of brokers or dealers in the
execution of transactions in portfolio securities.
Decisions as to the assignment of portfolio brokerage business for the
Portfolios and negotiation of its commission rates are made by the Sub-Adviser,
whose policy is to obtain "best execution" (prompt and reliable execution at the
most favorable security price) of all portfolio transactions. In placing
portfolio transactions, the Sub-Adviser may give consideration to brokers who
provide supplemental investment research, in addition to such research obtained
for a flat fee, to the Sub-Adviser and/or the Sub-Adviser's parent, and pay
spreads or commissions to such brokers or dealers furnishing such services which
are in excess of spreads or commissions which another broker or dealer may
charge for the same transaction. Supplemental investment research provided to
the Sub- Adviser's parent, C.A.S.E., Inc., is available to the Sub-Adviser
pursuant to the Sub-Adviser's license agreement with its parent. (See
"Management of the Fund - The Sub-Adviser" in the Prospectus.)
In selecting brokers and in negotiating commissions, the Sub-Adviser
considers such factors as: the Sub-Adviser's knowledge of currently available
negotiated commission rates or prices of securities currently available and
other current transaction costs; the nature of the security traded; the size and
type of the transaction; the nature and character of the markets for the
security purchased or sold; the desired timing of the trade; the activity
existing and expected in the market for the particular security;
confidentiality; the quality of execution, clearance, and settlement services;
financial stability; the existence of actual or apparent operational problems of
any broker or dealer; and research products or services to be provided.
These products and services may include furnishing advice, either directly
or through publications or writings, as to the value of securities, the
advisability of purchasing or selling specific securities and the availability
of securities or purchasers or sellers of securities; furnishing seminars,
information, analyses and reports concerning issuers, industries, securities,
trading markets and methods, legislative developments, changes in accounting
practices, economic factors and trends and portfolio strategy; access to
research analysts, corporate management personnel, industry experts, economists
and government officials; comparative performance evaluation and technical
measurement services and quotation services, and products and other services
(such as third party publications, reports and analyses, and computer and
electronic access, equipment, software, information and accessories that
deliver, process or otherwise utilize information), including the research
described above.
Supplemental research obtained through brokers or dealers will be in
addition to and not in lieu of the services required to be performed by the
Sub-Adviser. The expenses of the Sub-Adviser will not
21
<PAGE>
necessarily be reduced as a result of the receipt by the Sub-Adviser or its
parent of such supplemental information. The Sub-Adviser may use such research
products and services in servicing other accounts in addition to the Portfolios.
If the Sub-Adviser determines that any research product or service has a mixed
use, such that it also serves functions that do not assist in the investment
decision-making process, the Sub-Adviser will allocate the costs of such service
or product accordingly. The portion of the product or service that a Sub-Adviser
determines will assist it in the investment decision-making process may be paid
for in brokerage commission dollars. Such allocation may create a conflict of
interest for the Sub-Adviser. Conversely, such supplemental information obtained
by the placement of business for the Sub-Adviser will be considered by and may
be useful to the Sub-Adviser in carrying out its obligations to the Portfolios.
When a Portfolio purchases or sells a security in the over-the-counter
market, the transaction takes place directly with a principal market-maker,
without the use of a broker, except in those circumstances where, in the opinion
of the Sub-Adviser, better prices and executions are likely to be achieved
through the use of a broker.
Securities held by one or more of the Portfolios may also be held by other
separate accounts, mutual funds or other accounts for which the Investment
Adviser or Sub-Adviser serves as an adviser, or held by the Investment Adviser
or Sub-Adviser for their own accounts. Because of different investment
objectives or other factors, a particular security may be bought by the
Investment Adviser or Sub-Adviser for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities for
one or more of the Portfolios or other entities for which they act as investment
adviser or for their advisory clients arise for consideration at or about the
same time, transactions in such securities will be made, insofar as feasible,
for the respective entities and clients in a manner deemed equitable to all. To
the extent that transactions on behalf of more than one client of the Investment
Adviser or Sub-Adviser during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on price.
On occasions when the Investment Adviser or the Sub-Adviser deems the
purchase or sale of a security to be in the best interests of a Portfolio as
well as other accounts or companies, it may to the extent permitted by
applicable laws and regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Portfolio(s) with those to be sold or
purchased for such other accounts or companies in order to obtain favorable
execution and lower brokerage commissions. In that event, allocation of the
securities purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Sub-Adviser in the manner it considers to be
most equitable and consistent with its fiduciary obligations to a Portfolio and
to such other accounts or companies. In some cases this procedure may adversely
affect the size of the position obtainable for a Portfolio.
The Board of Directors of the Fund periodically reviews the brokerage
placement practices of the Sub-Adviser on behalf of the Portfolios, and reviews
the prices and commissions, if any, paid by the Portfolios to determine if they
were reasonable.
The Board of Directors of the Fund has authorized the Sub-Adviser to
consider sales of the Contracts by a broker-dealer as a factor in the selection
of broker-dealers to execute Portfolio transactions. As stated above, any such
placement of portfolio business will be subject to the ability of the
broker-dealer to provide best execution and to the Conduct Rules of the National
Association of Securities Dealers, Inc.
For the year ended December 31, 1996, and for the period May 1, 1995
(commencement of operations of the Portfolios), to December 31, 1995, the
C.A.S.E. Quality Growth Portfolio paid aggregate commissions in the amount of
$9,263 and $3,875 respectively; the C.A.S.E. Growth & Income Portfolio paid
$10,661 and $2,403 respectively; and the C.A.S.E. Growth Portfolio paid $97,761
and $8,662 respectively. For the same periods, the C.A.S.E. Quality Growth,
C.A.S.E. Growth & Income and C.A.S.E. Growth Portfolios paid no commissions to
C.A.S.E. Management, Inc.
22
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PURCHASE AND REDEMPTION OF SHARES
OFFERING OF THE SHARES AND DETERMINATION OF OFFERING PRICE
Shares of the Portfolios are currently sold only to the Separate Accounts
to fund the benefits under the Contracts. The Portfolio may, in the future,
offer its shares to other insurance company separate accounts. The Separate
Accounts invests in shares of one or more of the Portfolios in accordance with
the allocation instructions received from Contracts. Such allocation rights are
further described in the prospectuses and disclosure documents for the Policies
and Annuity Contracts. Shares of the Portfolios are sold and redeemed at their
respective net asset values as described in the Prospectus.
Net asset value of a Portfolio share is computed by dividing the value of
the net assets of the Portfolio by the total number of shares of the Portfolio
outstanding.
NET ASSET VALUATION
As stated in the Prospectus, the net asset value of a Portfolio's shares
ordinarily is determined, once daily, as of the close of the regular session of
business on the New York Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern
time), on each day the Exchange is open. (Currently the Exchange is closed on
New Year's Day, President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.) The per share net asset value of
each Portfolio is determined by dividing the total value of the securities and
other assets, less liabilities of that Portfolio, by the total number of shares
of that Portfolio outstanding. In determining asset value, securities listed on
the national securities exchanges and the NASDAQ National Market are valued at
the closing prices on such markets, or if such a price is lacking for the
trading period immediately preceding the time of determination, such securities
are valued at their current bid price. Foreign securities and currencies are
converted to U.S. dollars using the exchange rate in effect at the close of the
Exchange. Other securities which are traded on the over-the-counter market are
valued at bid price. Other securities for which quotations are not readily
available are valued at fair values as determined in good faith by the
Sub-Adviser under the supervision of the Fund's Board of Directors. Money market
instruments maturing in 60 days or less are valued on the amortized cost basis
discussed above.
INVESTMENT EXPERIENCE INFORMATION
The information provided in this section shows the historical investment
experience of the Portfolios. It does not represent or project future investment
performance.
The Portfolios commenced operations on May 1, 1995. The rate of return
indicated below depicts the actual investment experience of each Portfolio for
the period shown.
CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief discussion of how performance is
calculated.
TOTAL RETURN
The rate of return is based on the actual investment performance of the
Portfolios, after deduction of investment advisory fees and direct Portfolio
expenses. The rate is an average annual compounded rate of return for the year
ended December 31, 1996. Also shown are comparable figures for the unmanaged S&P
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>
C.A.S.E. Quality Growth 18.89% N/A N/A 17.54%
C.A.S.E. Growth & Income 20.66% N/A N/A 19.22%
C.A.S.E. Growth Portfolio 23.22% N/A N/A 17.50%
</TABLE>
- ----------------
* Portfolios commenced operations May 1, 1995.
23
<PAGE>
Total return quotations for each of the Portfolios are computed by finding
the average annual compounded rates of return over the relevant periods that
would equate the initial amount invested to the ending redeemable value,
according to the following equation:
P (1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value (at the end of the applicable period
of a hypothetical $1,000 payment made at the beginning of the
applicable period)
The total return quotation calculations for a Portfolio reflect the
deduction of a proportionate share of the Portfolio's investment advisory fee
and Portfolio expenses and assume that all dividends and capital gains during
the period are reinvested in the Portfolio when made. The calculations also
assume a complete redemption as of the end of the particular period.
The rates of return do not reflect charges or deductions against the
Separate Account, or charges and deductions against the Contracts. Accordingly,
these rates of return do not illustrate how actual investment performance will
affect benefits under the Contracts. Where relevant, the prospectus for the
Contracts contain performance information. Moreover, these rates of return are
not an estimate, projection or guarantee of future performance.
YIELD QUOTATIONS
The yield quotations for a Portfolio are based on a specific thirty-day
period and are computed by dividing the net investment income per share earned
during the period by the maximum offering price per share on the last date of
the period, according to the following formula:
a-b
YIELD = 2 [ (--- + 1)6 - 1]
cd
Where: a = dividends and interest earned during the period by the Portfolio
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
TAXES
Shares of the Portfolios are offered only to the Separate Account that
funds the Contracts. See the prospectus for the Contracts for a discussion of
the special taxation of insurance companies with respect to the Separate Account
and the Contracts, and the owners thereof.
Each Portfolio has qualified and expects to continue to qualify as a
regulated investment company ("RIC") under the Internal Revenue Code of 1986, as
amended (the "Code"). In order to qualify for that treatment, the Portfolio must
distribute to its Contract Owners for each taxable year at least 90% of its
investment company taxable income (consisting generally of net investment
income, net short-term capital gain, and net gains from certain foreign currency
transactions) ("Distribution Requirement") and must meet several additional
requirements. These requirements include the following: (1) the Portfolio must
derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans, and gains from the sale or
other disposition of securities or foreign currencies, or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in securities or those currencies ("Income
Requirement"); (2) the Portfolio must derive less than 30% of its gross income
each taxable year from the sale or other disposition of securities, or any of
the following, that were held for less than three months - options, futures or
forward contracts (other than those on foreign currencies), or foreign
currencies (or options, futures or forward contracts thereon) that are not
directly related to the Portfolio's principal business of investing in
securities (or options and futures with respect thereto) ("Short-Short
Limitation"); (3) at the
24
<PAGE>
close of each quarter of the Portfolio's taxable year, at least 50% of the value
of its total assets must be represented by cash and cash items, U.S. Government
securities, securities of other RICs, and other securities that, with respect to
any one issuer, do not exceed 5% of the value of the Portfolio's total assets
and that do not represent more than 10% of the outstanding voting securities of
the issuer; and (4) at the close of each quarter of the Portfolio's taxable
year, not more than 25% of the value of its total assets may be invested in
securities (other than U.S. Government securities or the securities of other
RICs) of any one issuer.
As noted in the Prospectus, each Portfolio must, and intends to, comply
with the diversification requirements imposed by section 817(h) of the Code and
the regulations thereunder. These requirements, which are in addition to the
diversification requirements mentioned above, place certain limitations on the
proportion of the Portfolio's assets that may be represented by any single
investment (which includes all securities of the same issuer). For purposes of
section 817(h), all securities of the same issuer, all interests in the same
real property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or instrumentality
is treated as a separate issuer, while a particular foreign government and its
agencies, instrumentalities and political subdivisions all are considered the
same issuer. For information concerning the consequences of failure to meet the
requirements of section 817(h), see the respective prospectuses for the
Contracts.
A Portfolio will not be subject to the 4% Federal excise tax imposed on
RICs that do not distribute substantially all their income and gains each
calendar year because that tax does not apply to a RIC whose only shareholders
are segregated asset accounts of life insurance companies held in connection
with variable annuity contracts and/or variable life insurance policies.
Dividends and interest received by each Portfolio may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and foreign countries generally do not impose taxes on capital gains in
respect of investments by foreign investors.
The Portfolios may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive
or (2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, the Portfolios will
be subject to Federal income tax on a portion of any "excess distribution"
received on the stock of a PFIC or of any gain on disposition of that stock
(collectively "PFIC income"), plus interest thereon, even if a Portfolio
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in a Portfolio's investment company
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders. If a Portfolio invests in a PFIC and
elects to treat the PFIC as a "qualified electing fund," then in lieu of the
foregoing tax and interest obligation, the Portfolio will be required to include
in income each year its pro rata share of the qualified electing fund's annual
ordinary earnings and net capital gain (the excess of net long-term capital gain
over net short-term capital loss), even if they are not distributed to the
Portfolio; those amounts would be subject to the Distribution Requirement. In
most instances it will be very difficult, if not impossible, to make this
election because of certain requirements thereof.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith by the
Portfolios. Income from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and income from
transactions in options, futures and forward contracts derived by a Portfolio
with respect to its business of investing in securities or foreign currencies,
will qualify as permissible income under the Income Requirement. However, income
from the disposition of options and futures contracts (other than those on
foreign currencies) will be subject to the Short-Short Limitation if they are
held for less than three months. Income from the disposition of foreign
currencies, and options, futures, and forward contracts on foreign currencies,
that are not directly related to a
25
<PAGE>
Portfolio's principal business of investing in securities (or options and
futures with respect thereto) also will be subject to the Short-Short Limitation
if they are held for less than three months.
If a Portfolio satisfies certain requirements, any increase in value on a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Portfolio satisfies
the Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The
Portfolio intends that, when it engages in hedging transactions, they will
qualify for this treatment, but at the present time it is not clear whether this
treatment will be available for all of the Portfolio's hedging transactions. To
the extent this treatment is not available, the Portfolio may be forced to defer
the closing out of certain options and futures contracts beyond the time when it
otherwise would be advantageous to do so, in order for the Portfolio to qualify
as a RIC.
The foregoing is only a general summary of some of the important Federal
income tax considerations generally affecting the Portfolios and their Contract
Owners. No attempt is made to present a complete explanation of the Federal tax
treatment of the Portfolios' activities, and this discussion and the discussion
in the prospectuses and/or statements of additional information for the
Contracts are not intended as a substitute for careful tax planning.
Accordingly, potential investors are urged to consult their own tax advisors for
more detailed information and for information regarding any state, local, or
foreign taxes applicable to the Contracts and their Contract Owners.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each Portfolio. The Fund is currently comprised of the following
portfolios: Money Market Portfolio, Bond Portfolio, Growth Portfolio, Global
Portfolio, Short-to-Intermediate Government Portfolio, Emerging Growth
Portfolio, Strategic Total Return Portfolio, Aggressive Growth Portfolio,
Balanced Portfolio, Growth & Income Portfolio, Tactical Asset Allocation
Portfolio, C.A.S.E. Quality Growth Portfolio, C.A.S.E. Growth & Income
Portfolio, C.A.S.E. Growth Portfolio, International Equity Portfolio, Janus
Balanced Portfolio, Value Equity Portfolio, Global Sector Portfolio, US Sector
Portfolio, Foreign Sector Portfolio; and U.S. Equity Portfolio.
REGISTRATION STATEMENT
The Fund has filed with the Securities and Exchange Commission, Washington,
D.C., a Registration Statement under the Securities Act of 1933, as amended,
with respect to the securities to which this Statement of Additional Information
relates. If further information is desired with respect to the Portfolios or
such securities, reference is made to the Registration Statement and the
exhibits filed as part thereof.
FINANCIAL STATEMENTS
The audited financial statements for each Portfolio of the Fund for the
year ended December 31, 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.
OTHER INFORMATION
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, located at 1055 Broadway, 10th Floor, Kansas City,
Missouri 64105, serves as the Fund's independent accountants. The Fund has
engaged Price Waterhouse LLP to examine, in accordance with generally accepted
auditing standards, its annual report. In addition, Price Waterhouse LLP signs
the tax returns for each of the Portfolio of the Fund.
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.
26
<PAGE>
APPENDIX A
DESCRIPTION OF PORTFOLIO SECURITIES
The following is intended only as a supplement to the information contained
in the Prospectus and should be read only in conjunction with the Prospectus.
Terms defined in the Prospectus and not defined herein have the same meanings as
those in the Prospectus.
1. CERTIFICATE OF DEPOSIT. A certificate of deposit generally is a
short-term, interest bearing negotiable certificate issued by a commercial bank
or savings and loan association against funds deposited in the issuing
institution.
2. EURODOLLAR CERTIFICATE OF DEPOSIT. A Eurodollar certificate of deposit
is a short-term obligation of a foreign subsidiary of a U.S. bank payable in
U.S. dollars.
3. FLOATING RATE NOTE. A floating rate note is debt issued by a corporation
or commercial bank that is typically several years in term but whose interest
rate is reset every one to six months.
4. TIME DEPOSIT. A time deposit is a deposit in a commercial bank for a
specified period of time at a fixed interest rate for which a negotiable
certificate is not received.
5. BANKERS' ACCEPTANCE. A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower, usually in connection with international
commercial transactions (to finance the import, export, transfer or storage of
goods). The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity.
6. VARIABLE AMOUNT MASTER DEMAND NOTE. A variable amount master demand note
is a note which fixes a minimum and maximum amount of credit and provides for
lending and repayment within those limits at the discretion of the lender.
Before investing in any variable amount master demand notes, the Portfolios will
consider the liquidity of the issuer through periodic credit analysis based upon
publicly available information.
7. COMMERCIAL PAPER. Commercial paper is a short-term promissory note
issued by a corporation primarily to finance short-term credit needs.
8. REPURCHASE AGREEMENT. A repurchase agreement is an instrument under
which the Portfolios acquire ownership of a debt security and the seller agrees
to repurchase the obligation at a mutually agreed upon time and price. The total
amount received on repurchase is calculated to exceed the price paid by the
Portfolios, reflecting an agreed upon market rate of interest for the period
from the time of a Portfolio's purchase of the security to the settlement date
(I.E., the time of repurchase), and would not necessarily relate to the interest
rate on the underlying securities. A Portfolio will only enter into repurchase
agreements with underlying securities consisting of U.S. Government or
government agency securities, certificates of deposit, commercial paper or
bankers' acceptances, and will be entered only with primary dealers. While a
Portfolio may invest in repurchase agreements for periods up to 30 days, it is
expected that typically such periods will be for a week or less. The staff of
the SEC has taken the position that repurchase agreements of greater than seven
days together with other illiquid investments should be limited to an amount not
in excess of 15% of a Portfolio's net assets.
Although repurchase transactions usually do not impose market risks on the
purchaser, a Portfolio would be subject to the risk of loss if the seller fails
to repurchase the securities for any reason and the value of the securities is
less than the agreed upon repurchase price. In addition, if the seller defaults,
a Portfolio may incur disposition costs in connection with liquidating the
securities. Moreover, if the seller is insolvent and bankruptcy proceedings are
commenced, under current law, a Portfolio could be ordered by a court not to
liquidate the securities for an indeterminate period of time and the amount
realized by a Portfolio upon liquidation of the securities may be limited.
9. REVERSE REPURCHASE AGREEMENT. A reverse repurchase agreement involves
the sale of securities held by the Portfolios, with an agreement to repurchase
the securities at an agreed upon
A-1
<PAGE>
price, date and interest payment. The Portfolios will use the proceeds of the
reverse repurchase agreements to purchase other money market securities
maturing, or under an agreement to resell, at a date simultaneous with or prior
to the expiration of the reverse repurchase agreement. The Portfolios will
utilize reverse repurchase agreements when the interest income to be earned from
the investment of the proceeds from the transaction is greater than the interest
expense of the reverse repurchase transaction.
10. ASSET-BACKED SECURITIES. The Portfolios may invest in securities backed
by automobile receivables and credit-card receivables and other securities
backed by other types of receivables or other assets. Credit support for
asset-backed securities may be based on the underlying assets and/or provided
through credit enhancements by a third party. Credit enhancement techniques
include letters of credit, insurance bonds, limited guarantees (which are
generally provided by the issuer), senior-subordinated structures and
over-collateralization. The Portfolios will only purchase an asset-backed
security if it is rated at least "A" by S&P or Moody's.
11. MORTGAGE-BACKED SECURITIES. The Portfolios may purchase mortgage-backed
securities issued by government and non-government entities such as banks,
mortgage lenders, or other financial institutions. Mortgage-backed securities
include mortgage pass-through securities, mortgage-backed bonds, and mortgage
pay-through securities. A mortgage pass-through security is a pro-rata interest
in a pool of mortgages where the cash flow generated from the mortgage
collateral is passed through to the security holder. Mortgage-backed bonds are
general obligations of their issuers, payable out of the issuers' general funds
and additionally secured by a first lien on a pool of mortgages. Mortgage
pay-through securities exhibit characteristics of both pass-through and
mortgage-backed bonds. Mortgage-backed securities also include other debt
obligations secured by mortgages on commercial real estate or residential
properties. Other types of mortgage-backed securities will likely be developed
in the future, and the Portfolios may invest in them if it is determined they
are consistent with a Portfolio's investment objective and policies.
12. COLLATERALIZED MORTGAGE OBLIGATIONS. (CMOs) are pay-through securities
collateralized by mortgages or mortgage-backed securities. CMOs are issued in
classes and series that have different maturities and often are retired in
sequence.
13. STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage backed
securities are created when the principal and interest payments of a
mortgage-backed security are separated by a U.S. Government agency or a
financial institution. The holder of the "principal-only" security receives the
principal payments made by the underlying mortgage-backed security, while the
holder of the "interest-only" security receives interest payments from the same
underlying security.
The value of mortgage-backed securities may change due to changes in the
market's perception of issuers. In addition, the mortgage securities market in
general may be adversely affected by regulatory or tax changes. Non-governmental
mortgage-backed securities may offer a higher yield than those issued by
government entities but also may be subject to greater price change than
government securities.
Like most mortgage securities, mortgage-backed securities are subject to
prepayment risk. When prepayment occurs, unscheduled or early payments are made
on the underlying mortgages, which may shorten the effective maturities of those
securities and may lower their total returns. Furthermore, the prices of
stripped mortgage-backed securities can be significantly affected by changes in
interest rates as well. As interest rates fall, prepayment rates tend to
increase, which in turn tends to reduce prices of "interest-only" securities and
increase prices of "principal-only" securities. Rising interest rates can have
the opposite effect.
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APPENDIX B
DESCRIPTION OF SELECTED CORPORATE BOND AND
COMMERCIAL PAPER RATINGS
CORPORATE BONDS - MOODY'S INVESTORS SERVICE, INC.
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged". Interest payments are protected by a large, or by an exceptionally
stable, margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position on such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements and
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safe-guarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Unrated - Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that are
not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
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CORPORATE BONDS - STANDARD & POOR'S
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they exhibit an adequate degree of protection,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC and CC - Bonds rated BB, B, CCC and CC are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation. While such bonds will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-) - The ratings from "AA" to "BBB" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
Unrated - Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
B-2
<PAGE>
PROSPECTUS
WRL SERIES FUND, INC.
GLOBAL SECTOR PORTFOLIO
US SECTOR PORTFOLIO
FOREIGN SECTOR PORTFOLIO
[GRAPHIC OMITTED] 201 Highland Avenue [GRAPHIC OMITTED]
Largo, Florida 33770
Telephone: (800) 851-9777
(813) 585-6565
WRL Series Fund, Inc. (the "Fund") is a diversified, open-end management
investment company consisting of separate series or investment portfolios. This
Prospectus pertains only to the Global Sector, US Sector and Foreign Sector
Portfolios of the Fund (collectively, the "Portfolios" and, individually, a
"Portfolio").
The investment objective of the Global Sector Portfolio is growth of
capital. The Global Sector Portfolio seeks to achieve its objective by following
an asset allocation strategy that shifts among a wide range of asset categories
and within them, market sectors.
The investment objective of the US Sector Portfolio is growth of capital.
The US Sector Portfolio seeks to achieve its objective by investing, under
normal circumstances, at least 65% of its total assets in the equity securities
of United States issuers.
The investment objective of the Foreign Sector Portfolio is growth of
capital. The Foreign Sector Portfolio seeks to achieve its objective by
investing, under normal circumstances, at least 65% of its total assets in the
equity securities of foreign issuers.
Shares of the Fund are sold only to the separate accounts (the "Separate
Accounts") of Western Reserve Life Assurance Co. of Ohio ("WRL"), PFL Life
Insurance Company ("PFL"), and AUSA Life Insurance Company, Inc. ("AUSA") (WRL,
PFL, and AUSA together, the "Life Companies") to fund the benefits under certain
individual variable life insurance policies (the "Policies") and individual and
group variable annuity contracts (the "Annuity Contracts"). The Life Companies
are affiliates. The Separate Accounts, which may or may not be registered with
the Securities and Exchange Commission, invest in shares of one or more of the
Portfolios in accordance with the allocation instructions received from holders
of the Policies and the Annuity Contracts (collectively, the "Policyholders").
Such allocation rights are further described in the prospectuses or disclosure
documents for the Policies and the Annuity Contracts.
WRL Investment Management, Inc. ("WRL Management") and Meridian Investment
Management Corporation ("Meridian") serve as the investment adviser (the
"Investment Adviser") and the sub-adviser ("Sub-Adviser"), respectively, to the
Portfolios. See "The Investment Adviser" and "The Sub-Adviser."
This Prospectus sets forth concisely the information about the Portfolios
that prospective investors ought to know before investing. Investors should read
this Prospectus and retain it for future reference.
Additional information about the Fund, the Portfolios and the other
portfolios of the Fund has been filed with the Securities and Exchange
Commission and is available upon request without charge by calling or writing
the Fund. The Statement of Additional Information ("SAI") pertaining to the
Portfolios bears the same date as this Prospectus and is incorporated by
reference into this Prospectus in its entirety.
--------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, A BANK OR OTHER FINANCIAL INSTITUTION, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
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.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Prospectus Dated May 1, 1997
<PAGE>
WRL SERIES FUND, INC.
GLOBAL SECTOR PORTFOLIO
US SECTOR PORTFOLIO
FOREIGN SECTOR PORTFOLIO
201 Highland Avenue
Largo, FL 33770
Telephone: (813) 585-6565
(800) 851-9777
TABLE OF CONTENTS
Page
----
The Global Sector Portfolio, US Sector Portfolio and
Foreign Sector Portfolio and the Fund ............ 2
Management of the Fund .............................. 7
Dividends and Other Distributions .................. 9
Taxes ............................................. 9
Purchase and Redemption of Shares .................. 10
Valuation of Shares ................................. 10
The Fund and Its Shares ........................... 10
Performance Information ........................... 11
General Information ................................. 11
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 in the SAI. The
tables provide information for one share of capital stock outstanding of the
Global Sector, US Sector and Foreign Sector Portfolios, respectively, for the
period May 1, 1996 (commencement of operations) through December 31, 1996, using
average shares outstanding throughout the period. 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 and Portfolio Turnover for
periods of less than one year are not annualized. A copy of the SAI and Annual
Report may be obtained without charge upon request.
GLOBAL SECTOR PORTFOLIO
PERIOD FROM
5/1/96* TO
12/31/96
-----------
Net asset value, beginning of period .............. $10.00
Income from operations:
Net investment income (loss) ..................... .06
Net realized and unrealized gain (loss)
on investments ................................... .55
------
Total income (loss) from operations ............. .61
------
Distributions:
Dividends from net investment income ............. (.02)
Dividends in excess of net investment income .....
Distributions from net realized gains
on investments ................................... (.04)
Distributions in excess of net realized gains
on investments ...................................
Total distributions ............................. (.06)
------
Net asset value, end of period .................... $10.55
======
Total return ...................................... 6.08%
Ratios and supplemental data:
Net assets at end of period (in thousands) ....... $6,986
Ratio of expenses to average net assets .......... 2.37%
Ratio of net investment income (loss) to average
net assets ....................................... 0.62%
Ratio of commissions paid to number of shares ... 3.13%
Portfolio turnover rate .......................... 27.58%
US SECTOR PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
5/1/96* TO
12/31/96
-----------
<S> <C>
Net asset value, beginning of period .............. $ 10.00
Income from operations:
Net investment income (loss) ..................... (.21)
Net realized and unrealized gain (loss)
on investments ................................... .64
-------
Total income (loss) from operations ............. .43
-------
Distributions:
Dividends from net investment income ............. .00
Dividends in excess of net investment income .....
Distributions from net realized gains
on investments ................................... .00
Distributions in excess of net realized gains
on investments ...................................
Total distributions ............................. .00
-------
Net asset value, end of period .................... $ 10.43
=======
Total return ...................................... 4.25%
Ratios and supplemental data:
Net assets at end of period (in thousands) ....... $ 2,100
Ratio of expenses to average net assets .......... 4.76%
Ratio of net investment income (loss) to average
net assets ....................................... (2.04%)
Ratio of commissions paid to number of shares .... 5.55%
Portfolio turnover rate .......................... 55.61%
</TABLE>
FOREIGN SECTOR PORTFOLIO
PERIOD FROM
5/1/96* TO
12/31/96
----------
Net asset value, beginning of period .............. $ 10.00
Income from operations:
Net investment income (loss) ..................... (.20)
Net realized and unrealized gain (loss)
on investments ................................... .54
---------
Total income (loss) from operations ............. .34
---------
Distributions:
Dividends from net investment income ............. .00
Dividends in excess of net investment income .....
Distributions from net realized gains
on investments ................................... (.20)
Distributions in excess of net realized gains
on investments ...................................
Total distributions ............................. (.20)
---------
Net asset value, end of period .................... $ 10.14
=========
Total return ...................................... 3.44%
Ratios and supplemental data:
Net assets at end of period (in thousands) ....... $ 1,477
Ratio of expenses to average net assets .......... 4.68%
Ratio of net investment income (loss) to average
net assets ....................................... (2.03%)
Ratio of commissions paid to number of shares .... 6.43%
Portfolio turnover rate .......................... 28.08%
- ----------------
* Commencement of operations of this Portfolio.
1
<PAGE>
THE GLOBAL SECTOR PORTFOLIO, US SECTOR PORTFOLIO AND FOREIGN SECTOR PORTFOLIO
AND THE FUND
The Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Portfolios are series of the Fund. The Fund consists of several
series, or separate investment portfolios, which offer shares for investment by
the Separate Accounts. This Prospectus describes only the Portfolios.
A particular portfolio of the Fund may not be available under the Policy
or Annuity Contract you have chosen or may not be available in your state due to
certain state insurance law considerations. The prospectus or disclosure
document for the particular Policy or Annuity Contract you have chosen will
indicate the portfolios which are generally available under the applicable
Policy or Annuity Contract and should be read in conjunction with this
Prospectus.
There can be, of course, no assurance that the Portfolios will achieve
their investment objectives. The Portfolios' investment objectives and, unless
otherwise noted, their investment policies and techniques, may be changed by the
Board of Directors of the Fund without shareholder or Policyholder approval. A
change in the investment objectives or policies of the Portfolios may result in
the Portfolios having investment objectives or policies different from those
which a Policyholder deemed appropriate at the time of investment.
INVESTMENT OBJECTIVES AND POLICIES
GLOBAL SECTOR PORTFOLIO
The investment objective of the Global Sector Portfolio is growth of
capital.
The Portfolio seeks to achieve this objective by following an asset
allocation strategy that shifts among a wide range of asset categories and
within them, market sectors. The Portfolio will invest in the following asset
categories: equity securities of domestic and foreign issuers, including common
stocks, preferred stocks, convertible securities and warrants; debt securities
of domestic and foreign issuers, including mortgage-related and other
asset-backed securities and securities rated below investment grade;
exchange-traded or over-the-counter real estate investment trusts (REITS);
equity securities of companies involved in the exploration, mining, processing,
or dealing or investing in gold ("gold stocks"); gold bullion; and domestic
money market instruments. Market sectors within the asset categories include the
industry, country or bond markets available for investment. See "Certain
Portfolio Policies and Techniques," page 3 and "Risk Factors," page 5 for a
discussion of the additional risks associated with investments in foreign
securities, lower-rated debt securities, REITs, gold stocks and gold bullion.
Under normal circumstances, the Portfolio will invest at least 65% of its
total assets in securities of issuers domiciled in at least three countries, one
of which may be the United States, although the 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.
The Portfolio is not required to maintain a portion of its assets in each
of the permitted asset categories. The Portfolio, however, under normal
circumstances, will maintain a minimum of 20% of its total assets in equity
securities and 10% in debt securities. The Portfolio may, however, invest up to
100% of its total assets in equity securities and up to 70% in debt securities.
For temporary defensive purposes, during times of unusual market conditions, the
Portfolio may invest 100% of its assets in short-term securities. (See Appendix
B in the SAI for a detailed description of these instruments.) The Portfolio
will not invest more than 20% of its total assets in gold stocks. The Portfolio
will not invest more than 25% of its total assets in the securities of any
single country, other than the United States, or in securities of issuers in any
one industry. The Sub-Adviser determines the allocation of the Portfolio's
assets among the asset categories described above based on proprietary
quantitative research and then selects the specific securities in which the
Portfolio will invest.
US SECTOR PORTFOLIO
The investment objective of the US Sector Portfolio is growth of capital.
Under normal circumstances, the Portfolio will invest at least 65% of its
total assets in the equity securities of United States issuers. Equity
investments are first selected based on industry attractiveness. In attempting
to determine industry attractiveness, the Sub-Adviser uses its proprietary
valuation model to analyze approximately 1,200 domestic stocks based on the
following factors: historical and estimated future earnings; long-term earnings
growth projections; risk; current and future interest rate conditions; and
current price. The Sub-Adviser then groups stocks into approximately 71 industry
classifications in order to determine those industries the Sub-Adviser deems to
be attractive relative to other industries. The Portfolio, under normal market
conditions, will invest in securities of 10 to 20 industries that are deemed to
be attractive based on the Sub-Adviser's quantitative research. The Portfolio
will not invest more than 25% of its total assets in any one industry.
After industry selections and relative portfolio weighting of such
industries are determined by the Sub-Adviser, securities will be selected in
each industry. The Portfolio may invest up to 25% of its total assets, measured
at the time of purchase, in foreign securities. The Sub-Adviser will deem a
particular company to be principally engaged in business in the industry if more
than 50% of its gross income or net sales is derived from activities in such
industry or more than 50% of its assets are dedicated to the production of
revenues from such industry. In circumstances where, based on available
financial information, a question exists whether a company meets one of these
standards, the Portfolio may invest in the
2
<PAGE>
securities of such a company only if the Sub-Adviser determines, after review of
information describing the company and its business activities, that the
company's primary business is within the industry.
FOREIGN SECTOR PORTFOLIO
The investment objective of the Foreign Sector Portfolio is growth of
capital.
Under normal circumstances, the Portfolio will invest at least 65% (but
may invest up to 100%) of its total assets in the equity securities of foreign
issuers. Investments are first selected based on country attractiveness. In
attempting to determine country attractiveness, the Sub-Adviser uses its
proprietary valuation model to analyze approximately 800 foreign and U.S. stocks
based on the following factors: historical and estimated future earnings;
long-term earnings growth projections; risk; current and future interest rate
condition; and current price. The Sub-Adviser groups stocks into approximately
24 country classifications, in order to determine which countries are deemed to
be attractive relative to other countries. The Portfolio, under normal
conditions, will invest in securities of issuers in 6 to 14 countries that the
Sub-Adviser deems to be attractive based on its quantitative research.
After country selections and relative portfolio weightings for issuers of
each country in which the Portfolio will invest have been designated by the
Sub-Adviser, it will select the specific securities within each country. The
Portfolio will not invest more than 25% of its total assets in securities of
issuers of any one country (with the exception of Japan; total assets invested
in securities of Japanese issuers may be up to 65%). A foreign issuer is a
company that, in the opinion of the Sub-Adviser, has one or more of the
following characteristics: (i) its principal securities trading market is in a
foreign country; (ii) the company derives 50% or more of its annual revenue from
either goods produced, sales made or services performed in foreign countries; or
(iii) the company is organized under the laws of, or has its principal office
in, a foreign country. The Sub-Adviser will base its determination of whether a
company will be deemed to be a foreign issuer on publicly available information
or inquiries made to the company.
CERTAIN PORTFOLIO POLICIES AND TECHNIQUES
Each Portfolio's investment in stocks, bonds and cash securities may vary
from time to time, depending upon the Sub-Adviser's assessment of business,
economic and market conditions. In periods of abnormal economic and market
conditions, as determined by the Sub-Adviser, the Portfolios may depart from
their basic investment objectives and assume a temporary defensive position,
with up to 100% of their assets invested in U.S. government and agency
securities, investment grade corporate bonds or cash securities such as domestic
certificates of deposit and bankers' acceptances, repurchase agreements and
commercial paper. (See Appendix B in the SAI for a description of these
securities.) The Portfolios reserve the right to hold equity, debt and cash
securities in whatever proportion is deemed desirable at any time for defensive
purposes. While a Portfolio is in a defensive position, the opportunity to
achieve capital growth will be limited; however, the ability to maintain a
defensive position enables the Portfolios to seek to avoid capital losses during
market downturns. Under normal market conditions, the Portfolios do not expect
to have a substantial portion of their assets invested in cash securities.
EQUITY SECURITIES (ALL PORTFOLIOS). Each Portfolio may invest in equity
securities (common stocks and, to a lesser degree, preferred stocks and
securities convertible into common stocks, such as rights, warrants and
convertible debt securities). In selecting the equity securities in which the
Portfolios invest, 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 over-the-counter market. The risks of
investing in small capitalization companies are discussed on page 6 under "Risk
Factors - Small Capitalization Companies."
DEBT SECURITIES (ALL PORTFOLIOS). Consistent with their investment
objectives, the Portfolios also may invest in debt securities (corporate bonds,
commercial paper, debt securities issued by the U.S. government, its agencies
and instrumentalities, or foreign governments, asset-backed securities and zero
coupon bonds). Each Portfolio may invest no more than 15% of its total assets in
debt securities that are rated below BBB by Standard & Poor's or Baa by Moody's
Investors Service, Inc. ("Moody's") or, if unrated, are judged by the
Sub-Adviser to be of equivalent quality to debt securities having such ratings
(commonly referred to as "junk bonds"). In no event will a Portfolio ever invest
in a debt security rated below CCC by Standard & Poor's or Caa by Moody's. The
risks of investing in lower rated debt securities are discussed on page 5 under
"Risk Factors - Equity and Debt Securities."
The Portfolios may hold certain cash and cash equivalent securities as
cash reserves ("cash securities"), as described above.
CONVERTIBLE SECURITIES (ALL PORTFOLIOS). Each Portfolio may invest in
convertible securities. Convertible securities may include corporate notes or
preferred stock, but ordinarily are a long-term debt obligation of the issuer
convertible at a stated exchange rate into common stock of the issuer. As with
all debt securities, the market value of convertible debt securities tends to
decline as interest rates increase and, conversely, to increase as interest
rates decline. Convertible securities generally rank senior to common stocks in
an issuer's capital structure and are consequently of higher quality and entail
less risk of declines in market value than the issuer's common stock. However,
the extent to which such risk is reduced depends in large measure upon the
degree to which the convertible security sells above its value as a fixed
3
<PAGE>
income security. For additional information regarding convertible securities,
see the SAI.
FOREIGN SECURITIES (ALL PORTFOLIOS). Consistent with their investment
objectives, the Portfolios may invest in foreign securities. Foreign securities
may also be purchased by means of American Depositary Receipts ("ADRs"). ADRs
that may be purchased by a Portfolio are receipts, typically issued by a U.S.
bank or trust company, evidencing ownership of the underlying foreign equity
securities. ADRs are denominated in U.S. dollars and trade in the U.S.
securities markets. ADRs may be issued in sponsored or unsponsored programs. In
sponsored programs, the issuer makes arrangements to have its securities traded
in the form of ADRs; in unsponsored programs, the issuer may not be directly
involved in the creation of the program. Investments in foreign securities
involve certain risks that are not associated with investments in domestic
issuers. These risks are discussed on page 6 under "Risk Factors."
FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS (ALL PORTFOLIOS). In
order to hedge their portfolios, the Portfolios may purchase and write options
on securities (including index options and options on foreign securities), and
may invest in futures contracts for the purchase or sale of debt securities and
instruments based on financial indices (collectively, "futures contracts"),
options on futures contracts and interest rate swaps and swap-related products.
Interest rate swaps involve the exchange by a Portfolio with another party of
their respective commitments to pay or receive interest, E.G., an exchange of
floating rate payments for fixed rate payments. These practices and securities
and their risks are discussed on page 6 under "Risk Factors" and in the SAI.
FORWARD FOREIGN CURRENCY CONTRACTS (ALL PORTFOLIOS). Each Portfolio may
enter into contracts to purchase or sell foreign currencies at a future date
("forward contracts") as a hedge against fluctuations in foreign exchange rates
pending the settlement of transactions in foreign securities or during the time
the Portfolio holds foreign securities. A forward contract, which is also
included in the types of instruments commonly known as derivatives, is an
agreement between contracting parties to exchange an amount of currency at some
future time at an agreed upon rate. A Portfolio will not enter into a forward
contract for a term of more than one year or for purposes of speculation.
Investors should be aware that hedging against a decline in the value of a
currency in the foregoing manner does not eliminate fluctuations in the prices
of portfolio securities or prevent losses if the prices of such securities
decline. Furthermore, such hedging transactions preclude the opportunity for
gain if the value of the hedging currency should rise. Forward contracts may,
from time to time, be considered illiquid, in which case they would be subject
to a Portfolio's limitation on investing in illiquid securities, discussed
below. For additional information regarding forward contracts, see the SAI.
WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES (ALL PORTFOLIOS). Each
Portfolio may make commitments to purchase or sell equity or debt securities on
a when-issued or delayed delivery basis (I.E., securities may be purchased or
sold by the Portfolio with settlement taking place in the future, often a month
or more later). The payment obligation and, in the case of debt securities, the
interest rate that will be received on the securities, generally are fixed at
the time the Portfolio enters into the commitment. During the period between
purchase and settlement, no payment is made by the Portfolio and no interest
accrues to the Portfolio. At the time of settlement, the market value of the
security may be more or less than the purchase price, and the Portfolio bears
the risk of such market value fluctuations. Each Portfolio maintains in a
segregated account cash, U.S. government securities, or other high-grade debt
obligations readily convertible into cash having an aggregate value at least
equal to the amount of such purchase commitments.
REPURCHASE AGREEMENTS (ALL PORTFOLIOS). Investments in short-term
securities may include repurchase agreements. Each Portfolio may enter into
repurchase agreements with respect to debt instruments eligible for investment
by the Portfolio. These agreements are entered into with member banks of the
Federal Reserve System, registered broker-dealers, and registered government
securities dealers, which are deemed creditworthy. A repurchase agreement is a
means of investing monies for a short period. In a repurchase agreement, which
may be considered a loan under the 1940 Act, the Portfolio acquires a debt
instrument (generally a security issued by the U.S. government or an agency
thereof, a bankers' acceptance, or a certificate of deposit) subject to resale
to the seller at an agreed upon price and date (normally, the next business
day). In the event that the original seller defaults on its obligation to
repurchase the security, the Portfolio could incur costs or delays in seeking to
sell such a security. To minimize risk, the securities underlying each
repurchase agreement will be maintained with the Portfolio's custodian in an
amount at least equal to the repurchase price under the agreement (including
accrued interest), and such agreements will be effected only with parties that
meet certain creditworthiness standards established by the Fund's Board of
Directors. A Portfolio will not enter into a repurchase agreement maturing in
more than seven days if as a result more than 15% of its net assets would be
invested in such repurchase agreements and other illiquid securities. The
Portfolios have not adopted any limit on the amount of their net assets that may
be invested in repurchase agreements maturing in seven days or less.
ILLIQUID AND RULE 144A SECURITIES (ALL PORTFOLIOS). Each Portfolio is
authorized to invest in securities that are considered illiquid because of the
absence of a readily available market or due to legal or contractual
restrictions on resale. However, a Portfolio will not purchase any such security
if the purchase would cause the Portfolio to invest more than 15% of its net
assets in illiquid securities. Repurchase agreements maturing in more than seven
days will be considered as illiquid for purposes of this restriction.
Investments in illiquid securities involve certain risks to the extent that a
Portfolio may be unable to dispose of such securities at the
4
<PAGE>
time desired or at a reasonable price. In addition, in order to resell a
restricted security, a Portfolio might have to bear the expense and incur the
delays associated with effecting a registration required in order to qualify for
resale.
Certain restricted securities that are not registered for sale to the
general public, but that can be resold to dealers or institutional investors
("Rule 144A Securities"), may be purchased without regard to the foregoing
limitation if a liquid institutional trading market exists. The liquidity of a
Portfolio's investments in Rule 144A Securities could be impaired if dealers or
institutional investors become uninterested in purchasing these securities. The
Fund's Board of Directors has delegated to the Sub-Adviser the authority to
determine the liquidity of Rule 144A Securities pursuant to guidelines approved
by the Board. For more information concerning Rule 144A Securities, see the SAI.
GOLD STOCKS AND GOLD BULLION (ALL PORTFOLIOS). Due to monetary and
political policies on a national and international level, the price of gold is
subject to substantial fluctuations, which will have an effect on the
profitability of issuers of gold stocks and the market value of their
securities. Changes in the political or economic climate for the two largest
producers - South Africa and the Commonwealth of Independent States (the former
Soviet Union) - may have a direct impact on the price of gold worldwide. The
Portfolios' investments in gold bullion will earn no income return. Appreciation
in the market price of gold is the sole manner in which a Portfolio would be
able to realize gains on such investments. Furthermore, the Portfolios may
encounter storage and transaction costs in connection with their ownership of
gold bullion that may be higher than those associated with the purchase, holding
and disposition of more traditional types of investments. In order to help
reduce these risks, no Portfolio will invest more than 10% of its total assets
in gold bullion.
REAL ESTATE SECURITIES (ALL PORTFOLIOS). Although the Portfolios will not
invest in real estate directly, they may invest in exchange-traded or
over-the-counter equity securities of real estate investment trusts ("REITs")
and other real estate industry companies. Therefore, each Portfolio may be
subject to certain risks associated with the direct ownership of real estate.
These risks include, among others: possible declines in the value of real
estate; possible lack of availability of mortgage funds; extended vacancies of
properties; risks related to general and local economic conditions;
overbuilding; increases in competition, property taxes and operating expenses;
changes in zoning laws; costs resulting from the clean-up of, and liability to
third parties for damages resulting from, environmental problems; casualty or
condemnation losses; uninsured damages from floods, earthquakes or other natural
disasters; limitations on and variations in rents; and changes in interest
rates. (See page 6 under "Risk Factors" for a discussion of risks of investing
in REITs.)
REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interests. REITs are
generally classified as equity REITs, mortgage REITs or hybrid REITs. Equity
REITs invest the majority of their assets directly in real property and derive
income primarily from the collection of rents. Equity REITs can also realize
capital gains by selling properties that have appreciated in value. Mortgage
REITs invest the majority of their assets in real estate mortgages and derive
income from the collection of interest payments. Hybrid REITs invest their
assets in both real property and mortgages. REITs are not taxed on income
distributed to shareholders provided they comply with several requirements of
the Internal Revenue Code of 1986, as amended (the "Code").
LENDING AND BORROWING
Each Portfolio is authorized to lend its securities to qualified brokers,
dealers, banks, or other financial institutions. Loans of securities will be
collateralized by cash, letters of credit, or securities issued or guaranteed by
the U.S. government or its agencies equal to at least 100% of the current market
value of the loaned securities, determined on a daily basis. Lending securities
involves certain risks, the most significant of which is the risk that a
borrower may fail to return a portfolio security. Each Portfolio monitors the
creditworthiness of borrowers in order to minimize such risks. The Portfolios do
not have the right to vote securities on loan, but would terminate the loan and
regain the right to vote if it were considered important with respect to the
investment. A Portfolio will not lend any security if, as a result of such loan,
the aggregate value of securities then on loan would exceed 33-1/3% of the
Portfolio's total assets (taken at market value).
Each Portfolio may only borrow money from banks for temporary or emergency
purposes (not for leverage or investment) in an amount not exceeding 33-1/3% of
the value of the Portfolio's total assets (including the amount borrowed) less
liabilities (other than borrowings). Reverse repurchase agreements are deemed to
be borrowings for purposes of this limitation.
RISK FACTORS
EQUITY AND DEBT SECURITIES. There can be no assurance that the Portfolios
will achieve their investment objectives. The Portfolios' investments in common
stocks and other equity securities may, of course, decline in value.
The Portfolios' investments in debt securities generally are subject to
both credit risk and market risk. Credit risk relates to the ability of the
issuer to meet interest or principal payments, or both, as they come due. Market
risk relates to the fact that the market values of the debt securities in which
a Portfolio invests generally will be affected by changes in the level of
interest rates. An increase in interest rates will tend to reduce the market
values of debt securities, whereas a decline in interest rates will tend to
increase their values.
Although the Sub-Adviser limits the Portfolios' investments in debt
securities to securities it believes are not highly speculative, both kinds of
risk are increased by investing in debt securities rated below the top three
grades by Standard & Poor's or Moody's or, if unrated, securities determined by
the Sub-Adviser to be of equivalent quality. Although bonds in the lowest
investment grade debt category (those rated
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BBB by Standard & Poor's or Baa by Moody's) are regarded as having adequate
capability to pay principal and interest, they have speculative characteristics.
Adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than is the case for
higher rated bonds. Lower rated bonds by Moody's (categories Ba, B, Caa) are of
poorer quality and also have speculative characteristics. Bonds rated Caa may be
in default or there may be present elements of danger with respect to principal
or interest. Lower rated bonds by Standard & Poor's (categories BB, B, CCC)
include those which are regarded, on balance, as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with their terms; BB indicates the lowest degree of speculation and
CCC a high degree of speculation. While such bonds likely will have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions. For a specific description of each
corporate bond rating category, see Appendix A to the SAI.
When a Portfolio invests in debt securities, investment income may
increase and may constitute a larger portion of the return on the Portfolio's
investments, and the Portfolio may not participate in stock market advances or
declines to the extent that it would if it were fully invested in equity
securities.
FOREIGN SECURITIES. For U.S. investors, the returns on foreign securities
are influenced not only by the returns on the foreign investments themselves,
but also by currency risk (I.E., changes in the value of the currencies in which
the securities are denominated relative to the U.S. dollar). In a period when
the U.S. dollar generally rises against foreign currencies, the returns on
foreign securities for a U.S. investor are diminished. By contrast, in a period
when the U.S. dollar generally declines, the returns on foreign securities
generally are enhanced.
Other risks and considerations of investing in foreign securities include
the following: differences in accounting, auditing and financial reporting
standards which may result in less publicly available information than is
generally available with respect to U.S. issuers; generally higher commission
rates on foreign portfolio transactions and longer settlement periods; higher
custodial expenses; the smaller trading volumes and generally lower liquidity of
foreign stock markets, which may result in greater price volatility; foreign
withholding taxes payable on a Portfolio's foreign securities, which may reduce
dividend income payable to shareholders; the possibility of expropriation or
confiscatory taxation; adverse changes in investment or exchange control
regulations; less stringent or different regulations than those applicable to
U.S. issuers; political instability which could affect U.S. investment in
foreign countries; potential restrictions on the flow of international capital;
and the possibility of the Portfolio experiencing difficulties in pursuing legal
remedies and collecting judgments. A Portfolio's investments in foreign
securities may include investments in developing countries. Many of these
securities are speculative and their prices may be more volatile than those of
securities issued by companies located in more developed countries.
ADRs are subject to certain of the same risks as direct investments in
foreign securities, including the risk that changes in the value of the currency
in which the security underlying an ADR is denominated relative to the U.S.
dollar may adversely affect the value of the ADR. The regulatory requirements
with respect to ADRs that are issued in sponsored and unsponsored programs are
generally similar but the issuers of unsponsored ADRs are not obligated to
disclose material information in the United States and, therefore, such
information may not be reflected in the market value of the ADRs.
SMALL CAPITALIZATION COMPANIES. The Portfolios may invest in equity
securities issued by small-cap companies. For these purposes, the Sub-Adviser
considers small-cap companies to be companies with market capitalizations of up
to $1 billion. The Portfolios' investments in small capitalization stocks may
include companies that have limited operating histories, product lines, and
financial and managerial resources. These companies may be subject to intense
competition from larger companies, and their stocks may be subject to more
abrupt or erratic market movements than the stocks of larger, more established
companies. Due to these and other factors, small cap companies may suffer
significant losses as well as realize substantial growth.
FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS. The use of futures,
options, forward contracts and swaps exposes the Portfolios to additional
investment risks and transaction costs. If the Sub-Adviser seeks to protect the
Portfolios against potential adverse movements in the securities, foreign
currency or interest rate markets using these instruments, and such markets do
not move in a direction adverse to the Portfolios, the Portfolios could be left
in a less favorable position than if such strategies had not been used. Risks
inherent in the use of futures, options, forward contracts and swaps include (1)
the risk that interest rates, securities prices and currency markets will not
move in the directions anticipated; (2) imperfect correlation between the prices
of futures, options and forward contracts and movements in the prices of the
securities or currencies hedged; (3) the fact that skills needed to use these
strategies are different from those needed to select portfolio securities; (4)
the possible absence of a liquid secondary market for any particular instrument
at any time; and (5) the possible need to defer closing out certain hedged
positions to avoid adverse tax consequences. Further information on the use of
futures, options, forward foreign currency contracts and swaps and swap-related
products, and the associated risks, is contained in the SAI.
REAL ESTATE INVESTMENT TRUSTS. Investing in REITs involves certain unique
risks in addition to those risks associated with investing in the real estate
industry in general. Equity REITs may be affected by changes in the value of the
underlying property owned by the REITs, while mortgage REITs may be affected by
the quality of any credit extended.
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REITs are dependent upon management skills, are not diversified, and are subject
to the risks of financing projects. REITs are subject to heavy cash flow
dependency, default by borrowers, self-liquidation and the possibilities of
failing to qualify for the exemption from tax for distributed income under the
Code. REITs (especially mortgage REITs) are also subject to interest rate risk.
(I.E., as interest rates rise, the value of the REIT may decline).
OTHER INVESTMENT POLICIES AND RESTRICTIONS
Each Portfolio is subject to certain other investment policies and
restrictions which are described in the SAI, some of which are fundamental
policies of the Portfolio and as such may not be changed without the approval of
a majority of the Portfolio's shareholders and the Policyholders.
PORTFOLIO TURNOVER
There are no fixed limitations regarding portfolio turnover. Although the
Portfolios do not trade for short-term profits, securities may be sold without
regard to the time they have been held in a Portfolio when, in the opinion of
the Sub-Adviser, investment considerations warrant such action. In addition,
portfolio turnover rates may increase as a result of large amounts of purchases
or redemptions of Portfolio shares due to economic, market or other factors that
are not within the control of the Sub-Adviser. As a result, under certain market
conditions, the portfolio turnover rate for a Portfolio may exceed 100%, and may
be higher than that of other investment companies seeking growth of capital.
Increased portfolio turnover would cause a Portfolio to incur greater brokerage
costs than would otherwise be the case.
MANAGEMENT OF THE FUND
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. There are currently five Directors, three of
whom are not "interested persons" of the Fund as that term is defined in the
1940 Act. The Board meets regularly four times each year and at other times as
necessary. By virtue of the functions performed by WRL Management as Investment
Adviser and Meridian as Sub-Adviser, the Fund requires no employees other than
its executive officers, none of whom devotes full time to the affairs of the
Fund. These officers are employees of WRL Management and receive no compensation
from the Fund. The SAI contains the names of and general background information
regarding each Director and executive officer of the Fund.
THE INVESTMENT ADVISER
WRL Management, located at 201 Highland Avenue, Largo, Florida 33770-2597,
serves as the Fund's Investment Adviser. The Investment Adviser is a direct,
wholly-owned subsidiary of WRL, which is wholly-owned by First AUSA Life
Insurance Company, a stock life insurance company, which is wholly-owned by
AEGON USA, Inc. ("AEGON"). AEGON is a financial services holding company whose
primary emphasis is on life and health insurance and annuity and investment
products. AEGON is a wholly-owned indirect subsidiary of AEGON nv, a Netherlands
corporation, which is a publicly traded international insurance group. The
Investment Adviser has served as the investment adviser to the Fund since
January 1, 1997. Prior to this date, WRL served as investment adviser to each
Portfolio.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Adviser is responsible for managing the Portfolios in accordance
with the Portfolios' stated investment objectives and policies. As compensation
for its services to the Portfolios, the Investment Adviser receives monthly
compensation at the annual rate of 1.10% of the average daily net assets of each
of the Portfolios. (Subject to shareholder approval, which will be sought on or
about June 16, 1997, the Investment Adviser's monthly compensation will be
reduced to 0.80% of the average daily net assets of each of the Portfolios.)
The Investment Adviser is responsible for furnishing continuous advice and
recommendations to the Fund as to the acquisition, holding or disposition of any
or all of the securities or other assets which the Portfolios may own or
contemplate acquiring from time to time; to cause its officers to attend
meetings and furnish oral or written reports, as the Fund may reasonably
require, in order to keep the Board of Directors and appropriate officers of the
Fund fully informed as to the conditions of each investment portfolio of the
Portfolios, the investment recommendations of the Investment Adviser, and the
investment considerations which have given rise to those recommendations; to
supervise the purchase and sale of securities of the Portfolios as directed by
the appropriate officers of the Fund; and to maintain all books and records
required to be maintained by the Investment Adviser pursuant to the 1940 Act and
the rules and regulations promulgated thereunder with respect to transactions on
behalf of the Fund.
In addition to the Investment Adviser's responsibilities discussed above,
the Investment Adviser's advisory agreement with the Fund (the "Advisory
Agreement") contemplates that the Investment Adviser, in connection with the
performance of its responsibilities under the Advisory Agreement, will enter
into sub-advisory agreements ("Sub-Advisory-Agreements") with Sub-Advisers to
provide each Portfolio with portfolio management. Under current law, every
Sub-Advisory Agreement must be submitted to and approved by shareholders of a
Portfolio before the Sub-Adviser can provide investment advice to that
Portfolio. For example, if a new Sub-Adviser were retained, shareholders would
require to approve the Sub-Advisory agreement with that Sub-Adviser. Similarly,
if a Sub-Advisory Agreement were amended in any material respect, such amendment
would generally be deemed to result in a new contract for which shareholder
approval would also be required. Moreover, in most instances when there is a
change of control of a Sub-Adviser, shareholder approval is required.
The Fund's Board of Directors has determined that shareholders of each
Portfolio have, in effect, elected to have the Investment Adviser select one or
more Sub-Advisers best suited to achieve the Portfolio's investment objectives.
The
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Board believes that part of a shareholder's investment decision is a
determination to have those selections made by the Investment Adviser, a
professional management organization with personnel having substantial
experience in making such evaluations, selections and terminations.
Under applicable law, the Fund is not generally required to hold annual
shareholders' meetings, and does not generally hold such meetings, unless
legally required to do so, in order to avoid the attendant costs. The Fund is
currently required to call a meeting of shareholders of a Portfolio whenever it
decides to employ new or additional Sub-Advisers, or to approve a new
Sub-Advisory Agreement after an "assignment," or due to a material change in
Sub-Advisory Agreement terms, with respect to such Portfolio. Given the nature
of the Fund's operations and shareholders' reasons for investing in various of
the Portfolios, such expenses are considered to provide little if any benefit to
shareholders. For these reasons, the Fund and the Investment Adviser have
applied to the SEC for an exemption from the provisions of the 1940 Act to
permit the Fund and the Investment Adviser, subject to certain conditions, to
enter into, materially amend, and terminate, and to permit Sub-Advisers to act
pursuant to, Sub-Advisory Agreements without shareholder approval (the "Proposed
Sub-Advisory Arrangement").
If the SEC exemption is granted, certain conditions would apply. The
conditions are intended to ensure that shareholders receive adequate disclosure
about the Sub-Advisers or a decision by the Investment Adviser and the Fund's
Board of Directors to appoint a new Sub-Adviser or to change materially the
terms of a Sub-Advisory Agreement. In addition, before a Portfolio could rely on
the exemption, the Proposed Sub-Advisory Arrangement must be approved by a
majority of the outstanding voting securities of the Portfolios. Shareholders of
the Portfolios will be asked in the near future to approve the Proposed
Sub-Advisory Arrangement.
DISTRIBUTION PLAN AND DISTRIBUTION AGREEMENT
Effective January 1, 1997, the Fund adopted a Plan of Distribution
pursuant to Rule 12b-1 under the 1940 Act ("Distribution Plan") and pursuant to
the Plan, has entered into a Distribution Agreement with InterSecurities, Inc.
("ISI"), whose principal office is located at 201 Highland Avenue, Largo,
Florida 33770. ISI is an affiliate of the Investment Adviser, and serves as
principal underwriter for the Fund.
The expenses the Fund may pay pursuant to the Distribution Plan shall
include, but not necessarily limited to, the following: cost of printing and
mailing Fund prospectuses and statements of additional information, and any
supplements thereto to prospective investors; costs relating to development and
preparation of Fund adverisements, sales literature and brokers' and other
promotional materials describing and/or relating to the Fund; expenses in
connection with presentation of seminars and sales meetings describing the Fund;
development of consumer-oriented sales materials describing the Fund; and
expenses attributable to "distribution-related services" provided to the Fund
(E.G., salaries and benefits, office expenses, equipment expenses (I.E.,
computers, software, office equipment, etc.), training expenses, travel costs,
printing costs, supply expenses, programming time and data center expenses, each
as they relate to the promotion of the sale of Fund shares).
Under the Distribution Plan, the Fund, on behalf of the Portfolios, is
authorized to pay to various service providers, as direct payment for expenses
incurred in connection with the distribution of a Portfolio's shares, amounts
equal to actual expenses associated with distributing such Portfolio's shares,
up to a maximum rate of 0.15% on an annualized basis of the average daily net
assets. This fee is measured and accrued daily and paid monthly.
ISI will submit to the Fund's Board for approval annual distribution
expenses with respect to each Portfolio. ISI allocates to each Portfolio
distribution expenses specifically attributable to the distribution of shares of
such Portfolio. Distribution expenses not specifically attributable to the
distribution of shares of a particular Portfolio are allocated among the
Portfolios, based upon the ratio of net asset value of each Portfolio to the net
asset value of all Portfolios, or such other factors as ISI deems fair and are
approved by the Fund's Board.
ISI has determined that it will not seek payment by the Fund of
distribution expenses with respect to any Portfolio during the fiscal year
ending December 31, 1997. Prior to ISI seeking reimbursement, Policyowners will
be notified in advance.
ADMINISTRATIVE AND TRANSFER AGENCY SERVICES
Effective January 1, 1997, the Fund entered into an Administrative
Services and Transfer Agency Agreement with WRL Investment Services, Inc. ("WRL
Services"), an affiliate of WRL Management and WRL, to furnish the Fund with
administrative services to assist the Fund in carrying out certain of its
functions and operations. Under this Agreement, WRL Services shall furnish to
each Portfolio, subject to the overall supervision of the Board, supervisory,
administrative, and transfer agency services, including recordkeeping and
reporting. WRL Services is reimbursed by the Fund monthly on a cost incurred
basis. Prior to January 1, 1997, WRL performed these services in connection with
its serving as the Fund's investment adviser.
THE SUB-ADVISER
Meridian Investment Management Corporation ("Meridian"), located at 12835
East Arapahoe Road, Tower II, Penthouse, Englewood Colorado 80112, serves as
Sub-Adviser to the Portfolios. Meridian is a wholly-owned subsidiary of Meridian
Management & Research Corporation ("MM&R"). Michael J. Hart and Dr. Craig T.
Callahan each own 50% of MM&R. Meridian provides investment management and
related services to other mutual fund portfolios and individual, corporate,
charitable and retirement accounts. Meridian manages seven mutual fund wrap-fee
programs which, as of March 1, 1997, had aggregate assets of approximately $700
million.
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Meridian's Investment Committee determines guidelines for asset, country
and industry weightings based on Meridian's proprietary quantitative methods.
The Committee is comprised of Dr. Craig T. Callahan, Michael J. Hart, Patrick S.
Boyle and Bryan M. Ritz.
Dr. Craig T. Callahan is Chairman of the Investment Committee and Chief
Investment Officer of Meridian, and directs Meridian's investment research and
analysis. Dr. Callahan obtained his D.B.A. from Kent State University. Michael
Hart is President of Meridian Investment Management and holds an M.B.A. from the
University of Denver. Patrick S. Boyle, a Chartered Financial Analyst, acts as a
Portfolio Manager for several of Meridian's private accounts. Bryan R. Ritz,
also a Chartered Financial Analyst, serves as a Portfolio Manager for Meridian's
private accounts. Mr. Ritz holds a Bachelor of Science in Business
Administration and a M.B.A. from University of Denver. In performing
sub-advisory services, Meridian may draw upon additional members of its research
team. These employees are generally specialists within Meridian's research
department. However, the Investment Committee supervises the members of the
research department and remains fully responsible for all such services.
Meridian provides investment advisory assistance and portfolio management
advice to the Investment Adviser for the Portfolios. Meridian also provides
quantitative investment research and portfolio management advice to the
Investment Adviser for the Portfolios. Subject to review and supervision by the
Investment Adviser and the Board of Directors of the Fund, the Sub-Adviser is
responsible for the actual investment management of the Portfolios and for
making decisions to buy, sell or hold any particular security. The Sub-Adviser
also places orders to buy or sell securities on behalf of each Portfolio. The
Sub-Adviser bears all of its expenses in connection with the performance of its
services, such as compensating and furnishing office space for its officers and
employees connected with the investment and economic research and investment
management of the Portfolios.
For its services, Meridian receives monthly compensation from the
Investment Adviser, as a percentage of each Portfolio's average daily net
assets, at an annual rate of 0.30% of the first $100 million of assets and 0.35%
of assets in excess of $100 million. Prior to March 1, 1997, INVESCO Global
Asset Management Limited ("INVESCO") served as a Co-Sub-Adviser to the
Portfolios. For its services, INVESCO received monthly compensation from the
Investment Adviser, as a percentage of each Portfolio's average daily net
assets, at an annual rate of 0.40% of the first $100 million of assets and 0.35%
of assets in excess of $100 million. (Subject to shareholder approval, which
will be sought on or about June 16, 1997, Meridian will receive monthly
compensation from the Investment Adviser at an annual rate of 0.40% of the
average daily net assets.)
The Sub-Adviser is also responsible for selecting the broker-dealers who
execute the portfolio transactions for the Portfolios. The Sub-Adviser is
authorized to consider sales of the Policies or Annuity Contracts described in
the accompanying prospectus by a broker-dealer as a factor in the selection of
broker-dealers to execute portfolio transactions. In placing portfolio business
with all dealers, the Sub-Adviser seeks best execution of each transaction and
all brokerage placement must be consistent with the Conduct Rules of the
National Association of Securities Dealers, Inc.
PERSONAL SECURITIES TRANSACTIONS
The Fund permits "Access Persons" as defined by Rule 17j-1 under the 1940
Act to engage in personal securities transactions, subject to the terms of the
Code of Ethics and Insider Trading Policy ("Ethics Policy") that has been
adopted by the Board of Directors of the Fund. Access Persons are required to
follow the guidelines established by this Ethics Policy in connection with all
personal securities transactions and are subject to certain prohibitions on
personal trading. The Fund's Sub-Advisers, pursuant to Rule 17j-1 and other
applicable laws, and pursuant to the terms of the Ethics Policy, must adopt and
enforce their own Code of Ethics and Insider Trading Policies appropriate to
their operations. Each Sub-Adviser is required to report to the Board of
Directors on a quarterly basis with respect to the administration and
enforcement of such Ethics Policy, including any violations thereof whch may
potentially affect the Fund.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Portfolios intend to distribute substantially all of their net
investment income, if any. Dividends, if any, from investment income normally
are declared and paid semi-annually in additional shares of the Portfolios at
net asset value. Distributions of net realized capital gains from security
transactions and net gains from foreign currency transactions, if any, normally
are declared and paid in additional shares of the Portfolios at the end of the
fiscal year.
TAXES
Each Portfolio has qualified and expects to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended ("Code"). As such, a Portfolio is not subject to Federal income
tax on that part of its investment company taxable income (consisting generally
of net investment income, net gains from certain foreign currency transactions,
and net short-term capital gain, if any) and any net capital gain (the excess of
net long-term capital gain over net short-term capital loss) that it distributes
to its shareholders. It is the Portfolios' intention to distribute all such
income and gains.
Portfolio shares are offered only to the Separate Accounts (which are
insurance company separate accounts that fund the Policies and the Annuity
Contracts). Under the Code, no tax is imposed on an insurance company with
respect to income of a qualifying separate account properly allocable to the
value of eligible variable annuity or variable life insurance contracts. For a
discussion of the taxation of life insurance companies and the Separate
Accounts, as well as the tax treatment of the Policies and Annuity Contracts and
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the holders thereof, see "Federal Tax Matters" included in the respective
prospectuses for the Policies and the Annuity Contracts.
Each Portfolio intends to comply with the diversification requirements
imposed by section 817(h) of the Code and the regulations thereunder. These
requirements are in addition to the diversification requirements imposed on the
Portfolios by Subchapter M and the 1940 Act. These requirements place certain
limitations on the assets of each separate account that may be invested in
securities of a single issuer, and, because section 817(h) and the regulations
thereunder treat each Portfolio's assets as assets of the related separate
account, these limitations also apply to each Portfolio's assets that may be
invested in securities of a single issuer. Specifically, the regulations provide
that, except as permitted by the "safe harbor" described below, as of the end of
each calendar quarter, or within 30 days thereafter, no more than 55% of each of
the Portfolio's total assets may be represented by any one investment, no more
than 70% by any two investments, no more than 80% by any three investments, and
no more than 90% by any four investments.
Section 817(h) provides, as a safe harbor, that a separate account will be
treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities, and
securities of other regulated investment companies. For purposes of section
817(h), all securities of the same issuer, all interests in the same real
property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or instrumentality
is treated as a separate issuer, while the securities of a particular foreign
government and its agencies, instrumentalities, and political subdivisions all
will be considered securities issued by the same issuer. Failure of the
Portfolios to satisfy the section 817(h) requirements would result in taxation
of the Separate Accounts, the insurance companies, the Policies, and the Annuity
Contracts, and tax consequences to the holders thereof, other than as described
in the respective prospectuses for the Policies and the Annuity Contracts.
The foregoing is only a summary of some of the important Federal income
tax considerations generally affecting the Portfolios and their shareholders;
see the SAI for a more detailed discussion. Prospective investors are urged to
consult their tax advisors.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Portfolios are sold and redeemed at their net asset value
next determined after receipt of a purchase order or notice of redemption in
proper form. Shares are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain sales and other charges may
apply to the Policies and the Annuity Contracts. Such charges are described in
the respective prospectuses for the Policies and the Annuity Contracts.
VALUATION OF SHARES
Each Portfolio's net asset value per share is ordinarily determined, once
daily, as of the close of the regular session of business on the New York Stock
Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day the
Exchange is open.
Net asset value of each Portfolio's shares is computed by dividing the
value of the net assets of the Portfolio by the total number of Portfolio shares
outstanding.
Except for money market instruments maturing in 60 days or less,
securities held by the Portfolios are valued at market value. Securities for
which market values are not readily available are valued at fair value as
determined in good faith by the Investment Adviser and Sub-Adviser under the
supervision of the Fund's Board of Directors. Money market instruments maturing
in 60 days or less are valued on the amortized cost basis.
THE FUND AND ITS SHARES
The Fund was incorporated under the laws of the State of Maryland on
August 21, 1985, and is registered with the Securities and Exchange Commission
as a diversified, open-end, management investment company.
The Fund offers its shares for purchase by the Separate Accounts of the
Life Companies to fund benefits under variable life insurance or variable
annuity contracts issued by the Life Companies. Because Fund shares are sold to
separate accounts established to receive and invest premiums received under
variable life insurance policies and purchase payments received under variable
annuity contracts, it is conceivable that, in the future, it may become
disadvantageous for variable life insurance separate accounts and variable
annuity separate accounts to invest in the Fund simultaneously. Neither the Life
Companies nor the Fund currently foresees any such disadvantages or conflicts,
either to variable life insurance policyowners or to variable annuity
contractowners. After being notified by one or more of the Life Companies of a
potential or existing conflict, the Fund's Board of Directors will determine if
a material conflict exists and what action, if any, should be taken in response
thereto. Such action could include the sale of Fund shares by one or more of the
Separate Accounts, which could have adverse consequences. Material conflicts
could result from, for example, (1) changes in state insurance laws, (2) changes
in Federal income tax laws, or (3) differences in voting instructions between
those given by variable life insurance policyowners and those given by variable
annuity contractowners. If the Board of Directors were to conclude that separate
funds should be established for variable life and variable annuity Separate
Accounts, the affected Life Companies will bear the attendant expenses, but
variable life insurance policyowners and variable annuity contractowners would
no longer have the economies of scale typically resulting from a larger combined
fund.
The Fund offers a separate class of common stock for each Portfolio. All
shares of the Portfolios and of each of the other portfolios have equal voting
rights, except that only shares of a particular portfolio are entitled to vote
on matters
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concerning only that portfolio. Each issued and outstanding share of the
Portfolios is entitled to one vote and to participate equally in dividends and
distributions declared by the Portfolios and, upon liquidation or dissolution,
to participate equally in the net assets of the Portfolios remaining after
satisfaction of outstanding liabilities. The shares of the Portfolios, when
issued, will be fully paid and nonassessable, have no preference, preemptive,
conversion, exchange or similar rights, and will be freely transferable. Shares
do not have cumulative voting rights and the holders of more than 50% of the
shares of the Fund voting for the election of directors can elect all of the
directors of the Fund if they choose to do so and, in such event, holders of the
remaining shares would not be able to elect any directors.
Only the Separate Accounts of the Life Companies may hold shares of the
Fund and are entitled to exercise the rights directly as described above. If and
to the extent required by law, the Life Companies will vote the Fund's shares in
the Separate Accounts, including Fund shares which are not attributable to
Policyholders, at meetings of the Fund in accordance with instructions received
from Policyholders having voting interests in the corresponding sub-accounts of
the Separate Accounts. Except as required by the 1940 Act, the Fund does not
hold regular or special shareholder meetings. If the 1940 Act or any regulation
thereunder should be amended or if present interpretation thereof should change,
and as a result it is determined that the Life Companies are permitted to vote
Fund shares in their own right, they may elect to do so. The rights of
Policyholders are described in more detail in the prospectuses or disclosure
documents for the Policies and the Annuity Contracts, respectively.
PERFORMANCE INFORMATION
Each Portfolio may, from time to time, include quotations of its total
return or yield in connection with the total return for the corresponding
Sub-Accounts of the Separate Account in advertisements, sales literature or
reports to Policyholders or to prospective investors. Total return and yield
quotations reflect only the performance of a hypothetical investment in the
Portfolios during the particular time period shown as calculated based on the
historical performance of the Portfolios during that period. SUCH QUOTATIONS DO
NOT IN ANY WAY INDICATE OR PROJECT FUTURE PERFORMANCE. Quotations of total
return and yield regarding the Portfolios do not reflect charges and deductions
against the Separate Accounts or charges and deductions against the Policies or
the Annuity Contracts. Where relevant, the prospectuses for the Policies and the
Annuity Contracts contain additional performance information.
The total return of the Portfolios refers to the average annual percentage
change in value of an investment in the Portfolios held for various periods of
time, including, but not limited to, one year, five years, ten years and since
the Portfolios began operations, as of a stated ending date. When the Portfolios
have been in operation for these periods, the total return for such periods will
be provided if performance information is quoted. Total return quotations are
expressed as average annual compound rates of return for each of the periods
quoted, reflect the deduction of a proportionate share of each Portfolio's
investment advisory fee and Portfolio expenses and assume that all dividends and
capital gains distributions during the period are reinvested in the Portfolio
when made.
The Portfolios may, from time to time, disclose in advertisements, sales
literature and reports to Policyholders or to prospective investors, total
return for the Portfolios for periods in addition to those required to be
presented, or disclose other nonstandardized data such as cumulative total
returns, actual year-by-year returns, or any combination thereof.
A Portfolio may also, from time to time, compare the performance of the
Portfolio in advertisements, sales literature and reports to Policyholders or to
prospective investors to: (1) the Standard & Poor's Index of 500 Common Stocks,
the Dow Jones Industrial Average or other widely recognized indices; (2) other
mutual funds whose performance is reported by Lipper Analytical Services, Inc.,
("Lipper"), Variable Annuity Research & Data Service ("VARDS") and Morningstar,
Inc. ("Morningstar") or reported by other services, companies, individuals or
other industry or financial publications of general interest, such as FORBES,
MONEY, THE WALL STREET JOURNAL, BUSINESS WEEK, BARRON'S, KIPLINGER'S PERSONAL
FINANCE, and FORTUNE, which rank and/or rate mutual funds by overall performance
or other criteria; and (3) the Consumer Price Index. Lipper, VARDS and
Morningstar are widely quoted independent research firms which rank mutual funds
by overall performance, investment objectives, and assets. Unmanaged indices may
assume the reinvestment of dividends but usually do not reflect any "deduction"
for the expense of operating or managing a fund. In connection with a ranking, a
Portfolio will also provide additional information with respect to the ranking,
including the particular category to which it relates, the number of funds in
the category, the period and criteria on which the ranking is based, and the
effect of fee waivers and/or expense reimbursements.
A Portfolio yield quotation refers to the income generated by a
hypothetical investment in the Portfolio over a specified thirty-day period
expressed as a percentage rate of return for that period. The yield is
calculated by dividing the net investment income per share for the period by the
price per share on the last day of that period.
(See the SAI for more information about the Portfolios' performance.)
GENERAL INFORMATION
REPORTS TO POLICYHOLDERS
The fiscal year of the Portfolios ends on December 31 of each year. The
Fund will send to the Portfolios' Policyholders, at least semi-annually, reports
showing each Portfolio's composition and other information. An annual report,
containing financial statements audited by the Fund's independent accountants,
will be sent to Policyholders each year.
11
<PAGE>
CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111, acts as Custodian and Dividend Disbursing Agent of each Portfolio's
assets.
ADDITIONAL INFORMATION
The telephone number or the address of the Fund appearing on the first
page of this Prospectus should be used for requests for additional information.
12
<PAGE>
WRL SERIES FUND, INC.
GLOBAL SECTOR PORTFOLIO
US SECTOR PORTFOLIO
FOREIGN SECTOR PORTFOLIO
OFFICE OF THE FUND:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, FL 33770-2597
(800) 851-9777
(813) 585-6565
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT ADVISER: INDEPENDENT ACCOUNTANTS:
WRL Investment Management, Inc.
201 Highland Avenue Price Waterhouse LLP
Largo, FL 33770-2597 1055 Broadway
Kansas City, MO 64105
SUB-ADVISER:
TRANSFER AGENT:
Meridian Investment Management Corporation
12835 East Arapahoe Road WRL Investment Services, Inc.
Tower II, Penthouse 201 Highland Avenue
Englewood, CO 80112 Largo, FL 33770-2597
CUSTODIAN: DISTRIBUTOR:
Investors Bank & Trust Company InterSecurities, Inc.
89 South Street 201 Highland Avenue
Boston, MA 02111 Largo, FL 33770-2597
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN
OFFER TO ANY PERSON IN ANY STATE OR JURISDICTION OF THE UNITED STATES OR
ANY COUNTRY WHERE SUCH OFFER WOULD BE UNLAWFUL.
WRL00100-05/97
13
<PAGE>
WRL SERIES FUND, INC.
GLOBAL SECTOR PORTFOLIO
US SECTOR PORTFOLIO
FOREIGN SECTOR PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the Prospectus for the Global
Sector Portfolio, US Sector Portfolio and Foreign Sector Portfolio of the WRL
Series Fund, Inc. (the "Fund"). A copy of the Prospectus may be obtained from
the Fund by writing the Fund at 201 Highland Avenue, Largo, Florida 33770 or by
calling the Fund at (800) 851-9777.
WRL INVESTMENT MANAGEMENT, INC.
Investment Adviser
MERIDIAN INVESTMENT MANAGEMENT CORPORATION
Sub-Adviser
The date of the Prospectus to which this Statement of Additional
Information relates and the date of this Statement of Additional Information is
May 1, 1997.
WRL00101-05/97
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE
OF TO
ADDITIONAL INFORMATION PAGE IN PROSPECTUS
---------------------- ------------------
<S> <C> <C>
Investment Objectives and Policies 1 2
Investment Restrictions 1 7
Lending of Portfolio Securities 3 5
Convertible Securities 3 3
Mortgage-Backed Securities 3 5
Asset-Backed Securities 4 3
Zero Coupon Bonds 4 3
Restricted/144A Securities 4 4
Futures, Options on Futures and Options on
Securities 4 4
Forward Foreign Currency Contracts 9 4
Swaps and Swap-Related Products 9 4
Repurchase Agreements 10 4
Foreign Exchange Transactions 10 4
Management of the Fund 10 7
Directors and Officers 10 7
The Investment Adviser 12 7
The Sub-Adviser 14 8
Portfolio Transactions and Brokerage 15 9
Portfolio Turnover 15 7
Placement of Portfolio Brokerage 16 9
Purchase and Redemption of Shares 17 10
Determination of Offering Price 17 10
Net Asset Valuation 17 10
Calculation of Performance Related Information 18 11
Total Return 18 11
Yield Quotations 18 11
Taxes 19 9
Capital Stock of the Fund 20 10
Registration Statement 21 N/A
Financial Statements 21 11
Other Information 21 11
Appendix A - Description of
Selected Corporate Bond Ratings A-1 5
Appendix B - Description of
Short-Term Securities B-1
2
</TABLE>
i
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Global Sector Portfolio, US Sector
Portfolio and Foreign Sector Portfolio (collectively, the "Portfolios" and,
individually, a "Portfolio") of the Fund are described in the Portfolios'
Prospectus. Shares of the Portfolios are sold only to the separate accounts of
Western Reserve Life Assurance Co. of Ohio ("WRL") and to separate accounts of
certain of its affiliated life insurance companies (collectively, the "Separate
Accounts") to fund the benefits under certain variable life insurance policies
(the "Policies") and variable annuity contracts (the "Annuity Contracts").
As indicated in the Prospectus, the Portfolios' investment objectives and,
unless otherwise noted, their investment policies and techniques may be changed
by the Board of Directors of the Fund without approval of shareholders or
holders of the Policies or of the Annuity Contracts (collectively,
("Policyholders"). A change in the investment objectives or policies of a
Portfolio may result in the Portfolio having an investment objective or policies
different from that which a Policyholder deemed appropriate at the time of
investment.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, each Portfolio is subject to certain
fundamental policies and restrictions which may not be changed without the
approval of the holders of a majority of the outstanding voting shares of the
Portfolio. "Majority" for this purpose and under the Investment Company Act of
1940, as amended (the "1940 Act"), means the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares of the
Portfolio are represented or (ii) more than 50% of the outstanding shares of the
Portfolio. A complete statement of all such fundamental policies is set forth
below.
A Portfolio may not, as a matter of fundamental policy:
1. With respect to seventy-five percent (75%) of the Portfolio's total
assets, purchase the securities of any one issuer, except cash items and
"government securities" as defined under the 1940 Act, if the purchase would
cause the Portfolio to have more than 5% of the value of its total assets
invested in the securities of such issuer or to own more than 10% of the
outstanding voting securities of such issuer.
2. Borrow money from banks or issue senior securities (as defined in the
1940 Act), except that a Portfolio may borrow money from banks for temporary or
emergency purposes (not for leveraging or investment) and may enter into reverse
repurchase agreements in an aggregate amount not exceeding 33-1/3% of the value
of its total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that come to exceed 33-1/3% of the value of a
Portfolio's total assets by reason of a decline in net assets will be reduced
within three business days to the extent necessary to comply with the 33-1/3%
limitation. This restriction shall not prohibit deposits of assets to margin or
guarantee positions in futures, options, swaps or forward contracts, or the
segregation of assets in connection with such contracts.
3. Invest directly in real estate or interests in real estate; however, a
Portfolio may own debt or equity securities issued by companies engaged in those
businesses.
4. Purchase or sell physical commodities other than gold or foreign
currencies unless acquired as a result of ownership of securities (but this
shall not prevent a Portfolio from purchasing or selling options, futures, swaps
and forward contracts or from investing in securities or other instruments
backed by physical commodities).
5. Lend any security or make any other loan if, as a result, more than
33-1/3% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of portfolio securities of the Portfolio.
7. Invest more than 25% of the value of its total assets in any particular
industry (other than government securities).
1
<PAGE>
Furthermore, the Portfolios have adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:
(A) A Portfolio will not (i) enter into any futures contracts or options on
futures contracts if immediately thereafter the aggregate margin deposits on all
outstanding futures contracts positions held by the Portfolio and premiums paid
on outstanding options on futures contracts, after taking into account
unrealized profits and losses, would exceed 5% of the market value of the total
assets of the Portfolio, or (ii) enter into any futures contracts if the
aggregate net amount of the Portfolio's commitments under outstanding futures
contracts positions of the Portfolio would exceed the market value of the total
assets of the Portfolio.
(B) A Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities sold
short without the payment of any additional consideration therefor, and provided
that transactions in options, swaps and forward futures contracts are not deemed
to constitute selling securities short.
(C) A Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the clearance
of transactions, and provided that margin payments and other deposits in
connection with transactions in options, futures, swaps and forward contracts
shall not be deemed to constitute purchasing securities on margin.
(D) A Portfolio may not (i) purchase securities of closed-end investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Limitations (i) and (ii) do not apply to
money market funds, funds that are the only practical means, or one of the few
practical means, of investing in a particular emerging country, or to securities
received as dividends, through offers of exchange, or as a result of a
reorganization, consolidation, or merger.
(E) A Portfolio may not mortgage or pledge any securities owned or held by
the Portfolio in amounts that exceed, in the aggregate, 15% of the Portfolio's
net asset value, provided that this limitation does not apply to reverse
repurchase agreements or in the case of assets deposited to margin or guarantee
positions in futures, options, swaps or forward contracts or placed in a
segregated account in connection with such contracts.
(F) A Portfolio may not purchase 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 Sub-Adviser acting pursuant to authority delegated by the Board of
Directors, may determine that a readily available market exists for securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933, or
any successor to such rule. According to the determination, such securities
would not be subject to the foregoing limitation.
(G) A Portfolio may not invest in companies for the purpose of exercising
control or management, except to the extent that exercise by the Fund of its
rights under agreements related to Portfolio securities would be deemed to
constitute such control.
With respect to investment restriction (F) above, the Fund's Board of
Directors has delegated to the Sub-Adviser the authority to determine that a
liquid market exists for securities eligible for resale pursuant to Rule 144A
under the Securities Act of 1933, as amended (the "1993 Act"), or any successor
to such rule and that such securities are not subject to such restriction. Under
guidelines established by the Board of Directors, the Sub-Adviser will consider
the following factors, among others, in making this determination: (1) the
frequency of trades and quotes for the security; (2) the number of dealers
willing to purchase or sell the security and the number of other potential
purchasers; (3) the willingness of dealers to undertake to make a market in the
security; and (4) the nature of the security and the nature of marketplace
trades (E.G., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer).
2
<PAGE>
Except as otherwise required by law, if a percentage limitation is complied
with at the time of the investment, a subsequent change in the percentage
resulting from any change in value or of a Portfolio's net assets will not
result in a violation of such restriction. State laws and regulations may impose
additional limitations on borrowing, lending, and the use of options, futures,
and other derivative instruments. In addition, such laws and regulations may
require the Portfolio's investments in foreign securities to meet additional
diversification and other requirements.
LENDING OF PORTFOLIO SECURITIES
Subject to investment restriction 5 above, each Portfolio, from time to
time, may lend its securities to qualified brokers, dealers, banks, or other
financial institutions. This practice permits a Portfolio to earn income, which,
in turn, can be invested in additional securities of the type described below in
pursuit of a Portfolio's investment objective. Loans of securities by a
Portfolio will be collateralized by cash, letters of credit, or securities
issued or guaranteed by the U.S. government or its agencies equal to at least
100% of the current market value of the loaned securities, determined on a daily
basis. Lending securities involves certain risks, the most significant of which
is the risk that a borrower may fail to return a portfolio security. A Portfolio
monitors the creditworthiness of borrowers in order to minimize such risks. A
Portfolio will not lend any security if, as a result of such loan, the aggregate
value of securities then on loan would exceed 33-13% of the Portfolio's total
assets (taken at market value). While voting rights may pass with the loaned
securities, if a material event (E.G., proposed merger, sale of assets, or
liquidation) is to occur affecting an investment on loan, the loan must be
called and the securities voted. Loans of securities made by a Portfolio will
comply with all other applicable regulatory requirements, including the rules of
the New York Stock Exchange and the requirements of the 1940 Act and the rules
of the Securities and Exchange Commission ("SEC") thereunder.
CONVERTIBLE SECURITIES (ALL PORTFOLIOS)
Each Portfolio may invest in convertible securities. Convertible securities
may include corporate notes or preferred stock, but ordinarily are a long-term
debt obligation of the issuer convertible at a stated exchange rate into common
stock of the issuer. As with all debt securities, the market value of
convertible securities tends to decline as interest rates increase and,
conversely, to increase as interest rates decline. Convertible securities
generally offer lower interest or dividend yields than non-convertible
securities of similar quality. However, when the market price of the common
stock underlying a convertible security exceeds the conversion price, the price
of the convertible security tends to reflect the value of the underlying common
stock. As the market price of the underlying common stock declines, the
convertible security tends to trade increasingly on a yield basis, and thus may
not depreciate to the same extent as the underlying common stock. Convertible
securities generally rank senior to common stocks in an issuer's capital
structure and are consequently of higher quality and entail less risk of
declines in market value than the issuer's common stock. However, the extent to
which such risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed income security. In
evaluating investment in a convertible security, primary emphasis will be given
to the attractiveness of the underlying common stock. The convertible debt
securities in which the Portfolios may invest are subject to the same rating
criteria as the Portfolios' investment in non-convertible debt securities.
MORTGAGE-BACKED SECURITIES (ALL PORTFOLIOS)
The Portfolios may invest in mortgage-backed securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities, or
institutions such as banks, insurance companies, and savings and loans. Some of
these securities, such as Government National Mortgage Association ("GNMA")
certificates, are backed by the full faith and credit of the U.S. Treasury while
others, such as Federal Home Loan Mortgage Corporation ("Freddie Mac")
certificates, are not. The Portfolios currently do not intend to invest more
than 5% of their respective net assets in mortgage-backed securities.
Mortgage-backed securities represent interests in a pool of mortgages.
Principal and interest payments made on the mortgages in the underlying mortgage
pool are passed through to the
3
<PAGE>
Portfolios. Unscheduled prepayments of principal shorten the securities'
weighted average life and may lower their total return. The value of these
securities also may change because of changes in the market's perception of the
creditworthiness of the federal agency or private institution that issued them.
In addition, the mortgage securities market in general may be adversely affected
by changes in governmental regulation or tax policies.
ASSET-BACKED SECURITIES (ALL PORTFOLIOS)
Asset-backed securities represent interests in pools of consumer loans
(generally unrelated to mortgage loans) and most often are structured as
pass-through securities. Interest and principal payments ultimately depend on
payment of the underlying loans by individuals, although the securities may be
supported by letters of credit or other credit enhancements. The underlying
assets (E.G., loans) are subject to prepayments which shorten the securities'
weighted average life and may lower their returns. If the credit support or
enhancement is exhausted, losses or delays in payment may result if the required
payments of principal and interest are not made. The value of these securities
also may change because of changes in the market's perception of the
creditworthiness of the servicing agent for the pool, the originator of the
pool, or the financial institution providing the credit support or enhancement.
The Portfolios currently do not intend to invest more than 5% of their
respective net assets in asset-backed securities.
ZERO COUPON BONDS (ALL PORTFOLIOS)
The Portfolios may invest in zero coupon bonds or "strips." Zero coupon
bonds do not make regular interest payments; rather, they are sold at a discount
from face value. Principal and accreted discount (representing interest accrued
but not paid) are paid at maturity. "Strips" are debt securities that are
stripped of their interest after the securities are issued, but otherwise are
comparable to zero coupon bonds. The market value of "strips" and zero coupon
bonds generally fluctuates in response to changes in interest rates to a greater
degree than interest-paying securities of comparable term and quality. In order
for a Portfolio to maintain its qualification as a regulated investment company,
it may be required to distribute income recognized on zero coupon bonds or
"strips" even though no cash may be paid to the Portfolio until the maturity or
call date of the bond, and any such distribution could reduce the amount of cash
available for investment by the Portfolio. The Portfolios currently do not
intend to invest more than 5% of their respective net assets in zero coupon
bonds or "strips."
RESTRICTED/144A SECURITIES (ALL PORTFOLIOS)
In recent years, a large institutional market has developed for certain
securities that are not registered under the 1933 Act. Institutional investors
generally will not seek to sell these instruments to the general public, but
instead will often depend on an efficient institutional market in which such
unregistered securities can readily be resold or on an issuer's ability to honor
a demand for repayment. Therefore, the fact that there are contractual or legal
restrictions on resale to the general public or certain institutions is not
dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
that might develop as a result of Rule 144A could provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment in order to satisfy share redemption orders. An insufficient number
of qualified institutional buyers interested in purchasing a Rule 144A-eligible
security held by a Portfolio could, however, adversely affect the marketability
of such portfolio security and the Portfolio might be unable to dispose of such
security promptly or at reasonable prices.
FUTURES, OPTIONS ON FUTURES AND OPTIONS ON SECURITIES (ALL PORTFOLIOS)
As discussed in the section entitled "The Global Sector Portfolio, US
Sector Portfolio and Foreign Sector Portfolio and the Fund" in the Prospectus,
each Portfolio may enter into futures contracts for hedging or other
non-speculative purposes, and purchase and sell ("write") options to buy or sell
futures contracts and other securities. These instruments are sometimes referred
to as "derivatives."
4
<PAGE>
The Portfolios will comply with and adhere to all limitations in the manner and
extent to which they effect transactions in futures and options on such futures
currently imposed by the rules and policy guidelines of the Commodity Futures
Trading Commission (the "CFTC") as conditions for exemption of a mutual fund, or
investment advisers thereto, from registration as a commodity pool operator.
Under those restrictions, the Portfolios will not, as to any positions, whether
long, short or a combination thereof, enter into futures and options thereon for
which the aggregate initial margins and premiums exceed 5% of the fair market
value of a Portfolio's total assets after taking into account unrealized profits
and losses on options it has entered into.
In the case of an option that is "in-the-money" (as defined in the
Commodity Exchange Act (the "CEA")), the in-the-money amount may be excluded in
computing the 5% limitation described above. (In general, a call option on a
future is "in-the-money" if the value of the future exceeds the exercise
("strike") price of the call; a put option on a future is "in-the-money" if the
value of the future that is the subject of the put is exceeded by the strike
price of the put.) As to long positions which are used as part of the
Portfolios' strategies and are incidental to their activities in the underlying
cash market, the "underlying commodity value" of the Portfolios' futures and
options thereon must not exceed the sum of (i) cash set aside in an identifiable
manner, or short-term U.S. debt obligations or other dollar-denominated
high-quality, short-term money instruments so set aside, plus sums deposited on
margin; (ii) cash proceeds from existing investments due in 30 days; and (iii)
accrued profits held by the futures commission merchant. The "underlying
commodity value" of a future is computed by multiplying the size of the future
by the daily settlement price of the future. For an option on a future, that
value is the underlying commodity value of the future underlying the option.
A futures contract is a bilateral agreement providing for the purchase and
sale of a specified type and amount of a financial instrument or foreign
currency, or for the making and acceptance of a cash settlement, at a stated
time in the future, for a fixed price. By its terms, a futures contract provides
a specified settlement date on which, for the majority of interest rate and
foreign currency futures contracts, the fixed income securities or currency
underlying the contract are delivered by the seller and paid for by the
purchaser, or on which, for stock index futures contracts and certain interest
rate and foreign currency futures contracts, the difference between the price at
which the contract was entered into and the contract's closing value is settled
between the purchaser and seller in cash. Futures contracts differ from options
in that they are bilateral agreements, with both the purchaser and the seller
equally obligated to complete the transaction. In addition, futures contracts
call for settlement only on the expiration date, and cannot be "exercised" at
any other time during their term.
The purchase or sale of a futures contract also differs from the purchase
or sale of a security or the purchase of an option in that no purchase price is
paid or received. Instead, an amount of cash or cash equivalent, which varies
but may be as low as 5% or less of the value of the contract, must be deposited
with the broker as "initial margin." Subsequent payments to and from the broker,
referred to as "variation margin," are made on a daily basis as the value of the
index or instrument underlying the futures contract fluctuates, making positions
in the futures contract more or less valuable. This process is known as
"marking-to-market."
Initial margin is in the nature of a performance bond or good faith deposit
on the contract. However, because losses on open contracts are required to be
reflected in cash in the form of variation margin payments, a Portfolio may be
required to make additional payments during the term of the contracts to its
broker. Such payments would be required, for example, when, during the term of
an interest rate futures contract purchased by a Portfolio, there is a general
increase in interest rates, thereby making the Portfolio's portfolio securities
less valuable. In all instances involving the purchase of financial futures
contracts by a Portfolio, an amount of cash, together with such other securities
as permitted by applicable regulatory authorities to be utilized for such
purpose at least equal to the market value of the futures contracts, will be
deposited in a segregated account with the Portfolio's custodian to
collateralize the position. At any time prior to the expiration of a futures
contract, the Portfolio may elect to close its position by taking an opposite
position that effectively operates to terminate the Portfolio's position in the
futures contract.
5
<PAGE>
A futures contract may be purchased or sold only on an exchange, known as a
"contract market," designated by the CFTC for the trading of such contract, and
only through a registered futures commission merchant which is a member of such
a contract market. A commission must be paid on each completed purchase and sale
transaction. The contract market clearing house guarantees the performance of
each party to a futures contract, by in effect taking the opposite side of such
contract. At any time prior to the expiration of a futures contract, a trader
may elect to close out its position by taking an opposite position on the
contract market on which the position was entered into, subject to the
availability of a secondary market, which will operate to terminate the initial
position. At that time, a final determination of variation margin is made and
any loss experienced by the trader is required to be paid to the contract market
clearing house while any profit due to the trader must be delivered to it.
When futures are purchased to hedge against a possible increase in the
price of a security before a Portfolio is able in an orderly fashion to invest
in the security, it is possible that the market may decline instead. If the
Portfolio, as a result, concluded not to make the planned investment at that
time because of concern as to possible further market decline or for other
reasons, the Portfolio would realize a loss on the futures contract that is not
offset by a reduction in the price of securities purchased.
In addition to the possibility of an imperfect correlation or no
correlation at all between movements in the futures and the portion of a
Portfolio hedged, the prices of futures may not correlate perfectly with
movements in interest rates or exchange rates due to certain market distortions.
All participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions that could distort the normal relationship between interest rates
or exchange rates and the value of a future. Moreover, the deposit requirements
in the futures market are less onerous than margin requirements in the
securities market and may therefore cause increased participation by speculators
in the futures market. Such increased participation also may cause temporary
price distortions. Due to the possibility of price distortion in the futures
market and because of the imperfect correlation between movements in interest
rates or exchange rates and movements in the prices of futures contacts, the
value of futures contracts as a hedging device may be reduced.
In addition, if a Portfolio has insufficient available cash, it may at
times have to sell securities to meet variation margin requirements. Such sales
may have to be effected at a time when it may be disadvantageous to do so.
Interest rate futures contracts currently are traded on a variety of fixed
income securities, including long-term U.S. Treasury Bonds, Treasury Notes,
Government National Mortgage Association modified pass-through mortgage-backed
securities, U.S. Treasury Bills, bank certificates of deposit and commercial
paper. In addition, interest rate futures contracts include contracts on indices
of municipal securities. Foreign currency futures contracts currently are traded
on the British pound, Canadian dollar, Japanese yen, Swiss franc, West German
mark and on Eurodollar deposits.
Options on Futures Contracts. Each Portfolio may buy and write options on
futures contracts solely for bona fide hedging purposes or for other
non-speculative purposes within the meaning and intent of the applicable
provisions of the CEA. The purchase of a call option on a futures contract is
similar in some respects to the purchase of a call option on an individual
security. Depending on the pricing of the option compared to either the price of
the futures contract upon which it is based or the price of the underlying
instrument, ownership of the option may or may not be less risky than ownership
of the futures contract or the underlying instrument. As with the purchase of
futures contracts, when a Portfolio is not fully invested it may buy a call
option on a futures contract to hedge against a market advance.
An option on a futures contract provides the holder with the right to enter
into a "long" position in the underlying futures contract, in the case of a call
option, or a "short" position in the underlying futures contract, in the case of
a put option, at a fixed exercise price to a stated expiration date. Upon
exercise of the option by the holder, the contract market clearing house
establishes a corresponding
6
<PAGE>
short position for the writer of the option, in the case of a call option, or a
corresponding long position, in the case of a put option. In the event that an
option is exercised, the parties will be subject to all the risks associated
with the trading of futures contracts, such as payment of variation margin
deposits. In addition, the writer of an option on a futures contract, unlike the
holder, is subject to initial and variation margin requirements on the option
position.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security or foreign currency which is
deliverable under, or the index comprising, the futures contract. If the futures
price at the expiration of the option is below the exercise price, a Portfolio
will retain the full amount of the option premium, which provides a partial
hedge against any decline that may have occurred in the Portfolio's holdings.
The writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the security or foreign currency which is
deliverable under, or of the index comprising, the futures contract. If the
futures price at expiration of the option is higher than the exercise price, a
Portfolio will retain the full amount of the option premium which provides a
partial hedge against any increase in the price of securities which the
Portfolio is considering buying. If a call or put option a Portfolio has written
is exercised, the Portfolio will incur a loss which will be reduced by the
amount of the premium it received. Depending on the degree of correlation
between changes in the value of its securities and changes in the value of the
futures positions, the Portfolio's losses from existing options on futures may
to some extent be reduced or increased by changes in the value of its
securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, a Portfolio may buy a put option on a futures contract to hedge against
the risk of falling prices.
The amount of risk a Portfolio assumes when it buys an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the options bought.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series. (I.E., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
An option, whether based on a futures contract, a stock index or a
security, becomes worthless to the holder when it expires. Upon exercise of an
option, the exchange or contract market clearing house assigns exercise notices
on a random basis to those of its members which have written options of the same
series and with the same expiration date. A brokerage firm receiving such
notices then assigns them on a random basis to those of its customers which have
written options of the same series and expiration date. A writer therefore has
no control over whether an option will be exercised against it, nor over the
time of such exercise.
Options on Securities. An option on a security provides the purchaser, or
"holder," with the right, but not the obligation, to purchase, in the case of a
"call" option, or sell, in the case of a "put" option, the security or
securities underlying the option, for a fixed exercise price up to a stated
expiration date. The holder pays a non-refundable purchase price for the option,
known as the "premium." The maximum amount of risk the purchaser of the option
assumes is equal to the premium plus related transaction costs, although the
entire amount may be lost. The risk of the seller, or "writer," however, is
potentially unlimited, unless the option is "covered," which is generally
accomplished through the writer's ownership of the underlying security, in the
case of a call option, or the writer's segregation of an amount of cash or
securities equal to the exercise price, in the case of a put option. If the
writer's obligation is not so covered, it is subject to the risk of the full
change in value of the underlying security from the time the option is written
until exercise.
7
<PAGE>
Upon exercise of the option, the holder is required to pay the purchase
price of the underlying security, in the case of a call option, or to deliver
the security in return for the purchase price, in the case of a put option.
Conversely, the writer is required to deliver the security, in the case of a
call option, or to purchase the security, in the case of a put option. Options
on securities which have been purchased or written may be closed out prior to
exercise or expiration by entering into an offsetting transaction on the
exchange on which the initial position was established, subject to the
availability of a liquid secondary market.
Options on securities are traded on national securities exchanges, such as
the Chicago Board of Options Exchange and the New York Stock Exchange, which are
regulated by the SEC. The Options Clearing Corporation ("OCC") guarantees the
performance of each party to an exchange-traded option, by in effect taking the
opposite side of each such option. A holder or writer may engage in transactions
in exchange-traded options on securities and options on indices of securities
only through a registered broker/dealer which is a member of the exchange on
which the option is traded.
An option position in an exchange-traded option may be closed out only on
an exchange which provides a secondary market for an option of the same series.
Although a Portfolio generally will purchase or write only those options for
which there appears to be an active secondary market, there is no assurance that
a liquid secondary market on an exchange will exist for any particular option at
any particular time. In such event it might not be possible to effect closing
transactions in a particular option with the result that the Portfolio would
have to exercise the option in order to realize any profit. This would result in
the Portfolio incurring brokerage commissions upon the disposition of underlying
securities acquired through the exercise of a call option or upon the purchase
of underlying securities upon the exercise of a put option. If a Portfolio, as a
covered call option writer, is unable to effect a closing purchase transaction
in a secondary market, unless the Portfolio is required to deliver the
securities pursuant to the assignment of an exercise notice, it will not be able
to sell the underlying security until the option expires.
Reasons for the potential absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient trading interest
in certain options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions, or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the facilities
of an exchange or a clearing corporation may not at all times be adequate to
handle current trading volume; or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or particular class or series of options) in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on that exchange which had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at a particular time, render certain of the facilities of any of the
clearing corporations inadequate and thereby result in the institution by an
exchange of special procedures which may interfere with the timely execution of
customers' orders. However, the OCC, based on forecasts provided by the U.S.
exchanges, believes that its facilities are adequate to handle the volume of
reasonably anticipated options transactions, and such exchanges have advised
such clearing corporation that they believe their facilities will also be
adequate to handle reasonably anticipated volume.
In addition, options on securities may be traded over-the-counter ("OTC")
through financial institutions dealing in such options as well as the underlying
instruments. OTC options are purchased from or sold (written) to dealers or
financial institutions which have entered into direct agreements with the Fund
on behalf of the Portfolios. With OTC options, such variables as expiration
date, exercise price and premium will be agreed upon between a Portfolio and the
transacting dealer, without the intermediation of a third party such as the OCC.
If the transacting dealer fails to make or take delivery of the securities
underlying an option it has written, in accordance with the terms of that option
as
8
<PAGE>
written, the Portfolio would lose the premium paid for the option as well as any
anticipated benefit of the transaction. The Portfolios will engage in OTC option
transactions only with primary U.S. government securities dealers recognized by
the Federal Reserve Bank of New York.
FORWARD FOREIGN CURRENCY CONTRACTS (ALL PORTFOLIOS)
As discussed in the section of the Portfolio's Prospectus entitled "The
Global Sector Portfolio, US Sector Portfolio and Foreign Sector Portfolio and
the Fund," each Portfolio may enter into forward contracts to purchase or sell
foreign currencies as a hedge against possible variations in foreign exchange
rates. A forward foreign currency contract is an agreement between the
contracting parties to exchange an amount of currency at some future time at an
agreed upon rate. The rate can be higher or lower than the spot rate between the
currencies that are the subject of the contract. A forward contract generally
has no deposit requirement, and such transactions do not involve commissions. By
entering into a forward contract for the purchase or sale of the amount of
foreign currency invested in a foreign security transaction, a Portfolio can
hedge against possible variations in the value of the dollar versus the subject
currency either between the date the foreign security is purchased or sold and
the date on which payment is made or received or during the time the Portfolio
holds the foreign security. The Portfolios will not speculate in forward
currency contracts. Although the Portfolios have not adopted any limitations on
their ability to use forward contracts as a hedge against fluctuations in
foreign exchange rates, the Portfolios will not attempt to hedge all of their
foreign portfolio positions and will enter into such transactions only to the
extent, if any, deemed appropriate by Meridian. The Portfolios will not enter
into a forward contract for a term of more than one year. Forward contracts may,
from time to time, be considered illiquid, in which case they would be subject
to the Portfolios' limitation on investing in illiquid securities, discussed
above.
SWAPS AND SWAP-RELATED PRODUCTS (ALL PORTFOLIOS)
Interest rate swaps involve the exchange by a Portfolio with another party
of their respective commitments to pay or receive interest, E.G., an exchange of
floating rate payments for fixed rate payments. The exchange commitments can
involve payments to be made in the same currency or in different currencies. The
purchase of an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive payments of
interest on a contractually-based principal amount from the party selling the
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a contractually-based
principal amount from the party selling the interest rate floor.
The Portfolios may enter into interest rate swaps, caps and floors, which
are included in the types of instruments sometimes known as derivatives, on
either an asset-based or liability-based basis, depending upon whether they are
hedging their assets or their liabilities, and usually will enter into interest
rate swaps on a net basis, I.E., the two payment streams are netted out, with a
Portfolio receiving or paying, as the case may be, only the net amount of the
two payments. The net amount of the excess, if any, of a Portfolio's obligations
over its entitlement with respect to each interest rate swap will be calculated
on a daily basis, and an amount of cash or high-grade liquid assets having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Portfolios' custodian. If a Portfolio
enters into an interest rate swap on other than a net basis, the Portfolio would
maintain a segregated account in the full amount accrued on a daily basis of the
Portfolio's obligations with respect to the swap. The Portfolios will not enter
into any interest rate swap, cap or floor transaction unless the unsecured
senior debt or the claims-paying ability of the other party thereto is rated in
one of the three highest rating categories of at least one nationally recognized
statistical rating organization at the time of entering into such transaction.
The 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 would have contractual remedies pursuant to the agreements related to
the transaction.
The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap
9
<PAGE>
documentation. Caps and floors are more recent innovations for which
standardized documentation has not yet been developed and, accordingly, they are
less liquid than swaps. To the extent a Portfolio sells (I.E., writes) caps and
floors, it will maintain in a segregated account cash or high-grade liquid
assets having an aggregate net asset value at least equal to the full amount,
accrued on a daily basis, of the Portfolio's obligations with respect to any
caps or floors.
There is no limit on the amount of interest rate swap transactions that may
be entered into by a Portfolio. These transactions may in some instances involve
the delivery of securities or other underlying assets by a Portfolio or its
counterparty to collateralize obligations under the swap. The documentation
currently used in those markets attempts to limit the risk of loss with respect
to interest rate swaps to the net amount of the payments that a party is
contractually obligated to make. If the other party to an interest rate swap
that is not collateralized defaults, the Portfolio would anticipate losing the
net amount of the payments that the Portfolio contractually is entitled to
receive over the payments that the Portfolio is contractually obligated to make.
The Portfolios may buy and sell (I.E., write) caps and floors without
limitation, subject to the segregated account requirement described above as
well as the Portfolios' other investment restrictions set forth above.
REPURCHASE AGREEMENTS (ALL PORTFOLIOS)
As discussed in the Portfolios' Prospectus, a Portfolio may enter into
repurchase agreements with respect to debt instruments eligible for investment
by the Portfolio with member banks of the Federal Reserve System, registered
broker-dealers, and registered government securities dealers. A repurchase
agreement may be considered a loan collateralized by securities. The resale
price reflects an agreed upon interest rate effective for the period the
instrument is held by a Portfolio and is unrelated to the interest rate on the
underlying instrument. In these transactions, the collateral securities acquired
by a Portfolio (including accrued interest earned thereon) must have a total
value in excess of the value of the repurchase agreement, and are held as
collateral by the Portfolios' custodian bank until the repurchase agreement is
completed.
FOREIGN EXCHANGE TRANSACTIONS (ALL PORTFOLIOS)
To the extent a Portfolio invests directly in foreign securities, a
Portfolio will engage in foreign exchange transactions. The foreign currency
exchange market is subject to little government regulation, and such
transactions generally occur directly between parties rather than on an exchange
or in an organized market. This means that a Portfolio is subject to the full
risk of default by a counterparty in such a transaction. Because such
transactions often take place between different time zones, a Portfolio may be
required to complete a currency exchange transaction at a time outside of normal
business hours in the counterparty's location, making prompt settlement of such
transaction impossible. This exposes a Portfolio to an increased risk that the
counterparty will be unable to settle the transaction. Although the counterparty
in such transactions is often a bank or other financial institution, currency
transactions are generally NOT covered by insurance otherwise applicable to such
institutions.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below:
PETER R. BROWN, DIRECTOR (DOB 5/10/28), 1475 South Belcher Road, Largo, Florida
33771. Chairman of the Board, Peter Brown Construction Company, (construction
contractors and engineers), Largo, Florida (1963 - present); Trustee of IDEX
Series Fund, former Trustee of IDEX Fund, IDEX II Series Fund and IDEX Fund 3;
Rear Admiral (Ret.) U.S. Navy Reserve, Civil Engineer Corps.
CHARLES C. HARRIS, DIRECTOR (DOB 7/15/30), 35 Winston Drive, Clearwater, Florida
34616. Retired (1988 - present); Senior Vice-President, Treasurer (1966 -
1988), Western Reserve Life Assurance Co. of Ohio; Vice President, Treasurer
(1968 - 1988), Director (1968 - 1987), Pioneer Western
10
<PAGE>
Corporation; Vice President of the Fund (1986 - 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, Florida 34630. General Manager, Sheraton Sand Key Resort (resort
hotel), Clearwater, Florida (1975 - present).
JOHN R. KENNEY (1, 2), CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT (DOB
2/8/38). Chairman of the Board of Directors (1987 - present), Chief Executive
Officer (1982 - present), President, (1978 - 1987 and December, 1992 - present)
Director (1978 - present), Western Reserve Life Assurance Co. of Ohio; Chairman
of the Board of Directors (September, 1996 - present), WRL Investment
Management, Inc. (investment adviser), Largo, Florida; Chairman of the Board of
Directors (September, 1996 - present), WRL Investment Services, Inc., Largo,
Florida; Chairman of the Board of Directors (February, 1997 - present), AEGON
Asset Management Services, Inc., Largo, Florida; Chairman of the Board of
Directors and Chief Executive Officer (1988 - February, 1991), President (1988
- 1989), Director (1976 - February, 1991), Executive Vice President (1972 -
1988), Pioneer Western Corporation (financial services), Largo, Florida;
President and Director (1985 - September, 1990) and Director (December, 1990
present); Idex Management, Inc. (investment adviser), Largo, Florida; Trustee
and Chairman (September, 1996 - present) of IDEX Series Fund (investment
company), Largo, Florida; Trustee (1987 - September, 1996), Chairman (December,
1989 - September, 1990 and November, 1990 - September, 1996) and President and
Chief Executive Officer (November, 1986 - September, 1990), IDEX Fund, IDEX II
Series Fund and IDEX Fund 3 (investment companies), all of Largo, Florida.
G. JOHN HURLEY (1, 2), EXECUTIVE VICE PRESIDENT AND DIRECTOR (DOB 9/12/48).
Executive Vice President (June, 1993 - present), Chief Operating Officer
(March, 1994 - 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; Director, President and Chief
Executive Officer (February, 1997 - present); AEGON Asset Management Services,
Inc., Largo, Florida; Trustee, President and Chief Financial Officer
(September, 1996 - present), IDEX Series Fund; 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; 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).
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).
Vice President and Associate General Counsel (March, 1997 - present), Assistant
Vice President and Counsel (June, 1995 - March, 1997), Attorney (August, 1993
-June, 1995), Western Reserve Life Assurance Co. of Ohio; Vice President,
Secretary and Counsel (September, 1996 - present), IDEX Series Fund; Vice
President and Associate General Counsel (February, 1997 - present), AEGON Asset
Management Services, Inc.; 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, all of
Largo, Florida; 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
- ----------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of the
Investment Adviser.
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(September, 1996 - present), WRL Investment Management, Inc. (investment
adviser), Largo, Florida; Director (September, 1996 - present), WRL Investment
Services, Inc., Largo, Florida.
- ----------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of the
Investment Adviser.
The Fund pays no salaries or compensation to any of its officers, all of
whom are employees of WRL. The Fund pays an annual fee of $6,000 to each
Director who is not affiliated with the Investment Adviser or the Sub-Adviser
("disinterested Director"). Each such Director also receives $500, plus
expenses, per each regular and special Board meeting attended. For the period
May 1, 1996 (commencement of operations of the Portfolios) through December 31,
1996 the Global Sector Portfolio and US Sector Portfolio paid Directors' fees in
the amounts of $19 and $1, respectively. (The Foreign Sector Portfolio did not
pay any Directors' fees for that period.) The following table provides
compensation amounts paid to disinterested Directors of the Fund for the fiscal
year ended December 31, 1996.
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE PENSION OR TOTAL COMPENSATION
COMPENSATION RETIREMENT BENEFITS PAID TO DIRECTORS FROM
FROM WRL ACCRUED AS PART OF WRL SERIES FUND, INC.,
NAME OF PERSON, POSITION SERIES FUND, INC. FUND EXPENSES* IDEX SERIES FUND
- ------------------------------------- ------------------ ------------------- ----------------------
<S> <C> <C> <C>
Peter R. Brown, Director ............ $9,500 $0 $34,000
Charles C.Harris, Director ......... $9,500 $0 $34,000
Russell A. Kimball, Jr., Director $9,000 $0 $ 9,000
</TABLE>
- ----------------
* The Plan became effective January 1, 1996.
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 II Series Fund (without imposition of sales
charge), as elected by the directors. It is not anticipated that the Plan will
have any impact on the Fund.
As of March 1, 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.
THE INVESTMENT ADVISER
The information that follows supplements the information provided about the
Investment Adviser under the caption "Management of the Fund - The Investment
Adviser" in the Prospectus.
WRL Investment Management, Inc. (the "Investment Adviser") serves as the
investment adviser to the Portfolios pursuant to an Investment Advisory
Agreement dated January 1, 1997, with the Fund. The Investment Adviser is a
direct, wholly-owned subsidiary of WRL, which is a wholly-owned subsidiary of
First AUSA Life Insurance Company ("First AUSA"), a stock life insurance company
which is wholly-owned by AEGON USA, Inc. ("AEGON"). AEGON is a financial
services holding company whose primary emphasis is on life and health insurance
and annuity and investment products. AEGON is a wholly-owned indirect subsidiary
of AEGON nv, a Netherlands corporation, which is a publicly traded international
insurance group.
12
<PAGE>
The Investment Advisory Agreement was approved by the Fund's Board of
Directors, including a majority of the Directors who are not "interested
persons" of the Fund (as defined in the 1940 Act) on 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 a Portfolio, and (b) by a majority of the Directors who are not
parties to such contract or "interested persons" of any such party. The
Investment Advisory Agreement may be terminated without penalty on 60 days'
written notice at the option of either party or by the vote of the shareholders
of a Portfolio and terminates automatically in the event of its assignment
(within the meaning of the 1940 Act).
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Fund, the Investment Advisory Agreement provides
that the Investment Adviser, subject to review by the Board of Directors, is
responsible for the actual management of the Fund and has responsibility for
making decisions to buy, sell or hold any particular security. The Investment
Adviser also is obligated to provide all the office space, facilities, equipment
and personnel necessary to perform its duties under the Investment Advisory
Agreement. For further information about the management of the Portfolios, see
"The Sub-Adviser", p. 14.
Advisory Fee. The method of computing the investment advisory fee is fully
described in the Prospectus. For the period May 1, 1996 (commencement of
operations of the Portfolios) through December 31, 1996, WRL (the Fund's
Investment Adviser prior to January 1, 1997) was paid fees for its services by
the Global Sector, US Sector and Foreign Sector Portfolios in the amounts of
$26,485, $6,446, and $8,289, respectively.
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 Securities Act of 1933 ("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 1933 Act and the securities laws of any states or
territories, subsequent to the effectiveness of the initial registration
statement under the 1933 Act; all costs
13
<PAGE>
involved in preparing and printing prospectuses of the Fund; extraordinary
expenses; and all other expenses properly payable by the Fund or the Portfolios.
Service Agreement. Effective January 1, 1997, the Fund has entered into an
Administrative Services and Transfer Agency Agreement ("Services Agreement")
with WRL Investment Services, Inc. ("WRL Services"), an affiliate of WRL
Management and 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 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 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.
THE SUB-ADVISER
This discussion supplements the information provided about the Sub-Adviser
under the caption "Management of the Fund - The Sub-Adviser" in the Prospectus.
Meridian Investment Management Corporation ("Meridian") located at 12835
East Arapahoe Road, Tower II, Penthouse, Englewood, Colorado 80112, serves as
the Sub-Adviser to the Portfolios,
14
<PAGE>
pursuant to a Sub-Advisory Agreement dated January 1, 1997 between Meridian and
WRL Management on behalf of the Portfolios. Meridian is a wholly-owned
subsidiary of Meridian Management & Research Corporation (MM&R). Meridian
provides investment management and related services to other mutual fund
portfolios and individual, corporate, charitable and retirement accounts. The
Sub-Advisory Agreement was approved by the Board of Directors of the Fund,
including a majority of the Directors who were not "interested persons" of the
Fund (as defined in the 1940 Act) on October 3, 1996 and by the shareholders of
each Portfolio on December 16, 1996. The Sub-Advisory Agreement provides that it
will continue in effect for an initial term ending January 1, 1999, and from
year to year thereafter, if approved annually (a) by the Board of Directors of
the Fund or by a majority of the outstanding shares of each Portfolio and (b) by
a majority of the Directors who are not parties to such Agreement or "interested
persons" (as defined in the 1940 Act) of any such party. The Sub-Advisory
Agreement may be terminated without penalty on 60 days' written notice at the
option of either party or by the vote of the shareholders of each Portfolio and
terminate automatically in the event of its assignment (within the meaning of
the 1940 Act) or termination of the Investment Advisory Agreement.
Pursuant to the Sub-Advisory Agreement, the Sub-Adviser provides investment
advisory assistance and portfolio management advice to the Investment Adviser
with respect to the Portfolios. Subject to review by the Investment Adviser and
the Board of Directors of the Fund, the Sub-Adviser is responsible for the
actual management of the Portfolios and for making decisions to buy, sell or
hold any particular security. The Sub-Adviser bears all of the expenses in
connection with the performance of its services under the Sub-Advisory Agreement
such as compensating and furnishing office space for its officers and employees
connected with investment and economic research, trading and investment
management of the Portfolios. The method of computing the Sub-Adviser's fee is
set forth in the Prospectus. Prior to March 1, 1997, INVESCO Global Asset
Management Limited ("INVESCO") served as a Co-Sub-Adviser to the Portfolios. For
the period May 1, 1996 (commencement of operation of the Portfolios) to December
31, 1996, each Co-Sub-Adviser was paid for their services in the following
amounts:
SUB-ADVISORY FEES
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1996* TO
DECEMBER 31,
SUB-ADVISER PORTFOLIO 1996
- -------------- ----------------- -----------------
<S> <C> <C>
Meridian Global Sector $7,223
US Sector 1,758
Foreign Sector 2,261
INVESCO Global Sector 9,631
US Sector 2,344
Foreign Sector 3,014
</TABLE>
- ----------------
* Portfolios commenced operations May 1, 1996.
PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TURNOVER
The information that follows supplements the information provided about
portfolio turnover under the caption "The Global Sector Portfolio, US Sector
Portfolio and Foreign Sector Portfolio and the Fund - Portfolio Turnover" in the
Prospectus. In computing the portfolio turnover rate for each Portfolio,
securities whose maturities or expiration dates at the time of acquisition are
one year or less are excluded. Subject to this exclusion, the turnover rate for
a Portfolio is calculated by dividing (a) the lesser of purchases or sales of
portfolio securities for the fiscal year by (b) the monthly average of portfolio
securities owned by the Portfolio during the fiscal year. For the period May 1,
1996 to
15
<PAGE>
December 31, 1996, the Portfolio turnover rates were 27.58% for the Global
Sector Portfolio, 55.61% for the US Sector Portfolio and 28.08% for the Foreign
Sector Portfolio.
There are no fixed limitations regarding the portfolio turnover of the
Portfolios. Portfolio turnover rates are expected to fluctuate under constantly
changing economic conditions and market circumstances. Higher turnover rates
tend to result in higher brokerage fees. Securities initially satisfying the
basic objective and policies of each Portfolio may be disposed of when they are
no longer deemed suitable.
PLACEMENT OF PORTFOLIO BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Sub-Adviser is primarily responsible for placement of the Portfolios' 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 the Sub-Adviser generally will seek reasonably
competitive spreads or commissions, the 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 each
Portfolio and negotiation of its commission rates are made by the Sub-Adviser,
whose policy is to obtain "best execution" (prompt and reliable execution at the
most favorable security price) of all portfolio transactions. In placing
portfolio transactions, the Sub-Adviser may give consideration to brokers who
provide supplemental investment research, in addition to such research obtained
for a flat fee, to the Sub-Adviser, and pay spreads or commissions to such
brokers or dealers furnishing such services which are in excess of spreads or
commissions which another broker or dealer may charge for the same trasaction.
In selecting brokers and in negotiating commissions, the Sub-Adviser
considers such factors as: the broker's reliability; the quality of its
execution services on a continuing basis, the financial condition of the firm;
and research products and services provided, which include: (i) furnishing
advice, either directly or through publications or writings, as to the value of
securities, the advisability of purchasing or selling specific securities and
the availability of securities or purchasers or sellers of securities and (ii)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends and portfolio strategy and products and other
services (such as third party publications; reports and analyses, and computer
and electronic access, equipment, software, information and accessories) that
assist the Sub-Adviser in carrying out its responsibilities.
Supplemental research obtained through brokers or dealers will be in
addition to, and not in lieu of, the services required to be performed by the
Sub-Adviser. The expenses of the Sub-Adviser will not necessarily be reduced as
a result of the receipt of such supplemental information. The Sub-Adviser may
use such research products and services in servicing other accounts in addition
to the respective Portfolios. If the Sub-Adviser determines that any research
product or service has a mixed use, such that it also serves functions that do
not assist in the investment decision-making process, the Sub-Adviser will
allocate the costs of such service or product accordingly. The portion of the
product or service that the Sub-Adviser determines will assist it in the
investment decision-making process may be paid for in brokerage commission
dollars. Such allocation may create a conflict of interest for the Sub-Adviser.
Conversely, such supplemental information obtained by the placement of business
for the Sub-Adviser will be considered by and may be useful to the Sub-Adviser
in carrying out its obligations to the Portfolios.
When a Portfolio purchases or sells a security in the 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 the Portfolio may also be held by other separate
accounts, mutual funds or other accounts for which the Investment Adviser or
Sub-Adviser serves as an adviser, or held by the
16
<PAGE>
Investment Adviser or Sub-adviser for their own accounts. Because of different
investment objectives or other factors, a particular security may be bought by
the Investment Adviser or Sub-Adviser for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities for
the Portfolios or other entities for which they act as investment adviser or for
their advisory clients arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective entities and clients in a manner deemed equitable to all. To the
extent that transactions on behalf of more than one client of the Investment
Adviser or Sub-Adviser during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on price.
On occasions when the Investment Adviser or the Sub-Adviser deems the
purchase or sale of a security to be in the best interests of a Portfolio as
well as other accounts or companies, it may to the extent permitted by
applicable laws and regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Portfolio 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 the Sub-Adviser on behalf of the Portfolios, and reviews
the prices and commissions, if any, paid by the Portfolios to determine if they
were reasonable.
The Board of Directors of the Fund has authorized the Sub-Adviser to
consider sales of the Policies and Annuity Contracts by a broker-dealer as a
factor in the selection of broker-dealers to execute Portfolio transactions. In
addition, the Sub-Adviser may occasionally place portfolio business with
affiliated brokers of the Investment or the Sub-Adviser. 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 Conduct Rules of the National
Association of Securities Dealers, Inc.
For the period May 1, 1996 (commencement of operations of the Portfolios)
to December 31, 1996, the Global Sector Portfolio paid aggregate commissions in
the amount of $17,933; the US Sector Portfolio paid $2,527; and the Foreign
Sector Portfolio paid $6,633.
PURCHASE AND REDEMPTION OF SHARES
DETERMINATION OF OFFERING PRICE
Shares of the Portfolios are currently sold only to the Separate Accounts
to fund the benefits under the Policies and the Annuity Contracts. The
Portfolios may, in the future, offer their shares to other insurance company
separate accounts. The Separate Accounts invest in shares of the Portfolios in
accordance with the allocation instructions received from holders of the
Policies and the Annuity Contracts. Such allocation rights are further described
in the prospectuses and disclosure documents for the Policies and the Annuity
Contracts. Shares of the Portfolios are sold and redeemed at their respective
net asset values as described in the Prospectus.
NET ASSET VALUATION
As stated in the Prospectus, the net asset value of a Portfolio's shares is
ordinarily determined, once daily, as of the close of the regular session of
business on the New York Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern
time) on each day the Exchange is open. (Currently the Exchange is closed on New
Year's Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day). The per share net asset value of a
Portfolio is determined by dividing the total value of the securities and other
assets, less liabilities, by the total number of shares outstanding. In
determining asset value, securities listed on the national securities exchanges
and traded on the NASDAQ National Market are valued at the closing prices on
such markets, or if such a price is lacking for the trading period immediately
preceding the time of
17
<PAGE>
determination, such securities are valued at their current bid price. Foreign
securities and currencies are converted to U.S. dollars using the exchange rate
in effect at the close of the Exchange. Other securities which are traded on the
over-the-counter market are valued at bid price. Other securities for which
quotations are not readily available are valued at fair values as determined in
good faith by the Investment Adviser and the Sub-Adviser under the supervision
of the Fund's Board of Directors. Money market instruments maturing in 60 days
or less are valued on the amortized cost basis. Values of gold bullion held by
the Global Sector Portfolio are based upon daily quotes provided by banks or
brokers dealing in such commodities.
CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief description of how performance is
calculated.
TOTAL RETURN
Total return quotations for each of the Portfolios are computed by finding
the average annual compounded rates of return over the relevant periods that
would equate the initial amount invested to the ending redeemable value,
according to the following equation:
P (1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value (at the end of the applicable
period of a hypothetical $1,000 payment made at the beginning
of the applicable period).
The total return quotation calculations reflect the deduction of a
proportionate share of a Portfolio's investment advisory fee and Portfolio
expenses and assume that all dividends and capital gains during the period are
reinvested in the Portfolio when made. The calculations also assume a complete
redemption as of the end of the particular period.
Total return quotation calculations do not reflect charges or deductions
against the Series Life Account or the Series Annuity Account or charges and
deductions against the Policies or the Annuity Contracts. Accordingly, these
rates of return do not illustrate how actual investment performance will affect
benefits under the Policies of the Annuity Contracts. Where relevant, the
prospectuses for the Policies and the Annuity Contracts contain performance
information about these products. Moreover, these rates of return are not an
estimate, projection or guarantee of future performance.
For the period May 1, 1996 (commencement of operations for the Portfolios)
through December 31, 1996, the total return for the Global Sector, US Sector and
Foreign Sector Portfolios was 6.08%, 4.25% and 3.44%, respectively. Additional
information regarding the investment performance of the Portfolios appear in the
Prospectus.
YIELD QUOTATIONS
The yield quotations for a Portfolio are based on a specific thirty-day
period and are computed by dividing the net investment income per share earned
during the period by the maximum offering price per share on the last date of
the period, according to the following formula:
a-b
YIELD = 2 [(--- + 1)6 - 1]
cd
Where: a = dividends and interest earned during the period by the Portfolio
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
18
<PAGE>
Because the Portfolios did not commence operations until May 1, 1996, no
quotations of standardized or non-standardized performance information are
available.
TAXES
Shares of the Portfolios are offered only to the Separate Accounts that
fund the Policies and Annuity Contracts. See the respective prospectuses for the
Policies and Annuity Contracts for a discussion of the special taxation of
insurance companies with respect to the Separate Accounts and of the Policies,
the Annuity Contracts and the holders thereof.
Each Portfolio has qualified and expects to continue to qualify as a
regulated investment company ("RIC") under the Internal Revenue Code of 1986, as
amended (the "Code"). In order to qualify for that treatment, a Portfolio must
distribute to its Policyholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of net investment
income, net short-term capital gain, and net gains from certain foreign currency
transactions) ("Distribution Requirement") and must meet several additional
requirements. These requirements include the following: (1) the Portfolio must
derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans, and gains from the sale or
other disposition of securities or foreign currencies, or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in securities or those currencies ("Income
Requirement"); (2) the Portfolio must derive less than 30% of its gross income
each taxable year from the sale or other disposition of securities, or any of
the following, that were held for less than three months - options, futures or
forward contracts (other than those on foreign currencies), or foreign
currencies (or options, futures or forward contracts thereon) that are not
directly related to the Portfolio's principal business of investing in
securities (or options and futures with respect thereto) ("Short-Short
Limitation"); (3) at the close of each quarter of the Portfolio's taxable year,
at least 50% of the value of its total assets must be represented by cash and
cash items, U.S. Government securities, securities of other RICs, and other
securities that, with respect to any one issuer, do not exceed 5% of the value
of the Portfolio's total assets and that do not represent more than 10% of the
outstanding voting securities of the issuer; and (4) at the close of each
quarter of the Portfolio's taxable year, not more than 25% of the value of its
total assets may be invested in securities (other than U.S. Government
securities or the securities of other RICs) of any one issuer.
As noted in the Prospectus, each Portfolio must, and intends to, comply
with the diversification requirements imposed by section 817(h) of the Code and
the regulations thereunder. These requirements, which are in addition to the
diversification requirements mentioned above, place certain limitations on the
proportion of the Portfolio's assets that may be represented by any single
investment (which includes all securities of the same issuer). For purposes of
section 817(h), all securities of the same issuer, all interests in the same
real property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or instrumentality
is treated as a separate issuer, while the securities of a particular foreign
government and its agencies, instrumentalities and political subdivisions all
will be considered securities by the same issuer. For information concerning the
consequences of failure to meet the requirements of section 817(h), see the
respective prospectuses for the Policies or the Annuity Contracts.
A Portfolio will not be subject to the 4% Federal excise tax imposed on
RICs that do not distribute substantially all their income and gains each
calendar year because that tax does not apply to a RIC whose only shareholders
are segregated asset accounts of life insurance companies held in connection
with variable annuity contracts and/or variable life insurance policies.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith by a
Portfolio. Income from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and income from
transactions in options, futures, and forward contracts derived by a Portfolio
with respect to its business of investing in securities or foreign
19
<PAGE>
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short Limitation
if they are held for less than three months. Income from the disposition of
foreign currencies, and options, futures, and forward contracts on foreign
currencies, that are not directly related to a Portfolio's principal business of
investing in securities (or options and futures with respect to securities) also
will be subject to the Short-Short Limitation if they are held for less than
three months.
If a Portfolio satisfies certain requirements, any increase in value on a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Portfolio satisfies
the Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that Limitation. A
Portfolio will consider whether it should seek to qualify for this treatment for
its hedging transactions. To the extent a Portfolio does not qualify for this
treatment, it may be forced to defer the closing out of certain options and
futures contracts beyond the time when it otherwise would be advantageous to do
so, in order for the Portfolio to qualify as a RIC.
Dividends and interest received by the Portfolios may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and foreign countries generally do not impose taxes on capital gains in
respect of investments by foreign investors.
The Portfolios may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive
or (2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, the Portfolios will
be subject to Federal income tax on a portion of any "excess distribution"
received on the stock of a PFIC or of any gain on disposition of that stock
(collectively "PFIC income"), plus interest thereon, even if the Portfolio
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Portfolios' investment
company taxable income and, accordingly, will not be taxable to it to the extent
that income is distributed to its shareholders. If the Portfolios invest in a
PFIC and elects to treat the PFIC as a "qualified electing fund," then in lieu
of the foregoing tax and interest obligation, the Portfolios will be required to
include in income each year their pro rata share of the qualified electing
fund's annual ordinary earnings and net capital gain (the excess of net
long-term capital gain over net short-term capital loss), even if they are not
distributed to the Portfolios; those amounts would be subject to the
Distribution Requirement. In most instances it will be very difficult, if not
impossible, to make this election because of certain requirements thereof.
The foregoing is only a general summary of some of the important Federal
income tax considerations generally affecting the Portfolios and their
shareholders. No attempt is made to present a complete explanation of the
Federal tax treatment of the Portfolios' activities, and this discussion and the
discussion in the prospectuses and/or statements of additional information for
the Policies and Annuity Contracts are not intended as a substitute for careful
tax planning. Accordingly, potential investors are urged to consult their own
tax advisors for more detailed information and for information regarding any
state, local, or foreign taxes applicable to the Policies, Annuity Contracts and
the holders thereof.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each portfolio. The Fund is currently comprised of the following
portfolios: Money Market Portfolio; Bond Portfolio; Growth Portfolio; Global
Portfolio; Short-to-Intermediate Government Portfolio; Emerging Growth
Portfolio; Strategic Total Return (formerly Equity-Income) Portfolio; Balanced
Portfolio; Growth & Income (formerly Utility) Portfolio; Aggressive Growth
Portfolio; Tactical Asset Allocation Portfolio;
20
<PAGE>
C.A.S.E. Quality Growth Portfolio; C.A.S.E. Growth & Income Portfolio; C.A.S.E.
Growth Portfolio; Janus Balanced Portfolio; International Equity Portfolio;
Value Equity Portfolio; Global Sector Portfolio; US Sector Portfolio, Foreign
Sector 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 1933 Act, 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 of the Portfolios for the period
from May 1, 1996 (commencement of operations) through December 31, 1996, and the
report of the Fund's independent accountants, are incorporated by reference in
this Statement of Additional Information.
OTHER INFORMATION
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, located at 1055 Broadway, 10th Floor, Kansas City,
Missouri 64105, serves as the Fund's independent accountants. The Fund has
engaged Price Waterhouse LLP to examine, in accordance with generally accepted
auditing standards, its annual report. In addition, Price Waterhouse LLP signs
tax returns for each of the Portfolios.
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.
21
<PAGE>
APPENDIX A
DESCRIPTION OF SELECTED CORPORATE BOND RATINGS
CORPORATE BONDS - MOODY'S INVESTORS SERVICE, INC.
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large, or by an exceptionally
stable, margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium-grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements and
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safe-guarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Unrated - Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
A-1
<PAGE>
CORPORATE BONDS - STANDARD & POOR'S
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit an adequate degree of
protection, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the higher rated categories.
BB, B, CCC and CC - Bonds rated BB, B, CCC and CC are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and CCC the highest. While such bonds
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
BB - Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B - Bonds rated B have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
CCC - Bonds rated CCC have a currently identifiable vulnerability to
default and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, they are not
likely to have the capacity to pay interest and repay principal.
Plus (+) or Minus (-) - The ratings from "AA" to "BBB" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
Unrated - Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
A-2
<PAGE>
APPENDIX B
DESCRIPTION OF SHORT-TERM SECURITIES
The following is intended only as a supplement to the information contained
in the Prospectus and should be read only in conjunction with the Prospectus.
Terms defined in the Prospectus and not defined herein have the same meanings as
those in the Prospectus.
1. CERTIFICATE OF DEPOSIT. A certificate of deposit generally is a
short-term, interest bearing negotiable certificate issued by a commercial bank
or savings and loan association against funds deposited in the issuing
institution.
2. EURODOLLAR CERTIFICATE OF DEPOSIT. A Eurodollar certificate of deposit
is a short-term obligation of a foreign subsidiary of a U.S. bank payable in
U.S. dollars.
3. FLOATING RATE NOTE. A floating rate note is debt issued by a corporation
or commercial bank that is typically several years in term but whose interest
rate is reset every one to six months.
4. TIME DEPOSIT. A time deposit is a non-negotiable deposit maintained in a
banking institution for a specified period of time at a stated interest rate.
Time deposits maturing in more than seven days will not be purchased by the
Portfolio, and time deposits maturing from two business days through seven
calendar days will not exceed 15% of the total assets of the Portfolio.
5. BANKERS' ACCEPTANCE. A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower, usually in connection with international
commercial transactions (to finance the import, export, transfer or storage of
goods). The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity.
6. VARIABLE AMOUNT MASTER DEMAND NOTE. A variable amount master demand note
is a note which fixes a minimum and maximum amount of credit and provides for
lending and repayment within those limits at the discretion of the lender.
Before investing in any variable amount master demand notes, the Portfolio will
consider the liquidity of the issuer through periodic credit analysis based upon
publicly available information.
7. COMMERCIAL PAPER. Commercial paper is a short-term promissory note
issued by a corporation primarily to finance short-term credit needs.
8. REPURCHASE AGREEMENT. A repurchase agreement is an instrument under
which a Portfolio acquires ownership of a debt security and the seller agrees to
repurchase the obligation at a mutually agreed upon time and price. The total
amount received on repurchase is calculated to exceed the price paid by a
Portfolio, reflecting an agreed upon market rate of interest for the period from
the time of a Portfolio's purchase of the security to the settlement date (I.E.,
the time of repurchase), and would not necessarily relate to the interest rate
on the underlying securities. A Portfolio will only enter into repurchase
agreements with underlying securities consisting of U.S. Government or
government agency securities, certificates of deposit, commercial paper or
bankers' acceptances, and will be entered only with primary dealers. While a
Portfolio may invest in repurchase agreements for periods up to 30 days, it is
expected that typically such periods will be for a week or less. The staff of
the Securities and Exchange Commission has taken the position that repurchase
agreements of greater than seven days together with other illiquid investments
should be limited to an amount not in excess of 15% of a Portfolio's net assets.
Although repurchase transactions usually do not impose market risks on the
purchaser, a Portfolio would be subject to the risk of loss if the seller fails
to repurchase the securities for any reason and the value of the securities is
less than the agreed upon repurchase price. In addition, if the seller defaults,
a Portfolio may incur disposition costs in connection with liquidating the
securities. Moreover, if the seller is insolvent and bankruptcy proceedings are
commenced, under current law, a Portfolio could be ordered by a court not to
liquidate the securities for an indeterminate period of time and the amount
realized by a Portfolio upon liquidation of the securities may be limited.
B-1
<PAGE>
PROSPECTUS
WRL SERIES FUND, INC.
GROWTH PORTFOLIO
201 HIGHLAND AVENUE
LARGO, FLORIDA 33770-2597
TELEPHONE (319) 398-8511
WRL Series Fund, Inc. (the "Fund") is a diversified, open-end management
investment company consisting of separate series or investment portfolios.
This Prospectus pertains only to the Growth Portfolio of the Fund (the
"Portfolio").
The investment objective of the Growth Portfolio is growth of capital. There
can be, of course, no assurance that the Portfolio will achieve its objective.
Shares of the Fund are sold only to the separate accounts (the "Separate
Accounts") of Western Reserve Life Assurance Co. of Ohio ("WRL"), PFL Life
Insurance Company ("PFL"), and AUSA Life Insurance Company, Inc. ("AUSA")
(WRL, PFL, and AUSA together, the "Life Companies") to fund the benefits under
certain variable life insurance policies (the "Policies") and variable annuity
contracts (the "Annuity Contracts"). The Life Companies are affiliates. The
Separate Accounts, which may or may not be registered with the Securities and
Exchange Commission, invest in shares of one or more of the portfolios in
accordance with the allocation instructions received from holders of the
Policies and the Annuity Contracts (collectively, the "Contract Owners"). Such
allocation rights are further described in the prospectuses or disclosure
documents for the Policies and the Annuity Contracts.
WRL Investment Management, Inc. ("WRL Management") and Janus Capital
Corporation serve as the investment adviser ("Investment Adviser") and the
sub-adviser ("Sub-Adviser") respectively, to the Portfolio (collectively,
"Advisers"). See "The Investment Adviser" and "The Sub-Adviser."
This Prospectus sets forth concisely the information about the Portfolio
that prospective investors ought to know before investing. Investors should
read this Prospectus and retain it for future reference.
Additional information about the Fund, the Portfolio and other portfolios of
the Fund has been filed with the Securities and Exchange Commission (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
Portfolio bears the same date as this Prospectus and is incorporated by
reference into this Prospectus in its entirety.
----------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, A BANK OR OTHER FINANCIAL INSTITUTION, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
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.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------------
PROSPECTUS DATED MAY 1, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Financial Highlights........................................................ 3
Performance Information..................................................... 4
The Growth Portfolio and the Fund........................................... 5
Other Investment Policies and Restrictions.................................. 6
Portfolio Securities and Risk Factors....................................... 8
Management of the Fund...................................................... 14
Other Information........................................................... 18
Distribution and Taxes...................................................... 21
</TABLE>
2
<PAGE>
FINANCIAL HIGHLIGHTS
PER SHARE INCOME AND CAPITAL CHANGES
The information contained in the table below for one share of capital stock
outstanding during the fiscal periods ended on December 31 of each year is
taken from the Fund's audited financial statements, which have been
incorporated by reference in the SAI. The Fund's Annual Report contains
additional performance information for the Portfolio. A copy of the Annual
Report may be obtained without charge upon request.
GROWTH PORTFOLIO
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---------- ---------- -------- -------- -------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period... $31.66 $ 23.81 $ 26.25 $ 25.83 $ 26.26 $ 17.48 $ 17.85 $ 12.97 $ 11.14 $ 10.14
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income. .34 .26 .22 .28 .36 .27 .30 .19 .31 .21
Net Gains or Losses on
Securities (both
realized and
unrealized).......... 5.35 10.97 (2.41) .79 .52 10.75 (.33) 6.29 1.83 1.00
---------- ---------- -------- -------- -------- -------- -------- ------- ------- -------
Total Income (Loss)
From Investment
Operations.......... 5.69 11.23 (2.19) 1.07 .88 11.02 (.03) 6.48 2.14 1.21
---------- ---------- -------- -------- -------- -------- -------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net
investment income)... (.35) (.24) (.22) (.28) (.36) (.27) (.30) (.19) (.31) (.21)
Dividends (in excess
of net investment
income).............. (.01) .00 .00 .00 .00 .00 .00 .00 .00 .00
Distributions (from
capital gains)....... (1.99) (3.14) (.00) (.37) (.95) (1.97) (.04) (1.41) .00 .00
Distributions in
excess of capital
gains................ .00 .00 (.03) .00 .00 .00 .00 .00 .00 .00
---------- ---------- -------- -------- -------- -------- -------- ------- ------- -------
Total Distributions.. (2.35) (3.38) (.25) (.65) (1.31) (2.24) (.34) (1.60) (.31) (.21)
---------- ---------- -------- -------- -------- -------- -------- ------- ------- -------
Net Asset Value,
End of Period......... $35.00 $ 31.66 $ 23.81 $ 26.25 $ 25.83 $ 26.26 $ 17.48 $ 17.85 $ 12.97 $ 11.14
========== ========== ======== ======== ======== ======== ======== ======= ======= =======
Total Return*.......... 17.96% 47.12% (8.31%) 3.97% 2.35% 59.79% (.22%) 47.04% 18.62% 10.90%
RATIOS/SUPPLEMENTAL
DATA
Net Assets, End of
Period (000 omitted).. $1,527,409 $1,195,174 $814,383 $934,810 $711,422 $393,511 $129,057 $74,680 $28,497 $15,815
Ratio of Expenses to
Average Net Assets**.. .88% .86% .84% .87% .86% .90% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment
Income to Average Net
Assets................ .98% .90% .88% 1.07% 1.44% 1.21% 2.06% 1.18% 2.50% 1.84%
Ratios of Commissions
paid to number of
shares................ 4.93% N/A N/A N/A N/A N/A N/A N/A N/A N/A
Portfolio Turnover Rate
...................... 45.21% 130.48% 107.33% 77.91% 77.70% 7.27% 157.07% 123.80% 76.27% 222.13%
</TABLE>
- ----------
*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 WRL.
3
<PAGE>
PERFORMANCE INFORMATION
The Fund may include quotations of the Portfolio's total return or yield in
connection with the total return for the appropriate Separate Account, in
advertisements, sales literature or reports to Contract Owners or to
prospective investors. Total return and yield quotations for the Portfolio
reflect only the performance of a hypothetical investment in the Portfolio
during the particular time period shown as calculated based on the historical
performance of the Portfolio during that period. Such quotations do not in any
way indicate or project future performance. Quotations of total return and
yield will not reflect charges or deductions against the Separate Accounts or
charges and deductions against the Policies or the Annuity Contracts. Where
relevant, 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.
TOTAL RETURN. Total return refers to the average annual percentage change in
value of an investment in the Portfolio held for a stated period of time as of
a stated ending date. When the 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 the 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.
PERFORMANCE SHOWN IN ADVERTISING. The Portfolio may disclose in
advertisements, sales literature and reports to Contract Owners or to
prospective Contract Owners, total returns for the Portfolio for periods in
addition to those required to be presented. It may also disclose other
nonstandardized data, such as cumulative total returns, actual year-by-year
returns, or any combination thereof.
PERFORMANCE RANKINGS AND COMPARISONS TO STANDARD INDEXES. Performance of the
Portfolio 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
4
<PAGE>
the expenses associated with operating and managing a portfolio. In connection
with a ranking, the 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.
THE GROWTH PORTFOLIO AND THE FUND
The Fund is a diversified, open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"). The
Growth Portfolio is a series of the Fund. The Fund consists of several series,
or separate investment portfolios, which offer shares for investment by the
Separate Accounts. This Prospectus describes only the Growth Portfolio.
INVESTMENT OBJECTIVE OF THE PORTFOLIO
The Portfolio's investment objective and, unless otherwise noted, its
investment policies and techniques, may be changed by the Board of Directors
of the Fund without shareholder or Contract Owner approval. A change in the
investment objective or policies of the Portfolio may result in the Portfolio
having an investment objective or policies different from that which a
Contract Owner deemed appropriate at the time of investment.
GROWTH PORTFOLIO
The investment objective of the Portfolio is growth of capital.
The Portfolio will invest 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 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
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.
The Portfolio may invest up to 25% of its assets in foreign securities
(which may be purchased through American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs"),
as well as directly), as described below and in the SAI. (See "PORTFOLIO
SECURITIES AND RISK FACTORS--Foreign Securities," p.12.)
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
5
<PAGE>
desirable risk/reward characteristics. The Portfolio may invest in government
securities, high grade commercial paper, corporate bonds and debentures,
warrants, preferred stocks or certificates of deposit of commercial banks or
other debt securities when the Sub-Adviser perceives an opportunity for
capital growth from such securities, or so that the Portfolio may receive a
return on its uninvested cash. See the SAI for further descriptions of such
securities. In the latter case, investment income may increase and may
constitute a larger portion of the return on the Portfolio's investments, and
the Portfolio may not participate in market advances or declines to the extent
it would if the Portfolio were fully invested in common stocks. The Portfolio
may invest up to 25% of its assets in securities of issuers in a single
industry. The Portfolio does not currently hold or intend to invest more than
5% of its assets in non-investment grade securities. See the SAI for further
information concerning such securities and bond ratings.
The Portfolio may also invest in repurchase agreements and reverse repur-
chase agreements. See "PORTFOLIO SECURITIES AND RISK FACTORS--Repurchase and
Reverse Repurchase Agreements," p. 10.
OTHER INVESTMENT POLICIES AND RESTRICTIONS
The Portfolio is subject to certain other investment policies and
restrictions which are described in the SAI for the Portfolio. Unless
otherwise noted, the investment policies, techniques, and percentage
restrictions described below are non-fundamental and may be changed by the
Fund's Board of Directors without Contract Owner approval. 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.
LENDING AND BORROWING
The Portfolio may lend its portfolio securities to qualified institutional
buyers for the purpose of realizing additional income. Such loans must be
continuously secured by liquid assets at least equal to the market value of
the securities loaned and may not together with any other outstanding loans
exceed 25% of the Portfolio's total assets. Securities lending may involve
some credit risk to the Portfolio if the borrower defaults and the Portfolio
is delayed or prevented from recovering the collateral or is otherwise
required to cover a transaction in the security loaned. The Portfolio does not
presently intend to lend securities or make any other loans valued at more
than 5% of its total assets. To secure borrowings, the Portfolio may not
mortgage or pledge its securities in amounts that exceed 15% of its net
assets, at the time the loan or borrowing is made. If portfolio securities are
loaned, collateral values will be continuously maintained at no less than 100%
by marking to market daily. If a material event is to be voted upon
6
<PAGE>
affecting the Portfolio's investment in securities which are on loan, the
Portfolio will take such action as may be appropriate in order to vote its
shares. The Portfolio does not have the right to vote securities on loan, but
would terminate the loan and regain the right to vote if it were considered
important with respect to the investment.
The Portfolio may borrow money from or lend money to other funds that permit
such transactions and are advised by the Sub-Adviser and if the Portfolio
seeks and obtains permission to do so from the SEC. There is no assurance that
such permission would be granted. The Portfolio may also borrow money from
banks. Any such loans or borrowings are expected to be short-term in nature
and used for temporary or emergency purposes, such as to provide cash for
redemptions, and will not exceed 25% of the Portfolio's net assets at the time
the loan or borrowing is made.
PORTFOLIO TURNOVER
A portfolio turnover rate is, in general, the percentage calculated by
taking the lesser of purchases or sales of portfolio securities (excluding
certain short-term securities) for a year and dividing it by the monthly
average of the market value of such securities during the year. (See
"Financial Highlights" for the Portfolio on page 3 for more information on
historical turnover rates.)
Changes in security holdings are made by the 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.
The Sub-Adviser may engage in a significant number of short-term
transactions if such investing serves the 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
the Portfolio; these charges are ultimately borne by the Contract Owners. For
further discussion of portfolio turnover, see the SAI.
SPECIAL SITUATIONS
The Portfolio may invest in "special situations" from time to time. A
special situation arises when, in the opinion of the 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,
7
<PAGE>
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 the Portfolio will depend
on the Portfolio's size and the extent of the holdings of the special
situation issuer relative to its total assets.
PORTFOLIO SECURITIES AND RISK FACTORS
FUTURES, OPTIONS AND OTHER DERIVATIVES
Subject to certain limitations, the Portfolio may engage in hedging
strategies involving instruments commonly called "derivatives." "Derivatives"
used by the Portfolio include futures contracts and related options, forward
currency contracts, and interest rate swaps, caps and floors. These
instruments are commonly called derivatives because their price is derived
from an underlying index, security or other measure of value.
The Portfolio may engage in futures contracts and options. The Portfolio
intends to use such derivatives 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. If used for
other purposes as may be permitted under applicable rules pursuant to which
the Portfolio would remain exempt from the definition of a "commodity pool
operator" under the rules of the CFTC, the aggregate initial margin and
premiums required to establish any non-hedging positions will not exceed 5% of
the fair market value of the Portfolio's net assets.
FORWARD CONTRACTS are contracts to purchase or sell a specified amount of
property for an agreed upon price at a specified time. Forward contracts are
not currently exchange traded and are typically negotiated on an individual
basis. The 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. The 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. The 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.
8
<PAGE>
The 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 or 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. The 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 specified 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.
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RISK FACTORS. There can be no assurance the use of derivatives will help the
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 the
Portfolio invests. Special risks of these instruments include:
INACCURATE MARKET PREDICTIONS. If interest rates, securities prices or
currency markets do not move in the direction expected by the Sub-Adviser
who uses derivatives based on those measures, these instruments may fall in
their intended purpose and result in losses to the Portfolio.
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.
ILLIQUIDITY. A liquid secondary market may not be available for a
particular instrument at a particular time. The Portfolio may therefore be
unable to control losses by closing out a derivative position.
TAX CONSIDERATIONS. The 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.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
The Portfolio may invest in repurchase and reverse repurchase agreements. A
repurchase agreement involves the purchase of a security by the Portfolio and
a simultaneous agreement (generally 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.
The 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, the Portfolio will
segregate with its custodian
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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 the purposes of the 1940 Act.
RISK FACTORS. Repurchase agreements involve the risk that the seller will
fail to repurchase the security, as agreed. In that case, the 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 the Portfolio to greater
fluctuations in the value of its assets.
ILLIQUID SECURITIES
The Portfolio may invest up to 15% of its net assets in securities that are
considered illiquid because of the absence of a readily available market or
due to legal or contractual restrictions on resale. However, certain
restricted securities that are not registered for sale to the general public
but that can be 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 the Portfolio's investments could be impaired if such trading
does not further develop or declines. The Sub-Adviser will determine the
liquidity of Rule 144A Securities under guidelines approved by the Fund's
Board of Directors.
RISK FACTORS. Investment in illiquid securities involve certain risks to the
extent that the Portfolio may be unable to dispose of such securities at the
time desired or at a reasonable price. In addition, in order to resell a
restricted security, the Portfolio might have to bear the expense and incur
the delays associated with effecting a registration required in order to
qualify for resale.
WHEN-ISSUED SECURITIES
The Portfolio may purchase new issues of U.S. Government securities on a
"when-issued" basis.
"When-issued" refers to securities whose terms are available, and for which
a market exists, but which are not available for immediate delivery. When-
issued transaction may be expected to occur a month or more before delivery is
due.
The Portfolio may engage in when-issued transactions to obtain what is
considered to be an advantageous price and yield at the time of the
transaction. When the Portfolio engages in when-issued 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.
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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 the
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.
FOREIGN SECURITIES
The Portfolio may invest up to 25% of net assets at the time of purchase in
the securities of foreign issuers and obligors. Investments may be made in both
domestic and foreign companies. Foreign securities include equity and debt
securities of foreign issuers.
If appropriate and available, the Sub-Adviser may purchase foreign securities
through dollar-denominated ADRs, EDRs, GDRs and other types of receipts or
shares evidencing ownership of the underlying foreign securities. While ADRs
are dollar-denominated receipts that are issued by domestic banks and traded in
the United States, EDRs are typically issued by European banks, and GDRs may be
issued by either domestic or foreign banks. In addition, the Portfolio may
invest indirectly in foreign securities through foreign investment funds or
trusts (including passive foreign investment companies).
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:
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, the 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 of 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 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 is denominated
may affect the value of the ADR.
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To the extent that the 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 the 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 the 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.
CURRENCY TRADING COSTS. The Portfolio incurs costs in converting foreign
currencies into U.S. dollars, and vice versa.
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.
LESS INFORMATION AVAILABLE. There is generally less public information
available about foreign companies.
MORE DIFFICULT BUSINESS NEGOTIATIONS. The Portfolio may find it difficult
to enforce obligations in foreign countries or to negotiate favorable
brokerage commission rates.
REDUCED LIQUIDITY/INCREASED VOLATILITY. Some foreign securities are less
liquid and their prices more volatile, than securities of comparable U.S.
companies.
SETTLEMENT DELAYS. Settling foreign securities may take longer than
settlements in the U.S.
HIGHER CUSTODY CHARGES. Custodianship of shares may cost more for foreign
securities than it does for U.S. securities.
ASSET VULNERABILITY. In some foreign countries, there is a risk of direct
seizure or appropriation through taxation of assets of the Portfolio.
Certain countries may also impose limits on the removal of securities or
other assets of the Portfolio. Interest, dividends and capital gains on
foreign securities held by the Portfolio may be subject to foreign
withholding taxes.
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.
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At times, the 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 Contract Owners cannot make transactions.
ADRS are subject to some of the same risks as direct investments in foreign
securities, including the currency risk discussed above. The regulatory
requirements with respect to ADRs that are issued in sponsored and unsponsored
programs are generally similar but the issuers of unsponsored ADRs are not
obligated to disclose material information in the U.S., and, therefore, such
information may not be reflected in the market value of the ADRs.
MANAGEMENT OF THE FUND
Overall responsibility for management and supervision of the Fund rests with
the Fund's Board of Directors. There are currently five Directors, three of
whom are not "interested persons" of the Fund within the meaning of that term
under the 1940 Act. The Board meets regularly four times each year and at
other times as necessary. By virtue of the functions performed by WRL
Management as Investment Adviser and Janus Capital Corporation as Sub-Adviser,
the Fund requires no employees other than its executive officers, none of whom
devotes full time to the affairs of the Fund. These officers are employees of
WRL and receive no compensation from the Fund. The SAI contains the names of
and general background information regarding each Director and executive
officer of the Fund.
THE INVESTMENT ADVISER
WRL Management, located at 201 Highland Avenue, Largo, Florida 33770-2597,
serves as the Fund's Investment Adviser. The Investment Adviser is a direct,
wholly-owned subsidiary of WRL, which is a wholly-owned subsidiary of First
AUSA Life Insurance Company ("First AUSA"), a stock life insurance company
which is wholly-owned by AEGON USA, Inc. ("AEGON"). AEGON is a financial
services holding company whose primary emphasis is on life and health
insurance and annuity and investment products. AEGON is a wholly-owned
indirect subsidiary of AEGON nv, a Netherlands corporation, which is a
publicly traded international insurance group. The Investment Adviser has
served as the investment adviser to the Fund since January 1, 1997. Prior to
that date, WRL served as the investment adviser to the Fund.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Adviser is responsible for managing the Portfolio in accordance
with the Portfolio's stated investment objective and policies. As compensation
for its services to the Portfolio, the Investment Adviser receives monthly
compensation at the annual rate of 0.80% of the average daily net assets of
the Portfolio. For the fiscal year ended December 31, 1996, the Fund paid the
Investment Adviser advisory fees of 0.80% of the average daily net assets of
the Portfolio.
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The Investment Adviser is responsible for furnishing continuous advice and
recommendations to the Portfolio as to the acquisition, holding or disposition
of any or all of the securities or other assets which the Portfolio may own or
contemplate acquiring from time to time; to cause the Fund's officers to
attend meetings and furnish oral or written reports, as the Fund may
reasonably require, in order to keep the Board of Directors and appropriate
officers of the Fund fully informed as to the conditions of the investment
portfolio of the Portfolio, the investment recommendations of the Investment
Adviser, and the investment considerations which have given rise to those
recommendations; to supervise the purchase and sale of securities of the
Portfolio as directed by the appropriate officers of the Fund; and to maintain
all books and records required to be maintained by the Investment Adviser
pursuant to the 1940 Act and the rules and regulations promulgated thereunder
with respect to transactions on behalf of the Fund.
The Investment Adviser has voluntarily undertaken, until at least April 30,
1998, to pay expenses on behalf of the Portfolio to the extent normal
operating expenses (including investment advisory fees but excluding interest,
taxes, brokerage fees, commissions and extraordinary charges) exceed, as a
percentage of the Portfolio's average daily net assets, 1.00%. For the fiscal
year ended December 31, 1996, the expenses of the Portfolio, as a percentage
of the Portfolio's average daily net assets, were 0.88%.
In addition to the Investment Adviser's responsibilities discussed above,
the Investment Adviser's advisory agreement with the Fund (the "Advisory
Agreement") contemplates that the Investment Adviser, in connection with the
performance of its responsibilities under the Advisory Agreement, will enter
into sub-advisory agreements ("Sub-Advisory-Agreements") with Sub-Advisers to
provide each Portfolio with portfolio management. Under current law, every
Sub-Advisory Agreement must be submitted to and approved by shareholders and
Contract Owners of a Portfolio before the Sub-Adviser can provide investment
advice to that Portfolio. For example, if a new Sub-Adviser were retained,
shareholders and Contract Owners would be required to approve the Sub-Advisory
agreement with that Sub-Adviser. Similarly, if a Sub-Advisory Agreement were
amended in any material respect, such amendment would generally be deemed to
result in a new contract for which shareholder and Contract Owner approval
would also be required. Moreover, in most instances when there is a change of
control of a Sub-Adviser, shareholder and Contract Owner approval is required.
The Fund's Board of Directors has determined that shareholders and Contract
Owners of each Portfolio have, in effect, elected to have the Investment
Adviser select one or more Sub-Advisers best suited to achieve the Portfolio's
investment objectives. The Board believes that part of a shareholder's and
Contract Owner's investment decision is a determination to have those
selections made by the Investment Adviser, a professional management
organization with personnel having substantial experience in making such
evaluations, selections and terminations.
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Under applicable law, the Fund is not generally required to hold annual
shareholders' meetings, and does not generally hold such meetings, unless
legally required to do so, in order to avoid the attendant costs. The Fund is
currently required to call a meeting of shareholders of a Portfolio whenever
it decides to employ new or additional Sub-Advisers, or to approve a new Sub-
Advisory Agreement after an "assignment," or due to a material change in Sub-
Advisory Agreement terms, with respect to such Portfolio. Given the nature of
the Fund's operations and shareholders' reasons for investing in various of
the Portfolios, such expenses are considered to provide little if any benefit
to shareholders. For these reasons, the Fund and the Investment Adviser have
applied to the SEC for an exemption from the provisions of the 1940 Act to
permit the Fund and the Investment Adviser, subject to certain conditions, to
enter into, materially amend, and terminate, and to permit Sub-Advisers to act
pursuant to, Sub-Advisory Agreements without shareholder or Contract Owner
approval (the "Proposed Sub-Advisory Arrangement").
If the SEC exemption is granted, certain conditions would apply. The
conditions are intended to ensure that shareholders and Contract Owners
receive adequate disclosure about the Sub-Advisers or a decision by the
Investment Adviser and the Fund's Board of Directors to appoint a new Sub-
Adviser or to change materially the terms of a Sub-Advisory Agreement. In
addition, before a Portfolio could rely on the exemption, the Proposed Sub-
Advisory Arrangement must be approved by a majority of the outstanding voting
securities of the Portfolio.
DISTRIBUTION AND SERVICE PLANS
DISTRIBUTION PLAN AND DISTRIBUTION AGREEMENT. Effective January 1, 1997, the
Fund 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 33770-2597. 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 may include,
but are not necessarily limited to, the following: cost of printing and
mailing Fund prospectuses and statements of additional information, and any
supplements thereto to prospective Contract Owners; 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 (i.e., computers, software, office equipment, etc.), training
expenses, travel
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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 Portfolio, is
authorized to pay to various service providers, as direct payment for expenses
incurred in connection with the distribution of the Portfolio's shares,
amounts equal to actual expenses associated with distributing the 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 of Directors for approval annual
distribution expenses with respect to the Portfolio. ISI allocates to the
Portfolio distribution expenses specifically attributable to the distribution
of shares of the Portfolio. Distribution expenses not specifically
attributable to the distribution of shares of the Portfolio are allocated
among the other Portfolios of the Fund, 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 the Portfolio during the fiscal year ending December 31, 1997.
Prior to ISI seeking reimbursement, Contract Owners will be notified in
advance.
ADMINISTRATIVE AND TRANSFER AGENCY SERVICES. Effective January 1, 1997, the
Fund entered into an Administrative Services and Transfer Agency Agreement
with WRL Investment Services, Inc. ("WRL Services"), located at 201 Highland
Avenue, Largo, Florida 33770-2597, an affiliate of WRL Management and WRL, to
furnish the Fund with administrative services to assist the Fund in carrying
out certain of its functions and operations. Under this Agreement, WRL
Services shall furnish to the Portfolio, subject to the overall supervision of
the Board of Directors, supervisory, administrative, and transfer agency
services, including recordkeeping and reporting. WRL Services is reimbursed by
the Fund monthly on a cost incurred basis. Prior to January 1, 1997, WRL
performed these services in connection with its serving as the Fund's
investment adviser.
THE SUB-ADVISER
Janus Capital Corporation, located at 100 Fillmore Street, Denver, Colorado
80206, serves as the Sub-Adviser to the Portfolio. Thomas H. Bailey is the
President of Janus Capital Corporation. Kansas City Southern Industries, Inc.
("KCSI") owns 83% of the Sub-Adviser. The Sub-Adviser provides investment
management and related services to other mutual funds, and individual,
corporate, charitable and retirement accounts. See "Management of the Fund--
The Sub-Adviser" in the SAI for a more detailed description of the previous
experience of Janus Capital Corporation as an investment adviser.
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Scott W. Schoelzel has served as the portfolio manager for the Portfolio
since January 2, 1996. Mr. Schoelzel also serves as co-portfolio manager of
other mutual funds. Mr. Schoelzel is a Vice president of the Sub-Adviser,
where he has been employed since 1994. From 1991 to 1993, Mr. Schoelzel was a
portfolio manager with Founders Asset Management, Denver, Colorado.
The Sub-Adviser provides investment advisory assistance and portfolio
management advice to the Investment Adviser for the Portfolio. Subject to
review and supervision by the Investment Adviser and the Board of Directors of
the Fund, the Sub-Adviser is responsible for the actual management of the
Portfolio and for making decisions to buy, sell or hold any particular
security, and it places orders to buy or sell securities on behalf of the
Portfolio. The Sub-Adviser bears all of its expenses in connection with the
performance of its services, such as compensating and furnishing office space
for its officers and employees connected with investment and economic
research, trading and investment management of the Portfolio.
For its services, the Sub-Adviser receives monthly compensation from the
Investment Adviser at the annual rate of 0.40% of the average daily net assets
of the Portfolio.
The Sub-Adviser is also responsible for selecting the broker-dealers who
execute the portfolio transactions for the Portfolio. The Sub-Adviser is
authorized to consider sales of the Annuity Contracts described in the
accompanying prospectus by a broker-dealer as a factor in the selection of
broker-dealers to execute portfolio transactions. In placing portfolio
business with all dealers, the Sub-Adviser seeks best execution of each
transaction and all brokerage placement must be consistent with the Rules of
Fair Practice of the National Association of Securities Dealers, Inc. In
addition, the Sub-Adviser may occasionally place portfolio business with
broker-dealers affiliated with the Investment Adviser or the Sub-Adviser; in
such event, the Sub-Adviser always will seek best execution.
OTHER INFORMATION
JOINT TRADING ACCOUNTS
Subject to approval by the Fund's Board of Directors, the Portfolio may
transfer uninvested cash balances on a daily basis into certain joint trading
accounts. Assets in the joint trading accounts are invested in money market
instruments. All other participants in the joint trading accounts will be
registered mutual funds or other clients of the Sub-Adviser or its affiliates.
The Portfolio will participate in the joint trading accounts only to the
extent that the investments of the joint trading accounts are consistent with
the Portfolio's investment policies and restrictions. The Sub-Adviser
anticipates that the investments made by the Portfolio through the joint
trading accounts will be at least as advantageous to the Portfolio as if the
Portfolio had made such investment directly. (See "The Sub-Adviser" in the
SAI.)
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PERSONAL SECURITIES TRANSACTIONS
The Fund permits "Access Persons" as defined by Rule 17j-1 under the 1940
Act to engage in personal securities transactions, subject to the terms of the
Code of Ethics and Insider Trading Policy ("Ethics Policy") that has been
adopted by the Board of Directors of the Fund. Access Persons are required to
follow the guidelines established by this Ethics Policy in connection with all
personal securities transactions and are subject to certain prohibitions on
personal trading. The Fund's Sub-Advisers, pursuant to Rule 17j-1 and other
applicable laws, and pursuant to the terms of the Ethics Policy, must adopt
and enforce their own Code of Ethics and Insider Trading Policies appropriate
to their operations. Each Sub-Adviser is required to report to the Board of
Directors on a quarterly basis with respect to the administration and
enforcement of such Ethics Policy, including any violations thereof which may
potentially affect the Fund.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Portfolio are sold and redeemed at their net asset value next
determined after receipt of a purchase order or notice of redemption in proper
form. Shares are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain sales and other charges may
apply to the Contract. Such charges are described in the prospectus for the
Contract.
VALUATION OF SHARES
The Portfolio's net asset value per share is ordinarily determined, once
daily, as of the close of the regular session of business on the New York
Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day the
Exchange is open.
Net asset value of a Portfolio share is computed by dividing the value of
the net assets of the Portfolio by the total number of shares outstanding in
the Portfolio.
Except for money market instruments maturing in 60 days or less, securities
held by the Portfolio are valued at market value. Securities for which market
values are not readily available are valued at fair value as determined in
good faith by the Advisers under the supervision of the Fund's Board of
Directors. Money market instruments maturing in 60 days or less are valued on
the amortized cost basis. (See the SAI for details.)
THE FUND AND ITS SHARES
The Fund was incorporated under the laws of the State of Maryland on August
21, 1985 and is registered with the SEC as a diversified, open-end, management
investment company.
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The Portfolio 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 the Portfolio's
shares are sold to the Separate Accounts established to receive and invest
premiums received under variable life insurance policies and purchase payments
received under the variable annuity contracts, it is conceivable that, in the
future, it may become disadvantageous for variable life insurance Separate
Accounts and variable annuity Separate Accounts to invest in the Portfolio
simultaneously. Neither the Life Companies nor the Fund currently foresees any
such disadvantages or conflicts, either to variable life insurance
policyowners or to variable annuity contract owners. After being notified by
one or more of the Life Companies of a potential or existing conflict, the
Fund's Board of Directors will determine if a material conflict exists and
what action, if any, should be taken in response thereto. Such action could
include the sale of Portfolio shares by one or more of the Separate Accounts,
which could have adverse consequences. Material conflicts could result from,
for example, (1) changes in state insurance laws, (2) changes in Federal
income tax laws, or (3) differences in voting instructions between those given
by variable life insurance policyowners and those given by variable annuity
contract owners. If the Board of Directors were to conclude that separate
funds should be established for variable life and variable annuity separate
accounts, the affected Life Companies will bear the attendant expenses, but
variable life insurance policyowners and variable annuity contract owners
would no longer have the economies of scale typically resulting from a larger
combined fund.
The Fund offers a separate class of common stock for each portfolio. All
shares of the Portfolio and of each of the other portfolios of the Fund have
equal voting rights, except that only shares of a particular portfolio will be
entitled to vote on matters concerning only that portfolio. Each issued and
outstanding share of the Portfolio is entitled to one vote and to participate
equally in dividends and distributions declared by the Portfolio and, upon any
liquidation or dissolution, to participate equally in the net assets of the
Portfolio remaining after satisfaction of outstanding liabilities. The shares
of the Portfolio, when issued, will be fully paid and nonassessable, have no
preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights and the
holders of more than 50% of the shares of the Fund voting for the election of
directors can elect all of the directors of the Fund if they choose to do so,
and in such event holders of the remaining shares would not be able to elect
any directors.
Only the Separate Accounts of the Life Companies may hold shares of the
Portfolio and are entitled to exercise the rights directly as described above.
If and to the extent required by law, Life Companies will vote the Portfolio's
shares held in the Separate Accounts, including
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the Portfolio's shares which are not attributable to Contract Owners, at
meetings of the Fund in accordance with instructions received from persons
having voting interests in the corresponding sub-accounts of the Separate
Accounts. Except as required by the 1940 Act, the Fund does not hold regular
or special shareholder meetings. If the 1940 Act or any regulation thereunder
should be amended, or if present interpretation thereof should change, and as
a result it is determined that the Life Companies are permitted to vote the
Portfolio's shares in their own right, they may elect to do so. The rights of
Contract Owners are described in more detail in the prospectuses or disclosure
documents for the Annuity Contracts.
REPORTS TO CONTRACT OWNERS
The fiscal year of the Portfolio ends on December 31 of each year. The Fund
will send to the Portfolio's Contract Owners, at least semi-annually, reports
showing the Portfolio's composition and other information. An annual report,
containing financial statements, audited by the Fund's independent
accountants, will be sent to Contract Owners each year.
CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, MA 02111, acts as
Custodian and Dividend Disbursing Agent of the Portfolio's assets.
ADDITIONAL INFORMATION
The telephone number or the address of the Fund appearing on the first page
of this Prospectus should be used for requests for additional information.
DISTRIBUTION AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Portfolio intends to distribute substantially all of the net investment
income, if any. Dividends from investment income, if any, of the Portfolio
normally are declared and paid semi-annually in additional shares of the
Portfolio at net asset value. Distributions of net realized capital gains from
security transactions and net gains from foreign currency transactions, if
any, normally are declared and paid in additional shares of the Portfolio at
the end of the fiscal year.
TAXES
The Portfolio has qualified and expects to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended ("Code"). As such, the Portfolio is not subject to Federal
income tax on that part of its investment company taxable income (consisting
generally of net investment income, net gains from certain foreign currency
transactions, and net short-term capital
21
<PAGE>
gain, if any) and any net capital gain (the excess of net long-term capital
gain over net short-term capital loss) that it distributes to its
shareholders. It is the Portfolio's intention to distribute all such income
and gains.
Shares of the Portfolio are offered only to the Separate Accounts (which are
insurance company separate accounts that fund the Contract). Under the Code,
no tax is imposed on an insurance company with respect to income of a
qualifying separate account properly allocable to the value of eligible
variable annuity or variable life insurance contracts. For a discussion of the
taxation of life insurance companies and the Separate Account, as well as the
tax treatment of the Contract and the Contract Owners thereof, see "Certain
Federal Income Tax Consequences" included in the prospectus for the Contract.
The Portfolio intends to comply with the diversification requirements
imposed by section 817(h) of the Code and the regulations thereunder. These
requirements are in addition to the diversification requirements imposed on
the Portfolio by Subchapter M and the 1940 Act. These requirements place
certain limitations on the assets of each separate account that may be
invested in securities of a single issuer, and, because section 817(h) and the
regulations thereunder treat the Portfolio's assets as assets of the related
Separate Accounts, these limitations also apply to the Portfolio's assets that
may be invested in securities of a single issuer. Specifically, the
regulations provide that, except as permitted by the "safe harbor" described
below, as of the end of each calendar quarter or within 30 days thereafter no
more than 55% of the Portfolio's total assets may be represented by any one
investment, no more than 70% by any two investments, no more than 80% by any
three investments, and no more than 90% by any four investments.
Section 817(h) provides, as a safe harbor, that a separate account will be
treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities, and
securities of other regulated investment companies. For purposes of section
817(h), all securities of the same issuer, all interests in the same real
property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or instrumentality
is treated as a separate issuer, while the securities of a particular foreign
government and its agencies, instrumentalities, and political subdivisions
will be considered securities issued by the same issuer. Failure of the
Portfolio to satisfy the section 817(h) requirements would result in taxation
of the Separate Accounts, the insurance companies, the Contract, and tax
consequences to the Contract Owners thereof, other than as described in the
prospectus for the Contract.
The foregoing is only a summary of some of the important Federal income tax
considerations generally affecting the Portfolio and its Contract Owners; see
the SAI for a more detailed discussion. Prospective Contract Owners are urged
to consult their tax advisors.
22
<PAGE>
WRL SERIES FUND, INC.
GROWTH PORTFOLIO
201 HIGHLAND AVENUE
LARGO, FLORIDA 33770-2597
TELEPHONE (319) 398-8511
INVESTMENT ADVISER:
WRL Investment Management, Inc. 201 Highland Avenue Largo, FL 33770-2597
SUB-ADVISER:
Janus Capital Corporation 100 Fillmore Street Denver, CO 80206
CUSTODIAN:
Investors Bank & Trust Company 89 South Street Boston, MA 02111
INDEPENDENT ACCOUNTANTS:
Price Waterhouse LLP 1055 Broadway Kansas City, MO 64105
TRANSFER AGENT:
WRL Investment Services, Inc. 201 Highland Avenue Largo, FL 33770-2597
DISTRIBUTOR:
InterSecurities, Inc. 201 Highland Avenue Largo, FL 33770-2597
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REP-
RESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH IN-
FORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO-
RIZED. 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.
23
<PAGE>
WRL SERIES FUND, INC.
GROWTH PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but supplements
and should be read in conjunction with the Prospectus for the Growth Portfolio
of the WRL Series Fund, Inc. (the "Fund"). A copy of the Prospectus may be
obtained by writing PFL Life Insurance Company, Administrative and Service
Office, Financial Markets Division--Variable Annuity Dept., 4333 Edgewood
Road, N.E., Cedar Rapids, Iowa 52499 or by calling (800) 525-6205.
-------------------------------------------------
WRL INVESTMENT MANAGEMENT, INC.
Investment Adviser
JANUS CAPITAL CORPORATION
Sub-Adviser
-------------------------------------------------
The date of the Prospectus to which this Statement of Additional Information
relates and the date of this Statement of Additional Information is May 1,
1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT OF CROSS-REFERENCE TO
ADDITIONAL INFORMATION PAGE IN PROSPECTUS
------------------------- ------------------
<S> <C> <C>
Investment Objective and
Policies........................ 3 5
Investment Restrictions........ 3 6
Repurchase and Reverse Repur-
chase Agreements.............. 5 10
Lending of Portfolio
Securities.................... 5 6
Foreign Securities............. 6 12
Non-Investment Grade Debt
Securities.................... 6 6
Investments in Futures, Options
and Other Derivative
Instruments................... 7 8
Management of the Fund........... 19 14
Directors and Officers......... 19 14
The Investment Adviser......... 22 14
Distribution and Service Plans. 24 16
The Sub-Adviser................ 25 17
Joint Trading Accounts......... 25 18
Portfolio Transactions and
Brokerage....................... 26 18
Portfolio Turnover............. 26 7
Placement of Portfolio
Brokerage..................... 26 18
Purchase and Redemption of
Shares.......................... 28 19
Offering of the Shares and
Determination of Offering
Price......................... 28 20
Portfolio Net Asset Valuation.. 28 19
Investment Experience
Information..................... 29 4
Calculation of Performance Re-
lated Information............... 29 4
Total Return................... 29 4
Taxes............................ 30 21
Capital Stock of the Fund........ 32 19
Registration Statement........... 32 N/A
Financial Statements............. 32 21
Other Information................ 32 21
Appendix A--Description of Port-
folio Securities................ A-1 8
Appendix B--Description of
Selected Corporate Bond and Com-
mercial Paper Ratings........... B-1 6
</TABLE>
- 2 -
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Growth Portfolio (the "Portfolio") of the
Fund is described in the Portfolio's Prospectus. Shares of the Portfolio are
sold only to the separate accounts of Western Reserve Life Assurance Co. of
Ohio ("WRL"), PFL Life Insurance Company, an affiliate of WRL, and to separate
accounts of certain of their affiliated life insurance companies
(collectively, the "Separate Accounts") to fund benefits under certain
variable life insurance policies (the "Policies") and variable annuity
contracts (the "Annuity Contracts", or "Contracts").
As indicated in the Prospectus, the Portfolio's investment objective and,
unless otherwise noted, its investment policies and techniques, may be changed
by the Board of Directors of the Fund without approval of shareholders or
owners of the Policies or the Annuity Contracts (collectively, "Contract
Owners"). A change in the investment objective or policies of the Portfolio
may result in the Portfolio's having an investment objective or policies
different from those which a Contract Owner deemed appropriate at the time of
investment.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, the Portfolio is subject to certain
fundamental policies and restrictions which may not be changed without the
approval of the holders of a majority of the outstanding voting shares of the
Portfolio. "Majority" for this purpose and under the Investment Company Act of
1940, as amended (the "1940 Act") means the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares of
the Portfolio are represented or (ii) more than 50% of the outstanding shares
of the Portfolio. A complete statement of all such fundamental policies is set
forth below.
The Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than cash items and "Government
securities" as defined in the 1940 Act) if immediately after and as a result
of such purchase (a) the value of the holdings of the Portfolio in the
securities of such issuer exceeds 5% of the value of the Portfolio's total
assets, or (b) the Portfolio owns more than 10% of the outstanding voting
securities of any one class of securities of such issuer;
2. Invest more than 25% of the value of the Portfolio's assets in any
particular industry (other than Government securities);
3. Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this restriction
shall not prevent the Portfolio from purchasing or selling options, futures
contracts, caps, floors and other derivative instruments, engaging in swap
transactions or investing in securities or other instruments backed by
physical commodities);
4. Invest directly in real estate or interests in real estate, including
limited partnership interests; however, the Portfolio may own debt or equity
securities issued by companies engaged in those businesses;
5. Act as underwriter of securities issued by others, except to the extent
that it may be deemed an underwriter in connection with the disposition of
portfolio securities of the Portfolio; and
6. Lend any security or make any other loan if, as a result, more than 25%
of its total assets would be lent to other parties (but this limitation does
not apply to purchases of commercial paper, debt securities or to repurchase
agreements).
- 3 -
<PAGE>
Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Contract Owner approval:
(A) The Portfolio may not, as a matter of non-fundamental policy: (i) enter
into any futures contracts or options on futures contracts for purposes other
than bona fide hedging transactions within the meaning of Commodity Futures
Trading Commission regulations if the aggregate initial margin deposits and
premiums required to establish positions in futures contracts and related
options that do not fall within the definition of bona fide hedging
transactions would exceed 5% of the fair market value of the Portfolio's net
assets, after taking into account unrealized profits and losses on such
contracts it has entered into and (ii) enter into any futures contracts or
options on futures contracts if the aggregate amount of the Portfolio's
commitments under outstanding futures contracts positions and options on
futures contracts would exceed the market value of its total assets;
(B) The Portfolio may not mortgage or pledge any securities owned or held by
the Portfolio in amounts that exceed, in the aggregate, 15% of the Portfolio's
net assets, provided that this limitation does not apply to reverse repurchase
agreements or in the case of assets deposited to provide margin or guarantee
positions in options, futures contracts, swaps, forward contracts or other
derivative instruments or segregation of assets in connection with such
transactions;
(C) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short, and provided that transactions in options, futures contracts,
swaps, forward contracts and other derivative instruments are not deemed to
constitute selling securities short;
(D) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions, and provided that margin payments and other
deposits made in connection with transactions in options, futures contracts,
swaps, forward contracts, and other derivative instruments shall not be deemed
to constitute purchasing securities on margin;
(E) The Portfolio may borrow money only for temporary or emergency purposes
(not for leveraging or investment) in an amount not exceeding 25% of the value
of the Portfolio's total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that exceed 25% of the
value of the Portfolio's total assets by reason of a decline in net assets
will be reduced within three business days to the extent necessary to comply
with the 25% limitation. This policy shall not prohibit reverse repurchase
agreements or deposits of assets to provide margin or guarantee positions in
connection with transactions in options, futures contracts, swaps, forward
contracts, or other derivative instruments or the segregation of assets in
connection with such transactions;
(F) The Portfolio may not invest more than 15% of its net assets in illiquid
securities. This does not include securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933 or any securities for which the
Board of Directors or the Sub-Adviser, as appropriate, has made a
determination of liquidity, as permitted under the 1940 Act;
(G) The Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Restrictions (i) and (ii) do not apply to
money market funds or to securities received as dividends, through offers to
exchange, or as a result of reorganization, consolidation, or merger. If the
Portfolio
- 4 -
<PAGE>
invests in a money market fund, the Investment Adviser will reduce its
advisory fee by the amount of any investment advisory or administrative
service fees paid to the investment manager of the money market fund;
(H) The Portfolio may not invest directly in oil, gas or other mineral
development or exploration programs or leases; however, the Portfolio may own
debt or equity securities of companies engaged in those businesses;
(I) The Portfolio may not invest more than 25% of its net assets at the time
of purchase in the securities of foreign issuers and obligors;
(J) The Portfolio may not invest in companies for the purpose of exercising
control or management; and
(K) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.
Except with respect to borrowing money, if a percentage limitation set forth
above is complied with at the time of the investment, a subsequent change in
the percentage resulting from any change in value or of the Portfolio's net
assets will not result in a violation of such restriction. State laws and
regulations may impose additional limitations on borrowing, lending and use of
options, futures, and other derivative instruments. In addition, such laws and
regulations may require the Portfolio's investments in foreign securities to
meet additional diversification and other requirements.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
In a repurchase agreement, the Portfolio purchases a security and
simultaneously commits to resell that security to the seller at an agreed upon
price on an agreed upon date within a number of days (usually not more than
seven) from the date of purchase. The resale price reflects the purchase price
plus an agreed upon incremental amount that is unrelated to the coupon rate or
maturity of the purchased security. A repurchase agreement involves the
obligation of the seller to pay the agreed upon price, which obligation is in
effect secured by the value (at least equal to the amount of the agreed upon
resale price and marked-to-market daily) of the underlying security. The
Portfolio may engage in a repurchase agreement with respect to any security in
which it is authorized to invest. While it does not presently appear possible
to eliminate all risks from these transactions (particularly the possibility
of a decline in the market value of the underlying securities, as well as
delays and costs to the Portfolio in connection with bankruptcy proceedings),
it is the policy of the Portfolio to limit repurchase agreements to those
parties whose creditworthiness has been reviewed and found satisfactory by the
Sub-Adviser.
In a reverse repurchase agreement, the Portfolio sells a portfolio security
to another party, such as a bank or broker-dealer, in return for cash and
agrees to repurchase the instrument at a particular price and time. While a
reverse repurchase agreement is outstanding, the Portfolio will maintain cash
and appropriate liquid assets in a segregated custodial account to cover its
obligation under the agreement. The Portfolio will enter into reverse
repurchase agreements only with parties that the Sub-Adviser deems
creditworthy.
LENDING OF PORTFOLIO SECURITIES
The Portfolio may lend its portfolio securities subject to the restrictions
stated in this Statement of Additional Information. Under applicable
regulatory requirements (which are subject to change), the following
conditions apply to securities loans: (a) the loan must be continuously
secured by liquid assets maintained on a current basis in an amount at least
equal
- 5 -
<PAGE>
to the market value of the securities loaned; (b) the Portfolio must receive
any dividends or interest paid by the issuer on such securities; (c) the
Portfolio must have the right to call the loan and obtain the securities
loaned at any time upon notice of not more than five business days, including
the right to call the loan to permit voting of the securities; and (d) the
Portfolio must receive either interest from the investment of collateral or a
fixed fee from the borrower. Securities loaned by the Portfolio remain subject
to fluctuations in market value. The Portfolio may pay reasonable finders,
custodian and administrative fees in connection with a loan. Securities
lending, as with other extensions of credit, involves the risk that the
borrower may default. Although securities loans will be fully collateralized
at all times, the Portfolio may experience delays in, or be prevented from,
recovering the collateral. During the period that the Portfolio seeks to
enforce its rights against the borrower, the collateral and the securities
loaned remain subject to fluctuations in market value. The Portfolio does not
have the right to vote securities on loan, but would terminate the loan and
regain the right to vote if it were considered important with respect to the
investment. The Portfolio may also incur expenses in enforcing its rights. If
the Portfolio has sold a loaned security, it may not be able to settle the
sale of the security and may incur potential liability to the buyer of the
security on loan for its costs to cover the purchase.
FOREIGN SECURITIES
Subject to the limitations set forth above, the Portfolio may purchase
certain foreign securities. Investments in foreign securities, particularly
those of non-governmental issuers, involve considerations which are not
ordinarily associated with investing in domestic issuers. These considerations
include changes in currency rates, currency exchange control regulations, the
possibility of expropriation, the unavailability of financial information or
the difficulty of interpreting financial information prepared under foreign
accounting standards, less liquidity and more volatility in foreign securities
markets, the impact of political, social or diplomatic developments, and the
difficulty of assessing economic trends in foreign countries. It is possible
that market quotations for foreign securities will not be readily available.
In such event, these securities shall be valued at fair market value as
determined in good faith by the Sub-Adviser under the supervision of the Board
of Directors. If it should become necessary, the Portfolio could encounter
greater difficulties in invoking legal processes abroad than would be the case
in the United States. Transaction costs with respect to foreign securities may
be higher. The Investment Adviser and the Sub-Adviser will consider these and
other factors before investing in foreign securities. The Portfolio will not
concentrate its investments in any particular foreign country.
To the extent the Portfolio invests directly in foreign securities, the
Portfolio will engage in foreign exchange transactions. The foreign currency
exchange market is subject to little government regulation, and such
transactions generally occur directly between parties rather than on an
exchange or in an organized market. This means that the Portfolio is subject
to the full risk of default by a counterparty in such a transaction. Because
such transactions often take place between different time zones, the Portfolio
may be required to complete a currency exchange transaction at a time outside
of normal business hours in the counterparty's location, making prompt
settlement of such transaction impossible. This exposes the Portfolio to an
increased risk that the counterparty will be unable to settle the transaction.
Although the counterparty in such transactions is often a bank or other
financial institution, currency transactions are generally not covered by
insurance otherwise applicable to such institutions. For a more detailed
explanation regarding the special risks of investing in foreign securities,
see "Foreign Investments and Special Risks" in the Prospectus.
NON-INVESTMENT GRADE DEBT SECURITIES
The Portfolio may, but does not currently invest, or intend to invest, in
debt securities below the four highest grades ("lower grade debt securities")
as determined by Moody's Investors
- 6 -
<PAGE>
Service, Inc. ("Moody's") (Baa) or Standard & Poor's (BBB). The Portfolio does
not currently intend to invest more than 5% of its assets in non-investment
grade securities. Before investing in any lower-grade debt securities, the
Sub-Adviser will determine that such investments meet the Portfolio's
investment objectives and that the lower-grade debt securities' ratings are
supported by an internal credit review, which the Sub-Adviser will conduct in
each such instance. Lower-grade debt securities usually have moderate to poor
protection of principal and interest payments, have certain speculative
characteristics (see Appendix B for a description of the ratings), and involve
greater risk of default or price declines due to changes in the issuer's
creditworthiness than investment-grade debt securities. Because the market for
lower-grade debt securities may be thinner and less active than for investment
grade debt securities, there may be market price volatility for these
securities and limited liquidity in the resale market. Market prices for
lower-grade debt securities may decline significantly in periods of general
economic difficulty or rising interest rates. Through portfolio
diversification and credit analysis, investment risk can be reduced, although
there can be no assurance that losses will not occur.
The quality limitation set forth in the Portfolio's investment policies is
determined immediately after the Portfolio's acquisition of a given security.
Accordingly, any later change in ratings will not be considered when
determining whether an investment complies with the Portfolio's investment
policies.
INVESTMENTS IN FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS
Futures Contracts. The Portfolio may enter into contracts for the purchase
or sale for future delivery of fixed-income securities, foreign currencies or
contracts based on financial indices including interest rates or indices of
U.S. Government or foreign government securities or equity or fixed-income
securities ("futures contracts"). U.S. futures contracts are traded on
exchanges that have been designated "contract markets" by the Commodity
Futures Trading Commission ("CFTC") and must be executed through a futures
commission merchant ("FCM"), or brokerage firm, which is a member of the
relevant contract market. Through their clearing corporations, the exchanges
guarantee performance of the contracts as between the clearing members of the
exchange. Since all transactions in the futures market are made through a
member of, and are offset or fulfilled through a clearinghouse associated
with, the exchange on which the contracts are traded, the Portfolio will incur
brokerage fees when it buys or sells futures contracts.
When the Portfolio buys or sells a futures contract, it incurs a contractual
obligation to receive or deliver the underlying instrument (or a cash payment
based on the difference between the underlying instrument's closing price and
the price at which the contract was entered into) at a specified price on a
specified date. Transactions in futures contracts will not be made for
speculation and will not be made other than to seek to hedge against potential
changes in interest or currency exchange rates or the price of a security or a
securities index which might correlate with or otherwise adversely affect
either the value of the Portfolio's securities or the prices of securities
which the Portfolio is considering buying at a later date.
The buyer or seller of a futures contract is not required to deliver or pay
for the underlying instrument unless the contract is held until the delivery
date. However, both the buyer and seller are required to deposit "initial
margin" for the benefit of 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
- 7 -
<PAGE>
constitute purchasing securities on margin for purposes of the Portfolio's
investment limitations. In the event of the bankruptcy of an FCM that holds
margin on behalf of the Portfolio, the Portfolio may be entitled to return of
margin owed to the Portfolio only in proportion to the amount received by the
FCM's other customers. The Sub-Adviser will attempt to minimize the risk by
careful monitoring of the creditworthiness of the FCM's with which the
Portfolio does business and by depositing margin payments in a segregated
account with the custodian when practical or otherwise required by law.
Although the Portfolio would hold cash and liquid assets in a segregated
account with a value sufficient to cover the Portfolio's open futures
obligations, the segregated assets would be available to the Portfolio
immediately upon closing out the futures position, while settlement of
securities transactions could take several days. However, because the
Portfolio's cash that may otherwise be invested would be held uninvested or
invested in high-grade liquid assets so long as the futures position remains
open, the Portfolio's return could be diminished due to the opportunity cost
of foregoing other potential investments.
The acquisition or sale of a futures contract may occur, for example, when
the Portfolio holds or is considering purchasing equity securities and seeks
to protect itself from fluctuations in prices without buying or selling those
securities. For example, if prices were expected to decrease, the Portfolio
might sell equity index futures contracts, thereby hoping to offset a
potential decline in the value of equity securities in the Portfolio by a
corresponding increase in the value of the futures contract position held by
the Portfolio and thereby preventing the Portfolio's net asset value from
declining as much as it otherwise would have. The Portfolio also could seek to
protect against potential price declines by selling portfolio securities and
investing in money market instruments. However, since the futures market is
more liquid than the cash market, the use of futures contracts as an
investment technique allows the Portfolio to maintain a defensive position
without having to sell portfolio securities.
Similarly, when prices of equity securities are expected to increase,
futures contracts may be bought to attempt to hedge against the possibility of
having to buy equity securities at higher prices. This technique is sometimes
known as an anticipatory hedge. Since the fluctuations in the value of futures
contracts should be similar to those of equity securities, the Portfolio could
take advantage of the potential rise in the value of equity securities without
buying them until the market has stabilized. At that time, the futures
contracts could be liquidated and the Portfolio could buy equity securities on
the cash market. To the extent the Portfolio enters into futures contracts for
this purpose, the assets in the segregated asset account maintained to cover
the Portfolio's obligations with respect to futures contracts will consist of
high-grade liquid assets from its portfolio in an amount equal to the
difference between the contract price and the aggregate value of the initial
and variation margin payments made by the Portfolio with respect to the
futures contracts.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial margin and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out futures contracts through offsetting
transactions which could distort the normal price relationship between the
cash and futures markets. Second, the liquidity of the futures market depends
on participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced and prices in the futures
market distorted. Third, from the point of view of speculators, the margin
deposit requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased participation by
speculators in the futures market may cause temporary price distortions. Due
to the possibility of the foregoing distortions, a correct forecast of general
price trends by the Sub-Adviser still may not result in a successful use of
futures contracts.
- 8 -
<PAGE>
Futures contracts entail risks. Although the Sub-Adviser believes that use
of such contracts can benefit the Portfolio, if the Sub-Adviser's investment
judgment is incorrect, the Portfolio's overall performance could be worse than
if the Portfolio had not entered into futures contracts. For example, if the
Portfolio has attempted to hedge against the effects of a possible decrease in
prices of securities held by the Portfolio and prices increase instead, the
Portfolio may lose part or all of the benefit of the increased value of these
securities because of offsetting losses in the Portfolio's futures positions.
In addition, if the Portfolio has insufficient cash, it may have to sell
securities from its portfolio to meet daily variation margin requirements.
Those sales may, but will not necessarily, be at increased prices which
reflect the rising market and may occur at a time when the sales are
disadvantageous to the Portfolio.
The prices of futures contracts depend primarily on the value of their
underlying instruments. Because there are a limited number of types of futures
contracts, it is possible that the standardized futures contracts available to
the Portfolio will not match exactly the Portfolio's current or potential
investments. The Portfolio may buy and sell futures contracts based on
underlying instruments with different characteristics from the securities in
which it typically invests--for example, by hedging investments in portfolio
securities with a futures contract based on a broad index of securities--which
involves a risk that the futures position will not correlate precisely with
the performance of the Portfolio's investments.
Futures prices can also diverge from the prices of their underlying
instruments, even if the underlying instruments correlate with the Portfolio's
investments. Futures prices are affected by such factors as current and
anticipated short-term interest rates, changes in volatility of the underlying
instruments, and the time remaining until expiration of the contract. Those
factors may affect securities prices differently from futures prices.
Imperfect correlations between the Portfolio's investments and its futures
positions may also result from differing levels of demand in the futures
markets and the securities markets, from structural differences in how futures
and securities are traded, and from imposition of daily price fluctuation
limits for futures contracts. The Portfolio may buy or sell futures contracts
with a greater or lesser value than the securities it wishes to hedge or is
considering purchasing in order to attempt to compensate for differences in
historical volatility between the futures contract and the securities,
although this may not be successful in all cases. If price changes in the
Portfolio's futures positions are poorly correlated with its other
investments, its futures positions may fail to produce desired gains or result
in losses that are not offset by the gains in the Portfolio's other
investments.
Because futures contracts are generally settled within a day from the date
they are closed out, compared with a settlement period of seven days for some
types of securities, the futures markets can provide superior liquidity to the
securities markets. Nevertheless, there is no assurance a liquid secondary
market will exist for any particular futures contract at any particular time.
In addition, futures exchanges may establish daily price fluctuation limits
for futures contracts and may halt trading if a contract's price moves upward
or downward more than the limit in a given day. On volatile trading days when
the price fluctuation limit is reached, it may be impossible for the Portfolio
to enter into new positions or close out existing positions. If the secondary
market for a futures contract is not liquid because of price fluctuation
limits or otherwise, the Portfolio may not be able to promptly liquidate
unfavorable positions and potentially be required to continue to hold a
futures position until the delivery date, regardless of changes in its value.
As a result, the Portfolio's access to other assets held to cover its futures
positions also could be impaired.
Although futures contracts by their terms call for the delivery or
acquisition of the underlying commodities or a cash payment based on the value
of the underlying commodities, in most cases the contractual obligation is
offset before the delivery date of the contract by buying, in the case of a
contractual obligation to sell, or selling, in the case of a contractual
obligation to buy, an identical futures contract on a commodities exchange.
Such a transaction cancels the obligation to make or take delivery of the
commodities.
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The Portfolio intends to comply with guidelines of eligibility for exclusion
from the definition of the term "commodity pool operator" with the CFTC and
the National Futures Association, which regulate trading in the futures
markets. Such guidelines presently require that to the extent that the
Portfolio enters into futures contracts or options on a futures position that
are not for bona fide hedging purposes (as defined by the CFTC), the aggregate
initial margin and premiums on these positions (excluding the amount by which
options are "in-the-money") may not exceed 5% of the Portfolio's net assets.
Options on Futures Contracts. The Portfolio may buy and write options on
futures contracts for only hedging purposes. An option on a futures contract
gives the Portfolio the right (but not the obligation) to buy or sell a
futures contract at 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 14. Transactions in options on futures
contracts will not be made for speculation and will not be made other than to
attempt to hedge against potential changes in interest rates or currency
exchange rates or the price of a security or a securities index which might
correlate with or otherwise adversely affect either the value of the
Portfolio's securities or the prices of securities which the Portfolio is
considering buying at a later date.
The purchase of a call option on a futures contract may or may not be less
risky than ownership of the futures contract or the underlying instrument,
depending on the pricing of the option compared to either the price of the
futures contract upon which it is based or the price of the underlying
instrument. As with the purchase of futures contracts, when the Portfolio is
not fully invested it may buy a call option on a futures contract to attempt
to hedge against a market advance.
The writing of a call option on a futures contract may constitute a partial
hedge against declining prices of the security or foreign currency which is
deliverable under, or of the index comprising, the futures contract. If the
futures price at the expiration of the option is below the exercise price, the
Portfolio will retain the full amount of the option premium which provides a
partial hedge against any decline that may have occurred in the Portfolio's
holdings. The writing of a put option on a futures contract may constitute a
partial hedge against increasing prices of the security or foreign currency
which is deliverable under, or of the index comprising, the futures contract.
If the futures price at expiration of the option is higher than the exercise
price, the Portfolio will retain the full amount of the option premium which
provides a partial hedge against any increase in the price of securities which
the Portfolio is considering buying. If a call or put option the Portfolio has
written is exercised, the Portfolio will incur loss which will be reduced by
the amount of the premium it received. Depending on the degree of correlation
between change in the value of its portfolio securities and changes in the
value of the futures positions, the Portfolio's losses from existing options
on futures may to some extent be reduced or increased by changes in the value
of portfolio securities.
The purchase of a put option on a futures contract is similar in some
respect to the purchase of protective put options on portfolio securities. For
example, the Portfolio may buy a put option on a futures contract to attempt
to hedge the Portfolio's securities against the risk of falling prices.
The amount of risk the Portfolio assumes when it buys an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the options bought.
Forward Contracts. The Portfolio may enter into forward foreign currency
exchange contracts ("forward currency contracts") to attempt to minimize the
risk to the Portfolio from adverse changes in the relationship between the
U.S. dollar and other currencies. A forward
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currency contract is an obligation to buy or sell an amount of a specified
currency for an agreed price (which may be in U.S. dollars or a foreign
currency) at a future date which is individually negotiated between currency
traders and their customers. The Portfolio may invest in forward currency
contracts with stated contract values of up to the value of the Portfolio's
assets.
The Portfolio may exchange foreign currencies for U.S. dollars and for other
foreign currencies in the normal course of business and may buy and sell
currencies through forward currency contracts in order to fix a price for
securities it has agreed to buy or sell. The Portfolio may enter into a
forward currency contract, for example, when it enters into a contract to buy
or sell a security denominated in a foreign currency in order to "lock in" the
U.S. dollar price of the security ("transaction hedge").
Additionally, when the Sub-Adviser believes that a foreign currency in which
portfolio securities are denominated may suffer a substantial decline against
the U.S. dollar, the Portfolio may enter into a forward currency contract to
sell an amount of that foreign currency (or a proxy currency whose performance
is expected to replicate the performance of that currency) for U.S. dollars
approximating the value of some or all of the portfolio securities denominated
in that currency (not exceeding the value of the Portfolio's assets
denominated in that currency) or by participating in options or futures
contracts with respect to the currency, or, when the Sub-Adviser believes that
the U.S. dollar may suffer a substantial decline against a foreign currency,
the Portfolio may enter into a forward currency contract to buy that foreign
currency for a fixed U.S. dollar amount ("position hedge"). This type of hedge
seeks to minimize the effect of currency appreciation as well as depreciation,
but does not protect against a decline in the security's value relative to
other securities denominated in the foreign currency.
The Portfolio also may enter into a forward currency contract with respect
to a currency where the Portfolio is considering the purchase of investments
denominated in that currency but has not yet done so ("anticipatory hedge").
In any of the above circumstances the Portfolio may, alternatively, enter
into a forward currency contract with respect to a different foreign currency
when the Sub-Adviser believes that the U.S. dollar value of that currency will
correlate with the U.S. dollar value of the currency in which portfolio
securities of, or being considered for purchase by, the Portfolio are
denominated ("cross-hedge"). For example, if the Sub-Adviser believes that a
particular foreign currency may decline relative to the U.S. dollar, the
Portfolio could enter into a contract to sell that currency or a proxy
currency (up to the value of the Portfolio's assets denominated in that
currency) in exchange for another currency that the Sub-Adviser expects to
remain stable or to appreciate relative to the U.S. dollar. Shifting the
Portfolio's currency exposure from one foreign currency to another removes the
Portfolio's opportunity to profit from increases in the value of the original
currency and involves a risk of increased losses to the Portfolio if the Sub-
Adviser's projection of future exchange rates is inaccurate.
The Portfolio also may enter into forward contracts to buy or sell at a
later date instruments in which the Portfolio may invest directly or on
financial indices based on those instruments. The market for those types of
forward contracts is developing and it is not currently possible to identify
instruments on which forward contracts might be created in the future.
Forward contracts are currently considered illiquid. Accordingly, the Fund's
custodian will place cash or high-grade liquid assets in a segregated account
of the Portfolio having a value equal to the aggregate amount of the
Portfolio's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the securities placed in the
segregated account declines, additional cash or high-grade liquid assets will
be placed in the account on a daily basis so that the value of the account
will be equal to the amount of the Portfolio's
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commitments with respect to such contracts. As an alternative to maintaining
all or part of the segregated account, the Portfolio may buy call options
permitting the Portfolio to buy the amount of foreign currency subject to the
hedging transaction by a forward sale contract or the Portfolio may buy put
options permitting the Portfolio to sell the amount of foreign currency
subject to a forward buy contract.
While forward contracts are not currently regulated by the CFTC, the CFTC
may in the future assert authority to regulate forward contracts. In such
event the Portfolio's ability to utilize forward contracts in the manner set
forth in the Prospectus may be restricted. Forward contracts will reduce the
potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies. Unforeseen changes in currency prices may
result in poorer overall performance for the Portfolio than if it had not
entered into such contracts. The use of foreign currency forward contracts
will not eliminate fluctuations in the underlying U.S. dollar equivalent value
of the proceeds of or rates of return on the Portfolio's foreign currency
denominated portfolio securities.
The matching of the increase in value of a forward contract and the decline
in the U.S. dollar equivalent value of the foreign currency denominated asset
that is the subject of the hedging transaction generally will not be precise.
In addition, the Portfolio may not always be able to enter into forward
contracts at attractive prices and accordingly may be limited in its ability
to use these contracts in seeking to hedge the Portfolio's assets.
Also, with regard to the Portfolio's use of cross-hedging transactions,
there can be no assurance that historical correlations between the movement of
certain foreign currencies relative to the U.S. dollar will continue. Thus, at
any time poor correlation may exist between movements in the exchange rates of
the foreign currencies underlying the Portfolio's cross-hedges and the
movements in the exchange rates of the foreign currencies in which the
Portfolio's assets that are subject of the cross-hedging transaction are
denominated.
Options on Foreign Currencies. The Portfolio may buy put and call options
and may write covered put and call options on foreign currencies for hedging
purposes in a manner similar to that in which futures contracts or forward
contracts on foreign currencies may be utilized. For example, a decline in the
U.S. dollar value of a foreign currency in which portfolio securities are
denominated will reduce the U.S. dollar value of such securities, even if
their value in the foreign currency remains constant. In order to protect
against such diminutions in the value of portfolio securities, the Portfolio
may buy put options on the foreign currency. If the value of the currency
declines, the Portfolio will have the right to sell such currency for a fixed
amount in U.S. dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Portfolio may buy call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. The purchase of an option on a foreign
currency may constitute an effective hedge against fluctuations in exchange
rates, although, in the event of exchange rate movements adverse to the
Portfolio's option position, the Portfolio could sustain losses on
transactions in foreign currency options which would require that the
Portfolio lose a portion or all of the benefits of advantageous changes in
those rates. In addition, in the case of other types of options, the benefit
to the Portfolio from purchases of foreign currency options will be reduced by
the amount of the premium and related transaction costs.
The Portfolio may write options on foreign currencies for the same types of
hedging purposes. For example, in attempting to hedge against a potential
decline in the U.S. dollar value of foreign currency denominated securities
due to adverse fluctuations in exchange rates, the Portfolio could,
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<PAGE>
instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most likely not be
exercised and the diminution in value of portfolio securities will be offset
by the amount of the premium received.
Similarly, instead of purchasing a call option to attempt to hedge against a
potential increase in the U.S. dollar cost of securities to be acquired, the
Portfolio could write a put option on the relevant currency which, if rates
move in the manner projected, will expire unexercised and allow the Portfolio
to hedge the increased cost up to the amount of the premium. As in the case of
other types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium received, and
only if exchange rates move in the expected direction. If that does not occur,
the option may be exercised and the Portfolio would be required to buy or sell
the underlying currency at a loss which may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, the Portfolio
also may lose all or a portion of the benefits which might otherwise have been
obtained from favorable movements in exchange rates.
The Portfolio may write covered call options on foreign currencies. A call
option written on a foreign currency by the Portfolio is "covered" if the
Portfolio owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
foreign currency held in its portfolio. A call option is also covered if the
Portfolio has a call on the same foreign currency and in the same principal
amount as the call written if the exercise price of the call held (i) is equal
to or less than the exercise price of the call written or (ii) is greater than
the exercise price of the call written, and if the difference is maintained by
the Portfolio in cash or high-grade liquid assets in a segregated account with
the Fund's custodian.
The Portfolio may also write call options on foreign currencies for cross-
hedging purposes that may not be deemed to be covered. A call option on a
foreign currency is for cross-hedging purposes if it is not covered but is
designed to provide a hedge against a decline due to an adverse change in the
exchange rate in the U.S. dollar value of a security which the Portfolio owns
or has the right to acquire and which is denominated in the currency
underlying the option. In such circumstances, the Portfolio collateralizes the
option by maintaining, in a segregated account with the Fund's custodian, cash
or high-grade liquid assets in an amount not less than the value of the
underlying foreign currency in U.S. dollars marked-to-market daily.
The Portfolio may buy or write options in privately negotiated transactions
on the types of securities and indices based on the types of securities in
which the Portfolio is permitted to invest directly. The Portfolio will effect
such transactions only with investment dealers and other financial
institutions (such as commercial banks or savings and loan institutions)
deemed creditworthy, and only pursuant to procedures adopted by the Sub-
Adviser for monitoring the creditworthiness of those entities. To the extent
that an option bought or written by the Portfolio in a negotiated transaction
is illiquid, the value of an option bought or the amount of the Portfolio's
obligations under an option written by the Portfolio, as the case may be, will
be subject to the Portfolio's limitation on illiquid investments. In the case
of illiquid options, it may not be possible for the Portfolio to effect an
offsetting transaction at the time when the Sub-Adviser believes it would be
advantageous for the Portfolio to do so.
Options on Securities. In an effort to reduce fluctuations in net asset
value, the Portfolio may write covered put and call options and may buy put
and call options and warrants on securities that are traded on United States
and foreign securities exchanges and over-the-counter. The Portfolio also may
write call options that are not covered for cross-hedging purposes. The
Portfolio may write and buy options on the same types of securities that the
Portfolio could buy directly
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<PAGE>
and may buy options on financial indices as described above with respect to
futures contracts. There are no specific limitations on the Portfolio's
writing and buying options on securities.
A put option gives the holder the right, upon payment of a premium, to
deliver a specified amount of a security to the writer of the option on or
before a fixed date at a predetermined price. A call option gives the holder
the right, upon payment of a premium, to call upon the writer to deliver a
specified amount of a security on or before a fixed date at a predetermined
price.
A put option written by the Portfolio is "covered" if the Portfolio (i)
maintains cash not available for investment or high-grade liquid assets with a
value equal to the exercise price in a segregated account with its custodian
or (ii) holds a put on the same security and in the same principal amount as
the put written and the exercise price of the put held is equal to or greater
than the exercise price of the put written. The premium paid by the buyer of
an option will reflect, among other things, the relationship of the exercise
price to the market price and the volatility of the underlying security, the
remaining term of the option, supply and demand and interest rates.
A call option written by the Portfolio is "covered" if the Portfolio owns
the underlying security covered by the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or has
segregated additional cash consideration with its custodian) upon conversion
or exchange of other securities held in its portfolio. A call option is also
deemed to be covered if the Portfolio holds a call on the same security and in
the same principal amount as the call written and the exercise price of the
call held (i) is equal to or less than the exercise price of the call written
or (ii) is greater than the exercise price of the call written if the
difference is maintained by the Portfolio in cash and high-grade liquid assets
in a segregated account with its custodian.
The Portfolio collateralizes its obligation under a written call option for
cross-hedging purposes by maintaining in a segregated account with its
custodian cash or high-grade liquid assets in an amount not less than the
market value of the underlying security, marked-to-market daily. The Portfolio
would write a call option for cross-hedging purposes, instead of writing a
covered call option, when the premium to be received from the cross-hedge
transaction would exceed that which would be received from writing a covered
call option and the Sub-Adviser believes that writing the option would achieve
the desired hedge.
If a put or call option written by the Portfolio was exercised, the
Portfolio would be obligated to buy or sell the underlying security at the
exercise price. Writing a put option involves the risk of a decrease in the
market value of the underlying security, in which case the option could be
exercised and the underlying security would then be sold by the option holder
to the Portfolio at a higher price than its current market value. Writing a
call option involves the risk of an increase in the market value of the
underlying security, in which case the option could be exercised and the
underlying security would then be sold by the Portfolio to the option holder
at a lower price than its current market value. Those risks could be reduced
by entering into an offsetting transaction. The Portfolio retains the premium
received from writing a put or call option whether or not the option is
exercised.
The writer of an option may have no control when the underlying security
must be sold, in the case of a call option, or bought, in the case of a put
option, since with regard to certain options, the writer may be assigned an
exercise notice at any time prior to the termination of the obligation.
Whether or not an option expires unexercised, the writer retains the amount of
the premium. This amount, of course, may, in the case of a covered call
option, be offset by a decline in the market value of the underlying security
during the option period. If a call option is exercised, the writer
experiences a profit or loss from the sale of the underlying security. If a
put option is exercised, the writer must fulfill the obligation to buy the
underlying security.
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<PAGE>
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction". This is accomplished by buying an option of
the same series as the option previously written. The effect of the purchase
is that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the holder
of an option may liquidate its position by effecting a "closing sale
transaction". This is accomplished by selling an option of the same series as
the option previously bought. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit the Portfolio to write another call option on the underlying security
with either a different exercise price or expiration date or both or, in the
case of a written put option, will permit the Portfolio to write another put
option to the extent that the exercise price thereof is secured by deposited
high-grade liquid assets. Also, effecting a closing transaction will permit
the cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other portfolio investments. If the Portfolio desires to
sell a particular security on which the Portfolio has written a call option,
the Portfolio will effect a closing transaction prior to or concurrent with
the sale of the security.
The Portfolio may realize a profit from a closing transaction if the price
of the purchase transaction is less than the premium received from writing the
option or the price received from a sale transaction is more than the premium
paid to buy the option; the Portfolio may realize a loss from a closing
transaction if the price of the purchase transaction is more than the premium
received from writing the option or the price received from a sale transaction
is less than the premium paid to buy the option. Because increases in the
market price of a call option will generally reflect increases in the market
price of the underlying security, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security owned by the Portfolio.
An option position may be closed out only where there exists a secondary
market for an option of the same series. If a secondary market does not exist,
it might not be possible to effect closing transactions in particular options
with the result that the Portfolio would have to exercise the options in order
to realize any profit. If the Portfolio is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or the Portfolio delivers the underlying
security upon exercise. Reasons for the absence of a liquid secondary market
may include the following: (i) there may be insufficient trading interest in
certain options, (ii) restrictions may be imposed by a national securities
exchange on which the option is traded ("Exchange") on opening or closing
transactions or both, (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options or
underlying securities, (iv) unusual or unforeseen circumstances may interrupt
normal operations on an Exchange, (v) the facilities of an Exchange or the
Options Clearing Corporation ("OCC") may not at all times be adequate to
handle current trading volume, or (vi) one or more Exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that
class or series of options) would cease to exist, although outstanding options
on that Exchange that had been issued by the OCC as a result of trades on that
Exchange would continue to be exercisable in accordance with their terms.
The Portfolio may write options in connection with buy-and-write
transactions; that is, the Portfolio may buy a security and then write a call
option against that security. The exercise price of the call the Portfolio
determines to write will depend upon the expected price movement of the
underlying security. The exercise price of a call option may be below ("in-
the-money"), equal to
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<PAGE>
("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the option is written. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will remain flat or decline
moderately during the option period. Buy-and-write transactions using at-the-
money call options may be used when it is expected that the price of the
underlying security will remain fixed or advance moderately during the option
period. Buy-and-write transactions using out-of-the-money call options may be
used when it is expected that the premiums received from writing the call
option plus the appreciation in the market price of the underlying security up
to the exercise price will be greater than the appreciation in the price of
the underlying security alone. If the call options are exercised in such
transactions, the Portfolio's maximum gain will be the premium received by it
for writing the option, adjusted upwards or downwards by the difference
between the Portfolio's purchase price of the security and the exercise price.
If the options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset by the amount of premium
received.
The writing of covered put options is similar in terms of risk and return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Portfolio's gain will be limited to the
premium received. If the market price of the underlying security declines or
otherwise is below the exercise price, the Portfolio may elect to close the
position or take delivery of the security at the exercise price and the
Portfolio's return will be the premium received from the put option minus the
amount by which the market price of the security is below the exercise price.
The Portfolio may buy put options to attempt to hedge against a decline in
the value of its securities. By using put options in this way, the Portfolio
will reduce any profit it might otherwise have realized in the underlying
security by the amount of the premium paid for the put option and by
transaction costs.
The Portfolio may buy call options to attempt to hedge against an increase
in the price of securities that the Portfolio may buy in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Portfolio upon exercise of the option, and,
unless the price of the underlying security rises sufficiently, the option may
expire worthless to the Portfolio.
In purchasing an option, the Portfolio would be in a position to realize a
gain if, during the option period, the price of the underlying security
increased (in the case of a call) or decreased (in the case of a put) by an
amount in excess of the premium paid and would realize a loss if the price of
the underlying security did not increase (in the case of a call) or decrease
(in the case of a put) during the period by more than the amount of the
premium. If a put or call option bought by the Portfolio were permitted to
expire without being sold or exercised, the Portfolio would lose the amount of
the premium.
Although they entitle the holder to buy equity securities, warrants on and
options to purchase equity securities do not entitle the holder to dividends
or voting rights with respect to the underlying securities, nor do they
represent any rights in the assets of the issuer of those securities.
Interest Rate Swaps and Swap-Related Products. In order to attempt to
protect the value of the Portfolio's investments from interest rate or
currency exchange rate fluctuations, the Portfolio may enter into interest
rate swaps, and may buy or sell interest rate caps and floors. The Portfolio
expects to enter into these transactions primarily to attempt to preserve a
return or spread on a particular investment or portion of its portfolio. The
Portfolio also may enter into these
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transactions to attempt to protect against any increase in the price of
securities the Portfolio may consider buying at a later date. The Portfolio
does not intend to use these transactions as a speculative investment.
Interest rate swaps involve the exchange by the Portfolio with another party
of their respective commitments to pay or receive interest, e.g., an exchange
of floating rate payments for fixed rate payments. The exchange commitments
can involve payments to be made in the same currency or in different
currencies. The purchase of an interest rate cap entitles the purchaser, to
the extent that a specified index exceeds a predetermined interest rate, to
receive payments of interest on a contractually based principal amount from
the party selling the interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index falls below
a predetermined interest rate, to receive payments of interest on a
contractually based principal amount from the party selling the interest rate
floor.
Swap and swap-related products are specialized over-the-counter instruments
and their use involves risks specific to the markets in which they are entered
into. The Portfolio will usually enter into interest rate swaps on a net
basis, i.e., the two payment streams are netted out, with the Portfolio
receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Portfolio's obligations
over its entitlements with respect to each interest rate swap will be
calculated on a daily basis and an amount of cash or high-grade liquid assets
having an aggregate net asset value at least equal to the accrued excess will
be maintained in a segregated account by the Fund's custodian. If the
Portfolio enters into an interest rate swap on other than a net basis, the
Portfolio would maintain a segregated account in the full amount accrued on a
daily basis of the Portfolio's obligations with respect to the swap. The
Portfolio will not enter into any interest rate swap, cap or floor transaction
unless the unsecured senior debt or the claims-paying ability of the other
party thereto is rated in one of the three highest rating categories of at
least one nationally recognized statistical rating organization at the time of
entering into such transaction. The Sub-Adviser will monitor the
creditworthiness of all counterparties on an ongoing basis. If there is a
default by the other party to such a transaction, the Portfolio will have
contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. The Sub-Adviser has determined
that, as a result, the swap market has become relatively liquid. Caps and
floors are more recent innovations for which standardized documentation has
not yet been developed and, accordingly, they are less liquid than swaps. To
the extent the Portfolio sells (i.e., writes) caps and floors, it will
maintain in a segregated account cash or high-grade liquid assets having an
aggregate net asset value at least equal to the full amount, accrued on a
daily basis, of the Portfolio's obligations with respect to any caps or
floors.
There is no limit on the amount of interest rate swap transactions that may
be entered into by the Portfolio; although the Portfolio does not presently
intend to engage in such transactions in excess of 5% of its total assets.
These transactions may in some instances involve the delivery of securities or
other underlying assets by the Portfolio or its counterparty to collateralize
obligations under the swap. Under the documentation currently used in those
markets, the risk of loss with respect to interest rate swaps is limited to
the net amount of the interest payments that the Portfolio is contractually
obligated to make. If the other party to an interest rate swap that is not
collateralized defaults, the Portfolio would risk the loss of the net amount
of the payments that the Portfolio contractually is entitled to receive. The
Portfolio may buy and sell (i.e., write) caps and floors without limitation,
subject to the segregated account requirement described above.
In addition to the instruments, strategies and risks described in this
Statement of Additional Information and in the Prospectus, there may be
additional opportunities in connection with
- 17 -
<PAGE>
options, futures contracts, forward currency contracts and other hedging
techniques, that become available as the Sub-Adviser develops new techniques,
as regulatory authorities broaden the range of permitted transactions and as
new instruments and techniques are developed. The Sub-Adviser may use these
opportunities to the extent they are consistent with the Portfolio's
respective investment objectives and are permitted by the Portfolio's
respective investment limitations and applicable regulatory requirements.
Special Investment Considerations and Risks. The successful use of the
investment practices described above with respect to futures contracts,
options on futures contracts, forward contracts, options on securities and on
foreign currencies, and swaps and swap-related products draws upon skills and
experience which are different from those needed to select the other
instruments in which the Portfolio invests. Should interest or exchange rates
or the prices of securities or financial indices move in an unexpected manner,
the Portfolio may not achieve the desired benefits of futures, options, swaps
and forwards or may realize losses and thus be in a worse position than if
such strategies had not been used. Unlike many exchange-traded futures
contracts and options on futures contracts, there are no daily price
fluctuation limits with respect to options on currencies, forward contracts
and other negotiated or over-the-counter instruments, and adverse market
movements could therefore continue to an unlimited extent over a period of
time. In addition, the correlation between movements in the price of the
securities and currencies hedged or used for cover will not be perfect and
could produce unanticipated losses.
The Portfolio's ability to dispose of its positions in the foregoing
instruments will depend on the availability of liquid markets in the
instruments. Markets in a number of the instruments are relatively new and
still developing, and it is impossible to predict the amount of trading
interest that may exist in those instruments in the future. Particular risks
exist with respect to the use of each of the foregoing instruments and could
result in such adverse consequences to the Portfolio as the possible loss of
the entire premium paid for an option bought by the Portfolio, the inability
of the Portfolio, as the writer of a covered call option, to benefit from the
appreciation of the underlying securities above the exercise price of the
option and the possible need to defer closing out positions in certain
instruments to avoid adverse tax consequences. As a result, no assurance can
be given that the Portfolio will be able to use those instruments effectively
for the purposes set forth above.
In connection with certain of its hedging transactions, the Portfolio must
place assets in a segregated account with the Fund's Custodian bank to ensure
that the Portfolio will be able to meet its obligations under these
instruments. Assets held in a segregated account generally may not be disposed
of during the period the Portfolio maintains the positions giving rise to the
segregation requirement. Segregation of a large percentage of the Portfolio's
assets could impede implementation of the Portfolio's investment policies or
the Portfolio's ability to meet redemption requests or other current
obligations.
Additional Risks of Options on Foreign Currencies, Forward Contracts and
Foreign Instruments. Unlike transactions entered into by the Portfolio in
futures contracts, options on foreign currencies and forward contracts are not
traded on contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by the SEC. To the contrary, such
instruments are traded through financial institutions acting as market-makers,
although foreign currency options are also traded on certain national
securities exchanges, such as the Philadelphia Stock Exchange and the Chicago
Board Options Exchange, subject to SEC regulation. Similarly, options on
currencies may be traded over-the-counter. In an over-the-counter trading
environment, many of the protections afforded to exchange participants will
not be available. For example, there are no daily price fluctuation limits,
and adverse market movements could therefore continue to an unlimited extent
over a period of time. Although the
- 18 -
<PAGE>
buyer of an option cannot lose more than the amount of the premium plus
related transaction costs, this entire amount could be lost. Moreover, an
option writer and a buyer or seller of futures or forward contracts could lose
amounts substantially in excess of any premium received or initial margin or
collateral posted due to the potential additional margin and collateral
requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges are available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the OCC, thereby reducing
the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting the Portfolio to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign government restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on
exercise and settlement.
In addition, options on U.S. Government securities, futures contracts,
options on futures contracts, forward contracts and options on foreign
currencies may be traded on foreign exchanges and over-the-counter in foreign
countries. Such transactions are subject to the risk of governmental actions
affecting trading in or the prices of foreign currencies or securities. The
value of such positions also could be adversely affected by (i) other complex
foreign political and economic factors, (ii) lesser availability than in the
United States of data on which to make trading decisions, (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States, (iv) the imposition of
different exercise and settlement terms and procedures and margin requirements
than in the United States, and (v) low trading volume.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below:
<TABLE>
<CAPTION>
NAME, RELATIONSHIP WITH PRINCIPAL OCCUPATION
THE FUND, AND ADDRESS (1) PAST FIVE YEARS
- ------------------------- --------------------
<S> <C>
PETER R. BROWN (68) Chairman of the Board, Peter Brown Construction Company
Director (construction contractors and engineers), Largo,
1475 South Belcher Road Florida (1963 - present); Trustee of IDEX Series Fund;
Largo, Florida 33771 former Trustee of IDEX Fund, IDEX II Series Fund and
IDEX Fund 3; Rear Admiral (Ret.) U.S. Navy Reserve,
Civil Engineer Corps.
</TABLE>
- 19 -
<PAGE>
<TABLE>
<CAPTION>
NAME, RELATIONSHIP WITH PRINCIPAL OCCUPATION
THE FUND, AND ADDRESS (1) PAST FIVE YEARS
- ------------------------- --------------------
<S> <C>
CHARLES C. HARRIS (66) Retired (1988 - present); Senior Vice President,
Director Treasurer (1966 - 1988), Western Reserve Life Assurance
35 Winston Drive Co. of Ohio; Trustee of IDEX Series Fund; former
Clearwater, Florida Trustee of IDEX Fund; IDEX II Series Fund and IDEX Fund
34616 3; Vice President, Treasurer (1968 - 1988), Director
(1968 - 1987), Pioneer Western Corporation; Vice
President of the Fund (1986 to December, 1990).
RUSSELL A. KIMBALL, Jr. General Manager, Sheraton Sand Key Resort (resort
(52) hotel), Clearwater, Florida (1975 - present).
Director
1160 Gulf Boulevard
Clearwater Beach,
Florida 34630
JOHN R. KENNEY (59) Chairman of the Board of Directors (1987 - present),
Chairman of the Board of Chief Executive Officer (1982 - present), President
Directors and President (1978 - 1987 and December, 1992 - present), Director
(2) (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; Director,
AEGON Asset Management Services, Inc. (February, 1997 -
present) Largo, Florida; Chairman of the Board of
Directors and Chief Executive Officer (1988 to
February, 1991), President (1988 - 1989), Director
(1976 to February, 1991), Executive Vice President
(1972 - 1988), Pioneer Western Corporation (financial
services), Largo, Florida; President and Director
(1985 - September, 1990) and Director (December, 1990
to present), Idex Management, Inc. (investment
adviser), Largo, Florida; Trustee (1987 - September,
1996), Chairman (December, 1989 to September, 1990 and
November, 1990 to September, 1996) and President and
Chief Executive Officer (November, 1986 to 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 (48) Executive Vice President (June 1993 - present), Chief
Director and Executive Operating Officer (March, 1994 - January, 1997) Western
Vice President (2) 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; Director, President and Chief
Executive Officer, AEGON Asset Management Services,
Inc. (February, 1997 - present), 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
</TABLE>
- 20 -
<PAGE>
<TABLE>
<CAPTION>
NAME, RELATIONSHIP WITH PRINCIPAL OCCUPATION
THE FUND, AND ADDRESS (1) PAST FIVE YEARS
- ------------------------- --------------------
<S> <C>
President of AEGON USA Managed Portfolios, Inc.
(September, 1991 - August, 1992); Vice President of
Pioneer Western Corporation (May, 1988 -February, 1991)
(financial services), all of Largo, Florida.
ALLAN J. HAMILTON (40) Vice President and Controller (1987 - present),
Treasurer, Principal Fi- Treasurer (February, 1997 - present), Assistant Vice
nancial Officer (2) President and Assistant Controller (1983 - 1987),
Western Reserve Life Assurance Co. of Ohio; Vice
President and Controller (1988 - February, 1991),
Pioneer Western Corporation (financial services), all
of Largo, Florida.
ALAN M. YAEGER (50) Executive Vice President (June, 1993 - present), Chief
Executive Vice President Financial Officer (December, 1995 - present), Senior
(2) 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.
REBECCA A. FERRELL (36) Vice President and Associate General Counsel (March,
Secretary, Vice Presi- 1997 - present) Assistant Vice President and Counsel
dent, and Counsel (2) (June, 1995 - March, 1997), Attorney (August, 1993 -
June, 1995), Western Reserve Life Assurance Co. of
Ohio; Secretary, Vice President and Counsel of IDEX
Series Fund (September, 1996 - present), Vice President
and Associate General Counsel (February, 1997 -
present) AEGON Asset Management Services, Inc., Largo,
Florida; Secretary and Assistant Vice President (March,
1994 - September, 1995), Vice President and Counsel
(September, 1995 - September, 1996) of IDEX Fund, IDEX
II Series Fund and IDEX Fund 3; Attorney (September,
1992 - August, 1993), Hearne, Graziano, Nader & Buhr,
P.A.; Legal Writing Instructor (August, 1991 - June,
1992), Florida State University College of Law.
<FN>
- --------
(1) The principal business address of each person listed, unless otherwise
indicated, is Western Reserve Life Assurance Co. of Ohio, P.O. Box 5068,
Clearwater, Florida 34618.
(2) Interested person as defined in the 1940 Act and affiliated person of
Investment Adviser.
</FN>
</TABLE>
The Fund pays no salaries or compensation to any of its officers, all of
whom are employees of WRL. The Fund pays an annual fee of $6,000 to each
Director who is not affiliated with the Investment Adviser or the Sub-Adviser.
Each Director also receives $500, plus expenses, per each regular and special
Board meeting attended. For the year ended December 31, 1996, the Portfolio
paid Directors' fees and expenses of $8,449. The following table provides
compensation amounts paid to disinterested Directors of the Fund for the
fiscal year ended December 31, 1996.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
AGGREGATE BENEFITS
COMPENSATION FROM ACCRUED AS TOTAL COMPENSATION PAID TO
WRL PART OF DIRECTORS FROM WRL SERIES
NAME OF PERSON, POSITION SERIES FUND, INC. FUND EXPENSES* FUND, INC., IDEX SERIES FUND
- ------------------------ ----------------- -------------- ----------------------------
<S> <C> <C> <C>
Peter R. Brown, Director $9,500 $0 $34,000
Charles C. Harris, Di-
rector $9,500 0 $34,000
Russell A. Kimball, Jr.,
Director $9,000 0 $ 9,000
<FN>
- --------
* The Plan became effective January 1, 1996.
</FN>
</TABLE>
- 21 -
<PAGE>
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 II Series Fund (without imposition of
sales charges), as elected by the directors. It is not anticipated that the
Plan will have any impact on the Fund.
As of March 1, 1997, the Directors and officers of the Fund beneficially
owned in the aggregate less than 1% of the Fund's shares through ownership of
the Contract indirectly invested in the Fund. The Board of Directors has
established an Audit Committee consisting of Messrs. Brown, Harris and
Kimball.
THE INVESTMENT ADVISER
The information that follows supplements the information provided about the
Investment Adviser under the caption "Management of the Fund--The Investment
Adviser" in the Prospectus.
WRL Investment Management, Inc. ("WRL Management" or the "Investment
Adviser") serves as the investment adviser to the Portfolio pursuant to an
Investment Advisory Agreement dated January 1, 1997 with the Fund. The
Investment Adviser is a direct, wholly-owned subsidiary of WRL, which is a
wholly-owned subsidiary of First AUSA Life Insurance Company ("First AUSA"), a
stock life insurance company which is wholly-owned by AEGON USA, Inc.
("AEGON"). AEGON is a financial services holding company whose primary
emphasis is on life and health insurance and annuity and investment products.
AEGON is a wholly-owned indirect subsidiary of AEGON nv, a Netherlands
corporation, which is a publicly traded international insurance group. Prior
to January 1, 1997, WRL served as investment adviser to the Fund.
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 the Portfolio 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 the Portfolio and terminates automatically in the event of its
assignment (within the meaning of the 1940 Act).
While the Investment Adviser is at all times subject to the direction of the
Board of Directors of the Fund, the Investment Advisory Agreement provides
that the Investment Adviser, subject to review by the Board of Directors, is
responsible for the actual management of the Portfolio and has responsibility
for making decisions to buy, sell or hold any particular security. The
Investment Adviser also is obligated to provide all the office space,
facilities, equipment and personnel necessary to perform its duties under the
Agreement. For further information about the management of the Portfolio, see
"The Sub-Adviser", below.
- 22 -
<PAGE>
Advisory Fee. The method of computing the investment advisory fee is fully
described in the Prospectus. For the years ended December 31, 1996, 1995 and
1994, the Investment Adviser was paid fees for its services to the Portfolio
in the following amounts:
<TABLE>
<CAPTION>
ADVISORY FEES
YEAR ENDED
----------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C>
$11,137,321 $7,847,750 $6,850,340
</TABLE>
Payment of Expenses. Under the terms of the Investment Advisory Agreement,
the Investment Adviser is responsible for providing investment advisory
services and furnishing office space for officers and employees of the
Investment Adviser connected with investment management of the Portfolio. The
Portfolio pays: all expenses incurred in connection with the formation and
organization of the 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 the Portfolio and its shares under the 1940 Act and the
Securities Act of 1933 Act and all other matters relating to the information
and organization of the 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 and Contract Owners;
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 Portfolio.
The Investment Adviser has voluntarily undertaken, until at least April 30,
1998, to pay expenses on behalf of the Portfolio to the extent normal
operating expenses (including investment advisory fees but excluding interest,
taxes, brokerage fees, commissions and extraordinary charges) exceed, as a
percentage of the Portfolio's average daily net assets, 1.00%. There were no
expenses paid by the Investment Adviser on behalf of the Portfolio for the
fiscal years ended December 31, 1996, 1995 and 1994, inasmuch as the normal
operating expenses of the Portfolio did not exceed the limitations described
above.
- 23 -
<PAGE>
Service Agreement. Effective January 1, 1997, the Fund entered into an
------------------
Administrative Services and Transfer Agency Agreement ("Services Agreement")
with WRL Investment Services, Inc. ("WRL Services"), an affiliate of WRL
Management and WRL, to furnish the Fund with administrative services to assist
the Fund in carrying out certain of its functions and operations. The Service
Agreement was approved by the Fund's Board of Directors, including a majority
of Directors who are not "interested persons" of the Fund (as defined in the
1940 Act) on October 3, 1996. Under this Agreement, WRL Services shall furnish
to each Portfolio, subject to the overall supervision of the Fund's Board,
supervisory, administrative, and transfer agency services, including
recordkeeping and reporting. WRL Services is reimbursed by the Fund monthly on
a cost incurred basis.
Distribution Agreement. Effective January 1, 1997, the Fund adopted a
-----------------------
distribution plan ("Distribution Plan") pursuant to Rule 12b-1 under the 1940
Act, as amended. Pursuant to the Distribution Plan, the Fund 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 and Contract Owners 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 Contract Owners; developing and preparing Fund
advertisements; sales literature and other promotional materials; holding
seminars and sales meetings designed to promote distribution of Fund shares;
the development of consumer-oriented sales materials describing and/or
relating to the Fund; and expenses attributable to "distribution-related
services" provided to the Fund, which include such things as salaries and
benefits, office expenses, equipment expenses, training costs, travel costs,
printing costs, supply expenses, computer programming time, and data center
expenses, each as they relate to the promotion of the sale of Fund shares.
ISI submits to the Directors of the Fund for approval annual distribution
budgets and quarterly reports of distribution expenses with respect to each
Portfolio. ISI allocates to each Portfolio distribution expenses specifically
attributable to the distribution of shares of such Portfolio. Distribution
expenses not specifically attributable to the distribution of shares of a
particular Portfolio are allocated among the Portfolios, based upon the ratio
of net asset value of each Portfolio to the net asset value of all Portfolios,
or such other factors as ISI deems fair and are approved by the Fund's Board
of Directors. ISI has determined that 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.
- 24 -
<PAGE>
THE SUB-ADVISER
This discussion supplements the information provided about the Sub-Adviser
under the caption "Management of the Fund--The Sub-Adviser" in the Prospectus.
Janus Capital Corporation (the "Sub-Adviser") serves as the Sub-Adviser for
the Portfolio pursuant to a Sub-Advisory Agreement dated January 1, 1997
between WRL Management and the Sub-Adviser on behalf of the Portfolio. The
Sub-Advisory Agreement was approved by the Board of Directors of the Fund,
including a majority of the Directors who were not "interested persons" of the
Fund (as defined in the 1940 Act), on October 3, 1996 and by the shareholders
and Contract Owners of the Portfolio on December 16, 1996. The Sub-Advisory
Agreement provides that it will continue in effect for an initial term ending
January 1, 1999, and from year to year thereafter, if approved annually (a) by
the Board of Directors of the Fund or by a majority of the outstanding shares
of the Portfolio, and (b) by a majority of the Directors who are not parties
to such Agreement or "interested persons" (as defined in the 1940 Act) of any
such party. The Sub-Advisory Agreement may be terminated without penalty on 60
days' written notice at the option of either party or by the vote of the
shareholders of the Portfolio and terminates automatically in the event of
assignment (within the meaning of the 1940 Act) or termination of the
Investment Advisory Agreement.
Pursuant to the Sub-Advisory Agreement, the Sub-Adviser provides investment
advisory assistance and portfolio management advice to the Investment Adviser
with respect to the Portfolio. Subject to review by the Investment Adviser and
the Board of Directors of the Fund, the Sub-Adviser is responsible for the
actual management of the Portfolio and for making decisions to buy, sell or
hold any particular security. The Sub-Adviser provides the portfolio managers
for the Portfolio. Such managers consider analyses from various sources, make
the necessary decisions and effect transactions accordingly. The Sub-Adviser
bears all of its expenses in connection with the performance of its services
under the Sub-Advisory Agreement, such as compensating and furnishing office
space for its officers and employees connected with investment and economic
research, trading and investment management of the Portfolio. The method of
computing the Sub-Adviser's fee is set forth in the Prospectus. For the years
ended December 31, 1996, 1995 and 1994, the Sub-Adviser was paid fees in the
amount of $5,568,661, $3,923,875 and $3,425,888, respectively.
The Sub-Adviser, located at 100 Fillmore Street, Denver, Colorado 80206, has
been engaged in the management of Janus funds since 1969. Janus Capital
Corporation also serves as investment adviser or sub-adviser to other mutual
funds, and for individual, corporate, charitable and retirement accounts. The
aggregate market value of the assets managed by the Sub-Adviser was over $50
billion as of January 31, 1997. Kansas City Southern Industries, Inc. ("KCSI")
owns 83% of the Sub-Adviser. KCSI, whose address is 114 West 11th Street,
Kansas City, Missouri 64105-1804, is a publicly-traded holding company whose
largest subsidiary, the Kansas City Southern Railway Company, is primarily
engaged in the transportation industry. Other KCSI subsidiaries are engaged in
financial services and real estate.
JOINT TRADING ACCOUNTS
As described in the Prospectus, the Portfolio and other clients of the Sub-
Adviser and its affiliates may place assets in joint trading accounts for the
purpose of making short-term investments in money market instruments. The
Board of Directors of the Fund must approve the participation of each
Portfolio in these joint trading accounts, and procedures pursuant to which
the joint accounts will operate. The joint trading accounts are to be operated
pursuant to an exemptive order issued to the Sub-Adviser and certain of its
affiliates by the SEC. All joint account participants including the Portfolio,
will bear the expenses of the joint trading accounts in proportion to their
investments. Financial difficulties of other participants in the joint
accounts could cause delays or other difficulties for the Portfolio in
withdrawing their assets from joint trading accounts.
- 25 -
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TURNOVER
The information that follows supplements the information provided about
portfolio turnover under the caption "The Growth Portfolio and the Fund--
Portfolio Turnover" in the Prospectus. In computing the portfolio turnover
rate for the Portfolio, securities whose maturities or expiration dates at the
time of acquisition are one year or less are excluded. Subject to this
exclusion, the turnover rate for the Portfolio is calculated by dividing (a)
the lesser of purchases or sales of portfolio securities for the fiscal year
by (b) the monthly average of portfolio securities owned by the Portfolio
during the fiscal year. The portfolio turnover rates for the years 1996, 1995
and 1994 were 45.21%, 130.48%, and 107.33%, respectively. The Fund's
management is unable to predict precisely the Portfolio's future annual
turnover rate, although an annual turnover rate in excess of 150% is not
presently anticipated. Higher turnover rates tend to result in higher
brokerage fees.
There are no fixed limitations regarding the portfolio turnover of the
Portfolio. Portfolio turnover rates are expected to fluctuate under constantly
changing economic conditions and market circumstances. Securities initially
satisfying the basic policies and objectives of the Portfolio may be disposed
of when they are no longer deemed suitable.
PLACEMENT OF PORTFOLIO BROKERAGE
Subject to policies established by the Board of Directors, the Sub-Adviser
is primarily responsible for placement of the Portfolio's securities
transactions. In placing orders, it is the policy of the Portfolio to obtain
the most favorable net results, taking into account various factors, including
price, dealer spread or commissions, if any, size of the transaction and
difficulty of execution. While the Sub-Adviser generally will seek reasonably
competitive spreads or commissions, the Portfolio will not necessarily be
paying the lowest spread or commission available. The Portfolio does not have
any obligation to deal with any broker, dealer or group of brokers or dealers
in the execution of transactions in portfolio securities.
Decisions as to the assignment of portfolio brokerage business for the
Portfolio and negotiation of its commission rates are made by the Sub-Adviser,
whose policy is to obtain "best execution" (prompt and reliable execution at
the most favorable security price) of all portfolio transactions. In placing
portfolio transactions, the Sub-Adviser may give consideration to brokers who
provide supplemental investment research, in addition to such research
obtained for a flat fee, to the Sub-Adviser, and pay spreads or commissions to
such brokers or dealers furnishing such services which are in excess of
spreads or commissions which another broker or dealer may charge for the same
transaction.
In selecting brokers and in negotiating commissions, the Sub-Adviser
considers such factors as: the Sub-Adviser's knowledge of currently available
negotiated commission rates or prices of securities currently available and
other current transaction costs; the nature of the security being traded; the
size and type of the transaction; the nature and character of the markets for
the security to be purchased or sold; the desired timing of the trade; the
activity existing and expected in the market for the particular security;
confidentiality; the quality of execution, clearance, and settlement services;
financial stability; the existence of actual or apparent operational problems
of any broker or dealer; and research products or services to be provided.
These products and services may include furnishing advice, either directly
or through publications or writings, as to the value of securities, the
advisability of purchasing or selling specific securities and the availability
of securities or purchasers or sellers of securities; furnishing seminars,
information, analyses and reports concerning issuers, industries, securities,
trading markets and methods, legislative developments, changes in accounting
practices, economic factors
- 26 -
<PAGE>
and trends and portfolio strategy; access to research analysts, corporate
management personnel, industry experts, economists and government officials;
comparative performance evaluation and technical measurement services and
quotation services, and products and other services (such as third party
publications, reports and analyses, and computer and electronic access,
equipment, software, information and accessories that deliver, process or
otherwise utilize information), including the research described above.
Supplemental research obtained through brokers or dealers will be in
addition to and not in lieu of the services required to be performed by the
Sub-Adviser. The expenses of the Sub-Adviser will not necessarily be reduced
as a result of the receipt of such supplemental information. The Sub-Adviser
may use such research products and services in servicing other accounts in
addition to the Portfolio. If the Sub-Adviser determines that any research
product or service has a mixed use, such that it also serves functions that do
not assist in the investment decision-making process, the Sub-Adviser will
allocate the costs of such service or product accordingly. The portion of the
product or service that a Sub-Adviser determines will assist it in the
investment decision-making process may be paid for in brokerage commission
dollars. Such allocation may create a conflict of interest for the Sub-
Adviser. Conversely, such supplemental information obtained by the placement
of business for the Sub-Adviser will be considered by and may be useful to the
Sub-Adviser in carrying out its obligations to the Portfolio.
When the Portfolio purchases or sells a security in the over-the-counter
market, the transaction takes place directly with a principal market-maker,
without the use of a broker, except in those circumstances where, in the
opinion of the Sub-Adviser, better prices and executions are likely to be
achieved through the use of a broker. The Portfolio does not have any
obligation to deal with any broker, dealer or group of brokers or dealers in
the execution of transactions in portfolio securities.
Normally, the Portfolio will deal directly with the underwriters or dealers
who make a market in the securities involved unless better prices and
execution are available elsewhere. Such dealers usually act as principals for
their own account. On occasion, securities may be purchased directly from the
issuer. Bonds and money market securities are generally traded on a net basis
and do not normally involve either brokerage commissions or transfer taxes.
The cost of portfolio securities transactions of the Portfolio that are
transactions with principals will consist primarily of brokerage commissions
or dealer or underwriter spreads between the bid and asked price, although
purchases from underwriters of portfolio securities include a commission or
concession paid by the issuer. No stated commission is generally applicable to
securities traded in the U.S. over-the-counter markets, but the prices of
those securities include undisclosed commissions or mark-ups.
Securities held by the Portfolio may also be held by other separate
accounts, mutual funds or other accounts for which the Investment Adviser or
Sub-Adviser serves as an adviser, or held by the Investment Adviser or Sub-
Adviser for their own accounts. Because of different investment objectives or
other factors, a particular security may be bought by the Investment Adviser
or Sub-Adviser for one or more clients when one or more clients are selling
the same security. If purchases or sales of securities for the Portfolio or
other entities for which they act as investment adviser or for their advisory
clients arise for consideration at or about the same time, transactions in
such securities will be made, insofar as feasible, for the respective entities
and clients in a manner deemed equitable to all. To the extent that
transactions on behalf of more than one client of the Investment Adviser or
Sub-Adviser during the same period may increase the demand for securities
being purchased or the supply of securities being sold, there may be an
adverse effect on price.
On occasions when the Investment Adviser or the Sub-Adviser deems the
purchase or sale of a security to be in the best interests of the Portfolio as
well as other accounts or companies, it may
- 27 -
<PAGE>
to the extent permitted by applicable laws and regulations, but will not be
obligated to, aggregate the securities to be sold or purchased for the
Portfolio with those to be sold or purchased for such other accounts or
companies in order to obtain favorable execution and lower brokerage
commissions. In that event, allocation of the securities purchased or sold, as
well as the expenses incurred in the transaction, will be made by the Sub-
Adviser in the manner it considers to be most equitable and consistent with
its fiduciary obligations to the Portfolio and to such other accounts or
companies. In some cases this procedure may adversely affect the size of the
position obtainable for the Portfolio.
The Board of Directors of the Fund periodically reviews the brokerage
placement practices of the Sub-Adviser on behalf of the Portfolio, and reviews
the prices and commissions, if any, paid by the Portfolio to determine if they
were reasonable.
The Board of Directors of the Fund has authorized the Sub-Adviser to
consider sales of the Policies and Annuity Contracts issued by a broker-dealer
as a factor in the selection of broker-dealers to execute Portfolio
transactions. In addition, the Sub-Adviser may occasionally place portfolio
business with affiliated brokers of the Investment Adviser or the Sub-Adviser,
including: DST Securities, Inc., 301 West 11th Street, Kansas City, Missouri
64105; and InterSecurities, Inc., P.O. Box 5068, Clearwater, Florida 33518. As
stated above, any such placement of portfolio business will be subject to the
ability of the broker-dealer to provide best execution and to the Conduct
Rules of the National Association of Securities Dealers, Inc.
The Portfolio paid aggregate commissions for the years ended December 31,
1996, 1995 and 1994 in the amount of $720,978, $1,577,115, and $1,466,443,
respectively. For the years ended December 31, 1996 and 1995, the Portfolio
did not pay any brokerage commissions to DST Securities, Inc. For the year
ended December 31, 1994, the Portfolio paid commissions to DST Securities,
Inc. in the amount of $2,796. The percentage of the Portfolio's aggregate
brokerage commissions and aggregate dollar amount of transactions paid to DST
Securities, Inc. during the Portfolio's most recent fiscal year did not exceed
one percent.
PURCHASE AND REDEMPTION OF SHARES
OFFERING OF THE SHARES AND DETERMINATION OF OFFERING PRICE
Shares of the Portfolio are currently sold only to the Separate Accounts.
The Separate Account invests in shares of the Portfolio in accordance with the
allocation instructions received from owners of the Contract ("Owners"). Such
allocation rights are further described in the prospectus and disclosure
documents for the Contract. Shares of the Portfolio are sold and redeemed at
their net asset value as described in the Prospectus. Net asset value of the
Portfolio's shares is determined, once daily, as of the close of the regular
session of business on the New York Stock Exchange ("Exchange") (usually 4:00
p.m., Eastern time), on each day the Exchange is open. (Currently the Exchange
is closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.)
Net asset value of a Portfolio share is computed by dividing the value of
the net assets of the Portfolio by the total number of shares of the Portfolio
outstanding.
PORTFOLIO NET ASSET VALUATION
As stated in the Prospectus and above, the net asset value of a Portfolio
share is determined, once daily, as of the close of the regular session of
business on the Exchange (usually 4:00 p.m., Eastern time), on each day the
Exchange is open. The per share net asset value of the Portfolio is
- 28 -
<PAGE>
determined by dividing the total value of the securities and other assets,
less liabilities, by the total number of shares outstanding. In determining
asset value, securities listed on the national securities exchanges and the
NASDAQ National Market are valued at the closing prices on such markets, or if
such a price is lacking for the trading period immediately preceding the time
of determination, such securities are valued at their current bid price. Other
securities which are traded on the over-the-counter market are valued at bid
price. 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, and other assets, are valued at
fair values as determined in good faith by the Sub-Adviser under the
supervision of the Fund's Board of Directors. Money market instruments
maturing in 60 days or less are valued on the amortized cost basis discussed
above.
INVESTMENT EXPERIENCE INFORMATION
The information provided in this section shows the historical investment
experience of the Portfolio. It does not represent or project future
investment performance.
The Portfolio commenced operations on October 2, 1986. The rates of return
shown below depict the actual investment experience of the Portfolio for the
periods shown.
CALCULATION OF PERFORMANCE RELATED INFORMATION
TOTAL RETURN
The rates of return shown below are based on the actual investment
performance, after the deduction of investment advisory fees and direct
Portfolio expenses. The rates are average annual compounded rates of return
for the periods ended on December 31, 1996.
The rates of return do not reflect charges or deductions against the
Separate Accounts, or charges and deductions against the Policies or
Contracts. Accordingly, these rates of return do not illustrate how actual
investment performance will affect benefits under the Contract. The
prospectuses for the Contracts contains relevant performance information.
Moreover, these rates of return are not an estimate, projection or guarantee
of future performance.
Also shown are comparable figures for the unmanaged Standard & Poor's Index
of 500 Common Stocks, a widely used measure of stock market performance.
AVERAGE ANNUAL COMPOUNDED RATES OF RETURN
FOR THE PERIODS ENDED ON DECEMBER 31, 1996
<TABLE>
<CAPTION>
INCEPTION* 10 YEARS 5 YEARS 1 YEAR
---------- -------- ------- ------
<S> <C> <C> <C> <C>
Growth Portfolio 17.66% 17.98% 11.11% 17.96%
Standard & Poor's Index
of 500 Common Stocks 15.46% 15.28% 15.22% 22.96%
<FN>
- --------
* The Portfolio commenced operations on October 2, 1986.
</FN>
</TABLE>
Additional information regarding the investment performance of the Portfolio
appears in the Prospectus.
- 29 -
<PAGE>
Total Return for the Portfolio
Total return quotations for the Portfolio are computed by finding the
average annual compounded rates of return over the relevant periods that
would equate the initial amount invested to the ending redeemable value,
according to the following equation:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value (at the end of the applicable period of
a hypothetical $1,000 payment made at the beginning of the applicable
period).
The total return quotation calculations for the Portfolio reflect the
deduction of a proportionate share of the Portfolio's investment advisory fee
and Portfolio expenses and assume that all dividends and capital gains during
the period are reinvested in the Portfolio when made. The calculations also
assume a complete redemption as of the end of the particular period.
TAXES
Shares of the Portfolio are offered to the Separate Account of PFL that
funds the Contracts. See the prospectus for the Contract for a discussion of
the special taxation of insurance companies with respect to the Separate
Account and the Contract, and the owners thereof.
The Portfolio has qualified and expects to continue to qualify as a
regulated investment company ("RIC") under the Internal Revenue Code of 1986,
as amended (the "Code"). In order to qualify for that treatment, the Portfolio
must distribute to its Contract Owners for each taxable year at least 90% of
its investment company taxable income (consisting generally of net investment
income, net short-term capital gain, and net gains from certain foreign
currency transactions) ("Distribution Requirement") and must meet several
additional requirements. These requirements include the following: (1) the
Portfolio must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of securities or foreign currencies, or other
income (including gains from options, futures or forward contracts) derived
with respect to its business of investing in securities or those currencies
("Income Requirement"); (2) the Portfolio must derive less than 30% of its
gross income each taxable year from the sale or other disposition of
securities, or any of the following, that were held for less than three
months--options, futures or forward contracts (other than those on foreign
currencies), or foreign currencies (or options, futures or forward contracts
thereon) that are not directly related to the Portfolio's principal business
of investing in securities (or options and futures with respect thereto)
("Short-Short Limitation"); (3) at the close of each quarter of the
Portfolio's taxable year, at least 50% of the value of its total assets must
be represented by cash and cash items, U.S. Government securities, securities
of other RICs, and other securities that, with respect to any one issuer, do
not exceed 5% of the value of the Portfolio's total assets and that do not
represent more than 10% of the outstanding voting securities of the issuer;
and (4) at the close of each quarter of the Portfolio's taxable year, not more
than 25% of the value of its total assets may be invested in securities (other
than U.S. Government securities or the securities of other RICs) of any one
issuer.
As noted in the Prospectus, the Portfolio must, and intends to, comply with
the diversification requirements imposed by section 817(h) of the Code and the
regulations thereunder. These
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<PAGE>
requirements, which are in addition to the diversification requirements
mentioned above, place certain limitations on the proportion of the
Portfolio's assets that may be represented by any single investment (which
includes all securities of the same issuer). For purposes of section 817(h),
all securities of the same issuer, all interests in the same real property
project, and all interests in the same commodity are treated as a single
investment. In addition, each U.S. Government agency or instrumentality is
treated as a separate issuer, while a particular foreign government and its
agencies, instrumentalities and political subdivisions all are considered the
same issuer. For information concerning the consequences of failure to meet
the requirements of section 817(h), see the respective prospectus for the
Contract.
The Portfolio will not be subject to the 4% Federal excise tax imposed on
RICs that do not distribute substantially all their income and gains each
calendar year because that tax does not apply to a RIC whose only shareholders
are segregated asset accounts of life insurance companies held in connection
with variable annuity contracts and/or variable life insurance policies.
Dividends and interest received by the Portfolio may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and foreign countries generally do not impose taxes on capital gains
in respect of investments by foreign investors.
The Portfolio may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive
or (2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, the Portfolio will
be subject to Federal income tax on a portion of any "excess distribution"
received on the stock of a PFIC or of any gain on disposition of that stock
(collectively "PFIC income"), plus interest thereon, even if the Portfolio
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Portfolio's investment
company taxable income and, accordingly, will not be taxable to it to the
extent that income is distributed to its shareholders. If the Portfolio
invests in a PFIC and elects to treat the PFIC as a "qualified electing fund,"
then in lieu of the foregoing tax and interest obligation, the Portfolio will
be required to include in income each year its pro rata share of the qualified
electing fund's annual ordinary earnings and net capital gain (the excess of
net long-term capital gain over net short-term capital loss), even if they are
not distributed to the Portfolio; those amounts would be subject to the
Distribution Requirement. In most instances it will be very difficult, if not
impossible, to make this election because of certain requirements thereof.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith by the
Portfolio. Income from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and income from
transactions in options, futures and forward contracts derived by the
Portfolio with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures, and forward contracts
on foreign currencies, that are not directly related to the Portfolio's
principal business of investing in securities (or options and futures with
respect thereto) also will be subject to the Short-Short Limitation if they
are held for less than three months.
If the Portfolio satisfies certain requirements, any increase in value on a
position that is part of a "designated hedge" will be offset by any decrease
in value (whether realized or not) of the
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<PAGE>
offsetting hedging position during the period of the hedge for purposes of
determining whether the Portfolio satisfies the Short-Short Limitation. Thus,
only the net gain (if any) from the designated hedge will be included in gross
income for purposes of that limitation. The Portfolio intends that, when it
engages in hedging transactions, they will qualify for this treatment, but at
the present time it is not clear whether this treatment will be available for
all of the Portfolio's hedging transactions. To the extent this treatment is
not available, the Portfolio may be forced to defer the closing out of certain
options and futures contracts beyond the time when it otherwise would be
advantageous to do so, in order for the Portfolio to qualify as a RIC.
The foregoing is only a general summary of some of the important Federal
income tax considerations generally affecting the Portfolio and its Owners. No
attempt is made to present a complete explanation of the Federal tax treatment
of the Portfolio's activities, and this discussion and the discussion in the
prospectus or statement of additional information for the Contract 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 Contract 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 of the Fund.
REGISTRATION STATEMENT
The Fund has filed with the Securities and Exchange Commission, Washington,
D.C., a Registration Statement under the Securities Act of 1933, as amended,
with respect to the securities to which this Statement of Additional
Information relates. If further information is desired with respect to the
Portfolio or such securities, reference is made to the Registration Statement
and the exhibits filed as part thereof.
FINANCIAL STATEMENTS
The audited financial statements for the Portfolio described in this
Statement of Additional Information for the year ended December 31, 1996 and
the report of the Fund's independent accountants are included in the Fund's
1996 Annual Report and are incorporated herein by reference to such Report. A
copy of the Annual Report may be obtained without charge upon request.
OTHER INFORMATION
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, located at 1055 Broadway, 10th Floor, Kansas City,
Missouri 64105, serves as the Fund's independent accountants. The Fund has
engaged Price Waterhouse LLP to examine, in accordance with generally accepted
auditing standards, its annual report. In addition, Price Waterhouse LLP signs
the tax returns for the Portfolio of the Fund.
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.
- 32 -
<PAGE>
APPENDIX A
DESCRIPTION OF PORTFOLIO SECURITIES
The following is intended only as a supplement to the information contained
in the Prospectus and should be read only in conjunction with the Prospectus.
Terms defined in the Prospectus and not defined herein have the same meanings
as those in the Prospectus.
1. Certificate of Deposit.* A certificate of deposit generally is a short-
term, interest bearing negotiable certificate issued by a commercial bank or
savings and loan association against funds deposited in the issuing
institution.
2. Eurodollar Certificate of Deposit.* A Eurodollar certificate of deposit is
a short-term obligation of a foreign subsidiary of a U.S. bank payable in U.S.
dollars.
3. Floating Rate Note.* A floating rate note is debt issued by a corporation
or commercial bank that is typically several years in term but whose interest
rate is reset every one to six months.
4. Time Deposit.* A time deposit is a deposit in a commercial bank for a
specified period of time at a fixed interest rate for which a negotiable
certificate is not received.
5. Bankers' Acceptance.* A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower, usually in connection with international
commercial transactions (to finance the import, export, transfer or storage of
goods). The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity.
6. Variable Amount Master Demand Note.* A variable amount master demand note
is a note which fixes a minimum and maximum amount of credit and provides for
lending and repayment within those limits at the discretion of the lender.
Before investing in any variable amount master demand notes, the Portfolio
will consider the liquidity of the issuer through periodic credit analysis
based upon publicly available information.
7. Commercial Paper.* Commercial paper is a short-term promissory note issued
by a corporation primarily to finance short-term credit needs.
8. Repurchase Agreement.* A repurchase agreement is an instrument under which
the Portfolio acquires ownership of a debt security and the seller agrees to
repurchase the obligation at a mutually agreed upon time and price. The total
amount received on repurchase is calculated to exceed the price paid by the
Portfolio, reflecting an agreed upon market rate of interest for the period
from the time of the Portfolio's purchase of the security to the settlement
date (i.e., the time of repurchase), and would not necessarily relate to the
interest rate on the underlying securities. The Portfolio will only enter into
repurchase agreements with respect to underlying securities consisting of U.S.
Government or government agency securities, certificates of deposit,
commercial paper or bankers' acceptances, and will be entered only with
primary dealers. While the Portfolio may invest in repurchase agreements for
periods up to 30 days, it is expected that typically such periods will be for
a week or less. The staff of the Securities and Exchange Commission has taken
the position that repurchase agreements of greater than seven days together
with other illiquid investments should be limited to an amount not in excess
of 15% of the Portfolio's net assets.
Although repurchase transactions usually do not impose market risks on the
purchaser, the Portfolio would be subject to the risk of loss if the seller
fails to repurchase the securities for any
- --------
* Short-term Securities.
A-1
<PAGE>
reason and the value of the securities is less than the agreed upon repurchase
price. In addition, if the seller defaults, the Portfolio may incur
disposition costs in connection with liquidating the securities. Moreover, if
the seller is insolvent and bankruptcy proceedings are commenced, under
current law, the Portfolio could be ordered by a court not to liquidate the
securities for an indeterminate period of time and the amount realized by the
Portfolio upon liquidation of the securities may be limited.
9. Reverse Repurchase Agreement. A reverse repurchase agreement involves the
sale of securities held by the Portfolio, with an agreement to repurchase the
securities at an agreed upon price, date and interest payment. The Portfolio
will use the proceeds of the reverse repurchase agreements to purchase other
money market securities maturing, or under an agreement to resell, at a date
simultaneous with or prior to the expiration of the reverse repurchase
agreement. The Portfolio will utilize reverse repurchase agreements when the
interest income to be earned from the investment of the proceeds from the
transaction is greater than the interest expense of the reverse repurchase
transaction.
10. Asset-Backed Securities. The Portfolio may invest in securities backed by
automobile receivables and credit-card receivables and other securities backed
by other types of receivables or other assets. Credit support for asset-backed
securities may be based on the underlying assets and/or provided through
credit enhancements by a third party. Credit enhancement techniques include
letters of credit, insurance bonds, limited guarantees (which are generally
provided by the issuer), senior-subordinated structures and over-
collateralization. The Portfolio will only purchase an asset-backed security
if it is rated at least "A" by S&P or Moody's.
11. Mortgage-Backed Securities. The Portfolio may purchase mortgage-backed
securities issued by government and non-government entities such as banks,
mortgage lenders, or other financial institutions. Mortgage-backed securities
include mortgage pass-through securities, mortgage-backed bonds, and mortgage
pay-through securities. A mortgage pass-through security is a pro-rata
interest in a pool of mortgages where the cash flow generated from the
mortgage collateral is passed through to the security holder. Mortgage-backed
bonds are general obligations of their issuers, payable out of the issuers'
general funds and additionally secured by a first lien on a pool of mortgages.
Mortgage pay-through securities exhibit characteristics of both pass-through
and mortgage-backed bonds. Mortgage-backed securities also include other debt
obligations secured by mortgages on commercial real estate or residential
properties. Other types of mortgage-backed securities will likely be developed
in the future, and the Portfolio may invest in them if it is determined they
are consistent with the Portfolio's investment objective and policies.
12. Collateralized Mortgage Obligations. (CMOs) are pay-through securities
collateralized by mortgages or mortgage-backed securities. CMOs are issued in
classes and series that have different maturities and often are retired in
sequence.
13. Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities
are created when the principal and interest payments of a mortgage-backed
security are separated by a U.S. Government agency or a financial institution.
The holder of the "principal-only" security receives the principal payments
made by the underlying mortgage-backed security, while the holder of the
"interest-only" security receives interest payments from the same underlying
security.
The value of mortgage-backed securities may change due to changes in the
market's perception of issuers. In addition, the mortgage securities market in
general may be adversely affected by regulatory or tax changes. Non-
governmental mortgage-backed securities may offer a higher yield than those
issued by government entities but also may be subject to greater price change
then government securities.
A-2
<PAGE>
Like most mortgage securities, mortgage-backed securities are subject to
prepayment risk. When prepayment occurs, unscheduled or early payments are
made on the underlying mortgages, which may shorten the effective maturities
of those securities and may lower their total returns. Furthermore, the prices
of stripped mortgage-backed securities can be significantly affected by
changes in interest rates as well. As interest rates fall, prepayment rates
tend to increase, which in turn tends to reduce prices of "interest-only"
securities and increase prices of "principal-only" securities. Rising interest
rates can have the opposite effect.
14. Zero Coupon Bonds. Zero coupon bonds are created three ways:
1) U.S. TREASURY STRIPS (Separate Trading of Registered Interest and
Principal of Securities) are created when the coupon payments and the
principal payment are stripped from an outstanding Treasury bond by the
Federal Reserve Bank. Bonds issued by the Resolution Funding Corporation
(REFCORP) and the Financial Corporation (FICO) also can be stripped in
this fashion.
2) STRIPS are created when a dealer deposits a Treasury Security or a
Federal agency security with a custodian for safe keeping and then sells
the coupon payments and principal payments that will be generated by
this security separately. Proprietary receipts, such as Certificates of
Accrual on Treasury Securities (CATS), Treasury Investment Growth
Receipts (TIGRS), and generic Treasury Receipts (TRs), are stripped U.S.
Treasury securities separated into their component parts through
custodial arrangements established by their broker sponsors. FICO bonds
have been stripped in this fashion. The Portfolio has been advised that
the staff of the Division of Investment Management of the Securities and
Exchange Commission does not consider such privately stripped
obligations to be U.S. Government securities, as defined by the 1940
Act. Therefore, the Portfolio will not treat such obligations as U.S.
Government securities for purposes of the 65% portfolio composition
ratio.
3) ZERO COUPON BONDS can be issued directly by Federal agencies and
instrumentalities, or by corporations. Such issues of zero coupon bonds
are originated in the form of a zero coupon bond and are not created by
stripping an outstanding bond.
Zero coupon bonds do not make regular interest payments. Instead they are
sold at a deep discount from their face value. Because a zero coupon bond does
not pay current income, its price can be very volatile when interest rates
change. In calculating its dividends, the fund takes into account as income a
portion of the difference between a zero coupon bond's purchase price and its
face value.
A-3
<PAGE>
APPENDIX B
DESCRIPTION OF SELECTED CORPORATE BOND AND
COMMERCIAL PAPER RATINGS
CORPORATE BONDS--MOODY'S INVESTORS SERVICE, INC.
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large, or by an
exceptionally stable, margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position on such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements and
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safe-guarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Unrated--Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
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CORPORATE BONDS--STANDARD & POOR'S CORPORATION
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they exhibit an adequate degree of protection,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC and CC--Bonds rated BB, B, CCC and CC are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation. While such bonds will likely
have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-)--The ratings from "AA" to "BBB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Unrated--Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate
a particular type of obligation as a matter of policy.
COMMERCIAL PAPER--MOODY'S INVESTORS SERVICE, INC.
"Prime-1"--Commercial paper issuers rated Prime-1 are judged to be of the
best quality. Their short-term debt obligations carry the smallest degree of
investment risk. Margins of support for current indebtedness are large or
stable with cash flow and asset protection well assured. Current liquidity
provides ample coverage of near-term liabilities and unused alternative
financing arrangements are generally available. While protective elements may
change over the intermediate or longer term, such changes are most unlikely to
impair the fundamentally strong position of short-term obligations.
"Prime-2"--Issuers in the Commercial Paper market rated Prime-2 are high
quality. Protection for short-term holders is assured with liquidity and value
of current assets as well as cash generation in sound relationship to current
indebtedness. They are rated lower than the best commercial paper issuers
because margins of protection may not be as large or because fluctuations of
protective elements over the near or immediate term may be of greater
amplitude. Temporary increases in relative short and overall debt load may
occur. Alternative means of financing remain assured.
COMMERCIAL PAPER--STANDARD & POOR'S CORPORATION
"A"--Issues assigned this highest rate are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designation 1, 2 and 3 to indicate the relative degree of safety.
"A-1"--This designation indicates that the degree of safety regarding timely
payment is very strong.
"A-2"--Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not overwhelming as for
issues designated "A-1".
"A-3"--Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designation.
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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 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), Growth
& Income (formerly Utility), Aggressive Growth, Tactical Asset
Allocation, C.A.S.E. Growth, Global Sector and Value Equity
Portfolios (filed 2/27/97 with the SEC pursuant to Rule 30b2-1
-Accession Number 0001016843-97-000103); US Sector, Foreign
Sector (filed 2/27/97 with the SEC pursuant to Rule 30b2-1
Accession Number - 0001016843-97-000107); and C.A.S.E. Quality
Growth and C.A.S.E. Growth & Income Portfolio (filed 2/27/97
with the SEC pursuant to Rule 30b2-1 - Accession Number -
0001016843-97-000104). (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
Prospectuses for the Portfolios (except International Equity
Portfolio and U.S. Equity Portfolio). (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. (3)
(I) Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (3)
(J) Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc.
2. Bylaws of WRL Series Fund, Inc. (3)
3. Not applicable.
4. Not applicable.
5. (i) Form of Investment Advisory Agreement on behalf of the
Portfolios of the WRL Series Fund, Inc. with WRL
Investment Management, Inc.
(ii) Form of Sub-Advisory Agreement on behalf of the Growth,
Bond and Global Portfolios of the Fund. (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)
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(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)
(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 Sub-Advisory Agreement on behalf of the US
Sector, Global Sector and Foreign Sector Portfolios of
the Fund.
(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. (3)
6. Form of Distribution Agreement. (4)
7. Director's Deferred Compensation Plan. (2)
8. Form of 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. (1)
11. Consent of Price Waterhouse LLP.
12. Not applicable.
13. Not applicable.
14. Not applicable.
15. Proposed Plan of Distribution. (4)
16. Schedules for Computations of Performance Quotations.
17. Financial Data Schedules.
18. Powers of Attorney. (1)
- ---------------------
(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.
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, Balanced, Aggressive Growth, Emerging Growth,
Short-to-
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Intermediate Government, Growth & Income, International Equity, U.S.
Equity and Tactical Asset Allocation Portfolio Common Stock are sold to Pooled
Account No. 27 established by AUSA Life Insurance Company, Inc.
Item 26. NUMBER OF HOLDERS OF SECURITIES.
-------------------------------
(2)
(1) NUMBER OF RECORD HOLDERS
TITLE OF CLASS AS OF APRIL 10, 1997
-------------- ------------------------
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 ($.01 par value) 3
Strategic Total Return Portfolio
(formerly Equity-Income)
Common Stock ($.01 par value) 3
Balanced Portfolio
Common Stock ($.01 par value) 3
Growth & Income Portfolio
(formerly Utility)
Common Stock ($.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
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against any liability to the corporation or to its security holders to
which he would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office ("disabling conduct"). No
indemnification of a director, officer or employee shall be made
pursuant to the preceding sentence unless there has been (a) a final
decision on the merits by a court or other body before whom the
proceeding was brought that the person to be indemnified ("indemnity")
was not liable by reason of disabling conduct or (b) in the absence of
such a decision, a reasonable determination, based upon a review of the
facts, that the indemnity was not liable by reason of disabling conduct
by (i) the vote of a majority of a quorum of directors who are neither
"interested persons" of the corporation, as defined in Section 2(a)(19)
of the Investment Company Act of 1940, nor parties to the proceeding
("non-interested, non-party directors"), or (ii) an independent legal
counsel in a written opinion. Reasonable expenses incurred by each such
director, officer or employee may be paid by the corporation in advance
of the final disposition of any proceeding to which such person is a
party, to the full extent and under the circumstances permitted by
Maryland law, provided that such person undertakes to repay the advance
unless it is ultimately determined that he is entitled to
indemnification and either (i) he provides security for his
undertaking, (ii) the corporation is insured against losses by reason
of any lawful advances or (iii) a majority of a quorum of the
non-interested, non-party directors, or an independent legal counsel in
a written opinion, determines, based on a review of readily available
facts, and there is reason to believe that such person ultimately will
be found entitled to indemnification. The corporation may purchase and
maintain insurance on behalf of any person who is or was a director,
officer or employee of the corporation against any liability asserted
against and incurred by such person in any such capacity or arising out
of such person's position, whether or not the corporation would have
the power to indemnify against such liability under the provisions of
this Article VI.
RULE 484 UNDERTAKING
Insofar as indemnification for liability arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
A. WRL INVESTMENT MANAGEMENT, INC.
WRL Investment Management, Inc. ("WRL Management") is principally
engaged in offering investment advisory services.
The only business, professions, vocations or employments of a
substantial nature of Messrs. Kenney, Hurley and Yaeger, directors
of WRL Management, are described in the Statement of Additional
Information under the section entitled "Management of the Fund."
Additionally, the following describes the principal occupations of
other persons who serve as executive officers of WRL Management:
Kenneth P. Beil, President and Treasurer, is Assistant Vice
President and Principal Accounting Officer of the WRL Series Fund,
Inc. and is Vice President and Assistant Treasurer of Western
Reserve Life Assurance Co. of Ohio; and Thomas E. Pierpan, Esq.,
Vice President and Secretary, is Vice President and Assistant
Secretary of the WRL Series Fund, Inc. and Vice President,
Associate General 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.
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Janus Capital Corporation also serves as sub-adviser to certain of
the mutual funds within the IDEX Group and as investment adviser
or sub-adviser to other mutual funds, and for private and
retirement accounts. Thomas H. Bailey, Trustee, Chairman and
President of Janus Investment Fund and Janus Aspen Series,
Chairman, Director and President of the Sub-Adviser and Chairman
and Director of IDEX Management, Inc., has no business,
profession, vocation or employment of a substantial nature other
than his positions with IDEX Management, Inc. and Janus Capital
Corporation. James P. Craig, Executive Vice President and Trustee
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., Vice President
Secretary, and Director of Janus Capital International Ltd. 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 and is President of Seaport Venture, Inc., (Venture
Capital). 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 and President
of Kansas City Royals Baseball Team. Thomas A. McDonnell, a
Director of Janus Capital Corporation, is President, Director and
Treasurer 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 and Director of
First Michigan Capital Corp., 100 Renaissance Center, Detroit, MI,
a broker-dealer and investment adviser. 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, Chief Financial Officer 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., Director of Janus Distributors, Inc. and IDEX Management,
Inc. and Vice President of Finance, Treasurer, Chief Financial
Officer and Director of Janus Capital International Ltd. Sandy R.
Rufenacht, Executive Vice President of Janus Investment Fund and
Aspen Series, and Assistant Vice President of Janus Capital. 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; Jean
L.P. Brunel, Director; William L. Cobb, Jr., Vice Chairman,
Director and Managing Director; Michael R. Granito, Director and
Managing Director; Thomas M. Luddy, Director, Managing Director
and Chief Investment Officer; Michael E. Patterson, Director (J.P.
Morgan & Co. Incorporated, 60 Wall Street, New York, NY
10260-0060); C. Nicholas Potter, Chairman of the Board (J.P.
Morgan & Co. Incorporated, 60 Wall Street, New York, NY
10260-0060); Keith M. Schappert, President, Director, Managing
Director and Chief Executive Officer; M. Steven Soltis, Director,
Managing Director, and Chief Financial Officer; John R. Thomas,
Director (J.P. Morgan Trust Bank Ltd., Akasaka Park Building 2-20,
Akasaka 5-chome, Minato-ku, Tokyo, Japan).
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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 has
assumed all of the investment advisory functions of AEGON USA
Securities, Inc. ("AEGON Securities"). AIMI and AEGON Securities,
Inc., wholly-owned subsidiaries 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., Cedar Income Fund, Ltd., 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") and PFL Life Insurance Company ("PFL
Life"), Director and Senior Vice President of AUSA Holding
Company, Director of AEGON USA Realty Advisors Inc., AEGON USA
Securities, 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., 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, Treasurer and Vice President of First
AUSA, LIICA, and Monumental Life, Director, Cashier and Treasurer
of Massachusetts Fidelity Trust Company, and Director of AEGON USA
Securities Inc., Senior Vice President, Controller and Treasurer
of Cadet Holding Corp., Vice President and Controller of AEGON
USA, Inc., Vice President, Treasurer and Chief Financial Officer
of Bankers United, PFL Life and Western Reserve and Director,
AEGON USA Realty Advisors, Inc., Treasurer AUSA Holding Company,
AUSA Life and Zahorik Company, Inc., Vice President, Treasurer,
Investor Warranty and Money Services and Vice President of Western
Reserve, Treasurer of Zahorik Company, Inc.; Craig D. Vermie,
Director and Secretary of AEGON Management Company, AEGON USA
Charitable Foundation, Inc., AUSA Holding Corp., Cadet Holding
Corp., and Massachusetts Fidelity Trust Company, Director,
Secretary, Vice President and General Counsel of Bankers United,
LICA and PFL Life, Director, Secretary and Vice President of
Investors Warranty of America, Inc., Director, Vice President,
General Counsel and Assistant Secretary of Monumental Life,
Director, Vice President and Assistant Secretary of Monumental
General and Zahoril Company, Inc., Director and Vice President of
The Whitestone Corporation, Director and Assistant Secretary of
Creditor Resources, Inc., Monumental General Insurance Group, Inc.
and Monumental General Mass Marketing, Inc., Director of AIMI,
AUSA Financial Markets, Inc., AUSA Institutional Marketing Group,
Inc., CORPA Reinsurance Company, Executive Management & Consultant
Services, Inc., Monumental General Administrators, Inc., Short
Hills Management Company, United Financial Services, Inc., Vice
President and General Counsel of AEGON USA, Inc., Vice President
and Assistant Secretary of Western Reserve, Secretary of AUSA
Life, Money Services, Inc. Supplemental Insurance Division, Inc.
and United Financial Services, Inc., Assistant Secretary of AEGON
USA Realty Advisors Inc., Bankers Financial Life Insurance Company
and ZCI, 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, 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 Executive Vice
President of AIMI, Vice President of LIICA, Monumental Life, PFL
Life, AUSA Life, Bankers United, First AUSA, Monumental General
and Western Reserve; Clifford A. Sheets is Executive Vice
President of AIMI, and Vice President of AUSA Life, First AUSA,
Monumental General, Western Reserve, Bankers United, LIICA,
Monumental Life and PFL Life; Ralph M. O'Brien is a Senior Vice
President of AIMI, Vice President of AEGON USA
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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 Senior 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,
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, 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; Robert L.
Hansen is Vice President of AIMI, AUSA Life, Bankers United, First
AUSA, LIICA, Monumental General, Monumental Life, PFL Life, and
Western Reserve; Frederick A. Sabetta is Vice President of , AUSA
Life, Bankers United, First AUSA, LIICA, Monumental General,
Monumental Life, PFL Life, and Western Reserve; Rachel A. Dennis,
David M. Carney, Steven P. Opp, Thomas A. Keel, Daniel H.
Thatcher, James E. Fine, Thomas E. Myers and Drew E. Washburn are
also Vice Presidents of AIMI; Bradley J. Beman and Mary T. Pech
are each an Assistant Vice President of AIMI; Robert S. Jeff is
Assistant Secretary 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: 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,
Steven R. Purvis, Timothy E. Harris, 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. GROWTH & INCOME 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.
C-7
<PAGE>
The Sub-Adviser serves as investment adviser to a number of
investment companies and private accounts. Total assets under
management or administered by the Sub-Adviser and other
subsidiaries of Federated Investors is approximately $110 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); 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, J. Alan Minteer and Charles A. Ritter, Senior Vice
Presidents; G. Michael Cullen, Michael P. Donnelly, Donald T.
Ellerberger, Edward C. Gonzales, Stephen A. Keen, Robert K. Kinsey
and Christopher J. Smith, 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.
C-8
<PAGE>
I. TACTICAL ASSET ALLOCATION PORTFOLIO: SUB-ADVISER - DEAN INVESTMENT
ASSOCIATES
Dean Investment Associates ("Dean"), the Sub-Adviser to the
Tactical Asset Allocation Portfolio, is a division of C.H. Dean
and Associates, Inc. Dean is the money management division of C.H.
Dean and Associates, Inc. Dean became a registered investment
adviser in October, 1972 and will assume all of the investment
advisory functions. C.H. Dean and Associates is a Nevada
corporation (6/30/95) which was an Ohio corporation originally
incorporated on March 28, 1975.
Chauncey H. Dean is the Chairman and Chief Executive Officer;
Dennis D. Dean is President; Frank H. Scott is Senior Vice
President; John C. Riazzi is Vice President and Director of
Consulting Services; Robert D. Dean is Vice President and Director
of Research; Richard M. Luthman is Senior Vice President; Darrell
N. Fulton is Vice President of Information Systems. The business
address of each of the Officers of the Sub-Adviser is 2480
Kettering Tower, Dayton, Ohio 45423-2480.
J. C.A.S.E. QUALITY GROWTH PORTFOLIO, C.A.S.E. GROWTH & INCOME
PORTFOLIO AND C.A.S.E. GROWTH PORTFOLIO (THE "PORTFOLIOS"):
SUB-ADVISER - C.A.S.E. MANAGEMENT, INC.
C.A.S.E. Management, Inc. ("C.A.S.E."), the Sub-Adviser to the
Portfolios, is a registered investment advisory firm and a
wholly-owned subsidiary of C.A.S.E. Inc. C.A.S.E. Inc. is
indirectly controlled by William Edward Lange, President and Chief
Executive Officer of C.A.S.E. C.A.S.E. provides investment
management services to financial institutions, high net worth
individuals, and other professional money managers.
William E. Lange is the President, Chief Executive Officer and
Founder; Robert G. Errigo, Investment Committee Board Member; John
Gordon, Investment Committee Board Member; Bruce H. Jordan, Senior
Vice President and James M. LaBonte, Chief Operating Officer;
William Fagon, Senior Vice President Marketing; Richard Wells,
Senior Vice President Marketing; and Robert Hardy, Marketing
Director. The business address of each of the Officers of the
Sub-Adviser is 2255 Glades Road, Suite 221-A, Boca Raton, Florida
33431.
K. INTERNATIONAL EQUITY PORTFOLIO: CO-SUB-ADVISERS - SCOTTISH
EQUITABLE INVESTMENT MANAGEMENT LIMITED AND GE INVESTMENT
MANAGEMENT INCORPORATED
Scottish Equitable Investment Management Limited ("Scottish
Equitable") serves as a Co-Sub-Adviser to the International Equity
Portfolio. See "Management of the Fund - The Co-Sub-Advisers" in
the Prospectus and Statement of Additional Information for
regarding the business of Scottish Equitable. Scottish Equitable
is a wholly owned subsidiary of Scottish Equitable plc.
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:
William W. Stewart, Chairman of the Board and Executive Director,
Strategy; Russell Hogan, Investment Development Director; Roy
Patrick, Director and Company Secretary; Paul N. Ritchie, Director
and Investment Administration Manager; Otto Thoresen, Director,
International Business.
None of these Directors or Officers has any substantial business,
profession, vocation or employment other than their positions with
Scottish Equitable, Scottish Equitable plc and other group
companies.
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 executive
officers of GEIC are: John H. Myers, Chairman, Director and CEO;
Michael J. Cosgrove, Executive Vice President, Alan M. Lewis,
Executive Vice President and General Counsel; Robert A.
MacDougall, 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.
C-9
<PAGE>
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,
Penthouse, 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
Officer 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, Chief
Investment Officer; Edward C. Friedel, Jr., Managing Director; Jon
D. Bosse, Managing Director/Director Equity Research; James H.
Galbreath (Denver), Managing Director; Mary-Gene Slaven,
Secretary/Treasurer & Managing Director; James P. Owen, Managing
Director; Michael C. Mendez (Scottsdale, AZ), Managing Director;
Phyllis G. Thomas, Managing Director; Louis T. Chambers, Vice
President, Justin T. Clifford, Managing Director; Jeffrey M.
Cohen, Vice President; Ronald R. Halverson (Minneapolis, MN), Vice
President; Thomas J. Laird, Managing Director, 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 executive
officers of GEIC are: John H. Myers, Chairman, Director and CEO;
Michael J. Cosgrove, Executive Vice President, Alan M. Lewis,
Executive Vice President and General Counsel; Robert A.
MacDougall, Executive Vice President; Eugene K. Bolton, Executive
Vice President; Donald W. Torey, Executive Vice President and
Ralph R. Layman, Executive Vice President. All of these officers
and/or directors have no substantial business, profession,
vocation or employment other than their positions with GEIM and/or
its subsidiaries and affiliates.
Item 29. PRINCIPAL UNDERWRITERS.
(a) The Registrant has entered into a Distribution Agreement with
InterSecurities, Inc. ("ISI"), whose address is P.O. Box 9053,
Clearwater, FL 34618-9053, to act as the principal underwriter of
Fund Shares. ISI also serves as an investment adviser and
principal underwriter to the Idex Funds 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)
NAME AND PRINCIPAL BUSINESS POSITIONS AND OFFICES WITH POSITIONS AND OFFICES WITH
ADDRESS UNDERWRITER REGISTRANT
--------------------------- -------------------------- --------------------------
<S> <C> <C>
John R. Kenney* Chairman and Director Chairman and President
G. John Hurley* Director, President and CEO Director and Executive
Vice President
Rebecca A. Ferrell* Assistant Vice President, Secretary, Vice President
Counsel and Assistant and Counsel
Secretary
William H. Geiger* Director and Secretary Vice President and
Assistant Secretary
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.
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. certifies that it meets all of the requirements for effectiveness of this
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post Effective Amendment No. 28 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 17th day of April,
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. 28 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 April 17, 1997
- -------------------------------------
Chairman of the Board and President
John R. Kenney
/s/ G. JOHN HURLEY April 17, 1997
- -------------------------------------
Executive Vice President and Director
G. John Hurley
/s/ PETER R. BROWN April 17, 1997
- -------------------------------------
Director - Peter R. Brown *
/s/ CHARLES C. HARRIS April 17, 1997
- -------------------------------------
Director - Charles C. Harris*
/s/ RUSSELL A. KIMBALL, JR. April 17, 1997
- -------------------------------------
Director - Russell A. Kimball, Jr. *
<PAGE>
/s/ ALLAN J. HAMILTON April 17, 1997
- -----------------------------------------
Treasurer and Principal Financial Officer
Allan J. Hamilton
/s/ KENNETH P. BEIL April 17, 1997
- -----------------------------------------
Vice President and
Principal Accounting Officer
Kenneth P. Beil
/s/ THOMAS E. PIERPAN
- -----------------------------------------
* Signed by Thomas E. Pierpan
as Attorney-in-fact
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS FILED WITH
POST-EFFECTIVE AMENDMENT NO. 28 TO
REGISTRATION STATEMENT
ON FORM N-1A
WRL SERIES FUND, INC.
REGISTRATION NO. 33-507
<PAGE>
Exhibit Index
EXHIBIT DESCRIPTION
NO. OF EXHIBIT
- ------- -----------
1. (J) Articles Supplementary to Articles of Incorporation of WRL Series
Fund, Inc.
5. (i) Form of Investment Advisory Agreement on behalf of the Portfolios of
the WRL Series Fund, Inc. with WRL Investment Management, Inc.
5. (xi) Form of Sub-Advisory Agreement on behalf of the US Sector, Global
Sector and Foreign Sector Portfolios of theFund.
11. Consent of Price Waterhouse LLP.
16. Schedules for Computations of Performance Quotations
17. Financial Data Schedule.
EXHIBIT 1 (J)
ARTICLES OF INCORPORATION OF WRL SERIES FUND, INC.
<PAGE>
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
WRL SERIES FUND, INC.
WRL SERIES FUND, INC., a Maryland corporation ("Corporation"), on
behalf of its Board of Directors ("Directors"), hereby certifies to the Maryland
Department of Assessments and Taxation as follows:
FIRST: The Corporation is registered as an open-end investment company
under the Investment Company Act of 1940, as amended.
SECOND: Pursuant to Article V, Paragraph 1 of the Corporation's
Articles of Incorporation, the Corporation is authorized to issue One Billion
(1,000,000,000) shares of Common Stock having a par value of one cent ($0.01)
per share and the aggregate par value of $10,000,000 ("Shares") which are
classified in the Corporation's Articles of Incorporation as follows: Three
Hundred Million (300,000,000) of the Shares are designated as Money Market
Portfolio Common Stock; Twenty-Five Million (25,000,000) of the Shares are
designated as Bond Portfolio Common Stock; and Six Hundred Seventy-five Million
(675,000,000) of the Shares are designated as Growth Portfolio Common Stock.
THIRD: Pursuant to the Corporation's Articles Supplementary to Articles
of Incorporation filed on November 25, 1992, the Shares were reclassified as
follows: Three Hundred Million (300,000,000) of the Shares are designated as
Money Market Portfolio Common Stock; Twenty-Five Million (25,000,000) of the
Shares are designated as Bond Portfolio Common Stock; and Two Hundred
Seventy-five Million (275,000,000) of the Shares are designated as Growth
Portfolio Common Stock; One Hundred Million (100,000,000) of the Shares are
designated as Global Portfolio Common Stock; One Hundred Million (100,000,000)
of the Shares are designated as Short-to-Intermediate Government Portfolio
Common Stock; One Hundred Million (100,000,000) of the Shares are designated as
Emerging Growth Portfolio Common Stock; and One Hundred Million (100,000,000) of
the Shares are designated as Equity-Income Portfolio Common Stock.
FOURTH: Pursuant to the Corporation's Articles Supplementary to
Articles of Incorporation filed on March 1, 1994, Shares were reclassified as
follows: One Hundred Fifty Million (150,000,000) of the authorized but unissued
Shares of the Growth Portfolio Common Stock were reclassified and designated as
follows: Seventy-five Million (75,000,000) were designated as Balanced Portfolio
Common Stock; and Seventy-five Million (75,000,000) were designated as Utility
Portfolio Common Stock. Seventy-five Million (75,000,000) of the authorized but
unissued Shares of the Money Market Portfolio Common Stock were reclassified and
designated as Aggressive Growth Portfolio Common Stock.
<PAGE>
FIFTH: Pursuant to the Corporation's Articles Supplementary to Articles
of Incorporation filed on September 2, 1994, Shares were reclassified as
follows: Seventy-five Million (75,000,000) of the authorized but unissued Shares
of the Money Market Portfolio Common Stock were reclassified and designated as
follows: Seventy-five Million (75,000,000) were designated as Tactical Asset
Allocation Portfolio Common Stock.
SIXTH: Pursuant to the Corporation's Articles Supplementary to Articles
of Incorporation filed on April 6, 1995, the Corporation increased the aggregate
number of shares of capital (common) stock which the Fund has authority to issue
from One Billion (1,000,000,000) Shares of the par value of one cent ($0.01) per
share and the aggregate par value of $10,000,000, to Two Billion (2,000,000,000)
Shares of the par value of one cent ($0.01) per share and the aggregate par
value of $20,000,000. Of the One Billion (1,000,000,000) shares newly authorized
by the Corporation, the Shares were classified as follows: Seventy-five Million
(75,000,000) of the Shares were designated as C.A.S.E. Quality Growth Portfolio
Common Stock; Seventy-five Million (75,000,000) of the Shares were designated as
C.A.S.E. Growth & Income Portfolio Common Stock; and Seventy-five Million
(75,000,000) of the Shares were designated as C.A.S.E. Growth Portfolio Common
Stock.
SEVENTH: Pursuant to the Corporation's Articles Supplementary to
Articles of Incorporation filed on July 14, 1995, shares of the authorized
capital (common) stock were classified as follows: Seventy-five Million
(75,000,000) of the Shares were designated as T. Rowe Price-WRL Equity Income
Portfolio Common Stock; Seventy-five Million (75,000,000) of the Shares were
designated as Leisure Portfolio Common Stock; Seventy-five Million (75,000,000)
of the Shares were designated as International Equity Portfolio Common Stock;
and Seventy-five Million (75,000,000) of the Shares were designated as Janus
Balanced Portfolio Common Stock.
EIGHTH: Pursuant to the Corporation's Articles Supplementary to
Articles of Incorporation filed on January 4, 1996, shares of the authorized
capital (common) stock were classified as follows: Seventy-five Million
(75,000,000) of the Shares were designated as Value Equity Portfolio Common
Stock; Seventy-five Million (75,000,000) of the Shares were designated as
Meridian/INVESCO Global Sector Portfolio Common Stock; Seventy-five Million
(75,000,000) of the Shares were designated as Meridian/INVESCO US Sector
Portfolio Common Stock; and Seventy-five Million (75,000,000) of the Shares were
designated as Meridian/INVESCO Foreign Sector Portfolio Common Stock.
NINTH: Pursuant to the Corporation's Articles Supplementary to Articles
of Incorporation filed on October 23, 1996, shares of the authorized capital
(common) stock were classified as follows: Seventy-five Million (75,000,000) of
the Shares were designated as U.S. Equity Portfolio Common Stock.
2
<PAGE>
TENTH: Pursuant to the Corporation's Articles Supplementary to Articles
of Incorporation filed on December 26, 1996, the authorized but unissued shares
of the Meridian/INVESCO Global Sector Portfolio Common Stock were designated as
Global Sector Portfolio Common Stock; the authorized capital (common) stock of
the Meridian/INVESCO US Sector Portfolio were designated as US Sector Portfolio
Common Stock; and the authorized capital (common) stock of the Meridian/INVESCO
Foreign Sector Portfolio Common Stock were designated as Foreign Sector Common
Stock.
ELEVENTH: The Board of Directors of the Corporation, at meetings duly
convened and held on March 3, 1997 and April 10, 1997, adopted resolutions
reclassifying the authorized but unissued shares of the Equity-Income Portfolio
Common Stock to be designated as Strategic Total Return Portfolio Common Stock
and the authorized but unissued shares of the Utility Portfolio to be designated
as Growth & Income Portfolio Common Stock.
TWELFTH: The Shares of Common Stock as so authorized and reclassified
by the Directors of the Corporation shall have the powers, preferences, and
rights, and qualifications, restrictions and limitations, specified in Article
V, Paragraph 4 of the Articles of Incorporation of the Corporation and shall be
subject to all its provisions relating to the stock of the Corporation.
THIRTEENTH: The aforesaid Shares of Common Stock have been duly
authorized and reclassified by the Directors pursuant to authority and power
contained in the Articles of Incorporation of the Corporation and in accordance
with Section 2-105(c) of the Maryland General Corporation Law.
IN WITNESS WHEREOF, the undersigned Chairman of the Board of Directors
of WRL Series Fund, Inc., hereby executes these Articles Supplementary on behalf
of the Corporation, acknowledges that these Articles Supplementary are the act
of the Corporation, and certifies that, to the best of his knowledge,
information and belief, all matters and facts set forth herein are true in all
material respects, under the penalties of perjury.
Date: April 17, 1997
WRL SERIES FUND, INC.
/s/ JOHN R. KENNEY
------------------
John R. Kenney
Chairman of the Board of Directors
and President
ATTEST:
/s/ PRISCILLA I. HECHLER
- ------------------------
Priscilla I. Hechler
Assistant Vice President
and Assistant Secretary
3
EXHIBIT 5(I)
FORM OF INVESTMENT ADVISORY AGREEMENT ON BEHALF OF THE
PORTFOLIOS OF THE WRL SERIES FUND
<PAGE>
WRL SERIES FUND, INC.
INVESTMENT ADVISORY AGREEMENT
This Agreement, entered into between WRL Series Fund, Inc., a Maryland
corporation (referred to herein as the "Fund"), and WRL Investment Management,
Inc., a Florida corporation (referred to herein as "WRL Management"), to provide
certain investment advisory services with respect to the series of shares of
common stock of the Fund.
The Fund is registered as an open-end investment company under the
Investment Company Act of 1940, as amended, (the "1940 Act") and consists of
more than one series of shares (the "Portfolios"). In managing its Portfolios,
the Fund wishes to have the benefit of the investment advisory services of WRL
Management and its assistance in performing certain management functions. WRL
Management desires to furnish such services to the Fund and to perform the
functions assigned to it under this Agreement for the considerations provided.
Schedule A lists the effective date and termination date of this Agreement for
each Portfolio of the Fund. Accordingly, the parties have agreed as follows:
1. INVESTMENT ADVISORY SERVICES. In its capacity as investment adviser
to the Fund, WRL Management shall have the following responsibilities:
(a) to furnish continuous advice and recommendations to the Fund as
to the acquisition, holding or disposition of any or all of the
securities or other assets which the Portfolios may own or
contemplate acquiring from time to time;
(b) to cause its officers to attend meetings and furnish oral or
written reports, as the Fund may reasonably require, in order to
keep the Board of Directors and appropriate officers of the Fund
fully informed as to the conditions of each investment portfolio of
the Portfolios, the investment recommendations of WRL Management,
and the investment considerations which have given rise to those
recommendations;
(c) to supervise the purchase and sale of securities of the
Portfolios as directed by the appropriate officers of the Fund; and
(d) to maintain all books and records required to be maintained by
the Investment Adviser pursuant to the 1940 Act and the rules and
regulations promulgated thereunder with respect to transactions on
behalf of the Fund. In compliance with the requirements of Rule
31a-3 under the 1940 Act, WRL Management hereby agrees: (i) that all
records that it maintains for the Fund are the property of the Fund,
(ii) to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act any records that it maintains for the Fund and that are
required to be maintained by Rule 31a-1 under the 1940 Act and (iii)
agrees to surrender promptly to the Fund any records that it
maintains for the Fund upon request by the Fund; provided, however,
WRL Management may retain copies of such records.
WRL Management shall pay all expenses incurred in connection with the
performance of its responsibilities under this Agreement. It is understood and
agreed that WRL Management may, and intends to, enter into Sub-Advisory
Agreements with duly registered investment advisers (the "Sub-Advisers") for
each Portfolio, under which each Sub-Adviser will, under the supervision of WRL
Management, furnish investment information and advice with respect to one or
more Portfolios to assist WRL Management in carrying out its responsibilities
under this Section 1. The compensation to be paid to each Sub-Adviser for such
services and the other terms and conditions under which the services shall
Page 1
<PAGE>
be rendered by the Sub-Adviser shall be set forth in the Sub-Advisory Agreement
between WRL Management and each Sub-Adviser; provided, however, that such
Agreement shall be approved by the Board of Directors and by the holders of the
outstanding voting securities of each Portfolio in accordance with the
requirements of Section 15 of the 1940 Act, and shall otherwise be subject to,
and contain such provisions as shall be required by the 1940 Act.
2. OBLIGATIONS OF THE FUND. The Fund shall have the following
obligations under this Agreement:
(a) to keep WRL Management continuously and fully informed as to the
composition of each Portfolio's investment securities and the nature
of all of its assets and liabilities from time to time;
(b) to furnish WRL Management with a certified copy of any financial
statement or report prepared for each Portfolio by certified or
independent public accountants, and with copies of any financial
statements or reports made to its shareholders or to any
governmental body or securities exchange;
(c) to furnish WRL Management with any further materials or
information which WRL Management may reasonably request to enable it
to perform its functions under this Agreement; and
(d) to compensate WRL Management for its services in accordance with
the provisions of Section 3 hereof.
3. COMPENSATION. For its services under this Agreement, WRL Management
is entitled to receive from each Portfolio a monthly fee, payable on the last
day of each month during which or part of which this Agreement is in effect, as
set forth on Schedule A attached to this Agreement, as it may be amended from
time to time in accordance with Section 11 below. For the month during which
this Agreement becomes effective and the month during which it terminates,
however, there shall be an appropriate pro-ration of the fee payable for such
month based on the number of calendar days of such month during which this
Agreement is effective.
4. EXPENSES PAID BY EACH PORTFOLIO. Nothing in this Agreement shall be
construed to impose upon WRL Management the obligation to incur, pay, or
reimburse a Portfolio for any expenses. A Portfolio shall pay all of its
expenses including, but not limited to:
(a) all costs and expenses, including legal and accounting fees,
incurred in connection with the formation and organization of a
Portfolio, including the preparation (and filing, when necessary) of
the Portfolio's contracts, plans and documents; conducting meetings
of organizers, directors and shareholders, and all other matters
relating to the formation and organization of a Portfolio and the
preparation for offering its shares. The organization of a Portfolio
for all of the foregoing purposes will be considered completed upon
effectiveness of the post-effective amendment to the Fund's
registration statement to register the Portfolio under the
Securities Act of 1933.
(b) all costs and expenses, including legal and accounting fees,
filing fees and printing costs, in connection with the preparation
and filing of the post-effective amendment to the Fund's
registration statement to register the Portfolio under the
Securities Act of 1933 and the 1940 Act (including all amendments
thereto prior to the effectiveness of the registration statement
under the Securities Act of 1933);
(c) investment advisory fees;
Page 2
<PAGE>
(d) any compensation, fees, or reimbursements which the Fund pays to
its Directors who are not interested persons (as that phrase is
defined in Section 2(a)(19) of the 1940 Act) of the Fund or WRL
Management;
(e) compensation of the Fund's custodian, administrator, registar
and dividend disbursing agent;
(f) legal, accounting and printing expenses;
(g) other administrative, clerical, recordkeeping and bookkeeping
expenses;
(h) pricing costs, including the daily calculation of net asset
value;
(i) auditing;
(j) insurance premiums, including Fidelity Bond Coverage, Error &
Ommissions Coverage and Directors and Officers Coverage, in
accordance with the provisions of the 1940 Act and the rules
thereunder;
(k) services for shareholders, including allocable telephone and
personnel expenses;
(l) brokerage commissions and all other expenses in connection with
execution of portfolio transactions, including interest:
(m) all federal, state and local taxes (including stamp, excise,
income and franchise taxes) and the preparation and filing of all
returns and reports inconnection therewith;
(n) costs of certificates and the expenses of delivering such
certificates to the purchasers of shares relating thereto;
(o) expenses of local representation in Maryland;
(p) fees and/or expenses payable pursuant to any plan of
distribution adopted with respect to the Fund in accordance with
Section 12(b) of the 1940 Act and Rule 12b-1 thereunder;
(q) expenses of shareholders' meetings and of preparing, printing
and distributing notices, proxy statements and reports to
shareholders;
(r) expenses of preparing and filing reports with federal and state
regulatory authorities;
(s) all costs and expenses, including fees and disbursements, of
counsel and auditors, filing and renewal fees and printing costs in
connection with the filing of any required amendments, supplements
or renewals of registration statement, qualifications or
prospectuses under the Securities Act of 1933 and the securities
laws of any states or territories subsequent to the effectiveness of
the initial registration statement under the Securities Act of 1933;
(t) all costs involved in preparing and printing prospectuses of the
Fund;
(u) extraordinary expenses; and
(v) all other expenses properly payable by the Fund or the
Portfolios.
Page 3
<PAGE>
5. TREATMENT OF INVESTMENT ADVICE. With respect to the Portfolios, the
Fund shall treat the investment advice and recommendations of WRL Management as
being advisory only, and shall retain full control over its own investment
policies. However, the Directors of the Fund may delegate to the appropriate
officers of the Fund, or to a committee of Directors, the power to authorize
purchases, sales or other actions affecting the Portfolios in the interim
between meetings of the Directors, provided such action is consistent with the
established investment policy of the Directors and is reported to the Directors
at their next meeting.
6. BROKERAGE COMMISSIONS. For purposes of this Agreement, brokerage
commissions paid by each Portfolio upon the purchase or sale of its portfolio
securities shall be considered a cost of securities of the Portfolio and shall
be paid by the Portfolio. WRL Management is authorized and directed to place
each Portfolio's securities transactions, or to delegate to the Sub-Adviser of
that Portfolio the authority and direction to place the Portfolio's securities
transactions, only with brokers and dealers who render satisfactory service in
the execution of orders at the most favorable price and at reasonable commission
rates (best price and execution); provided, however, that WRL Management or the
Sub-Adviser, may pay a broker or dealer an amount of commission for effecting a
securities transaction in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction, if WRL Management or
the Sub-Adviser determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer viewed in terms of either that particular
transaction or the overall responsibilities of WRL Management or the
Sub-Adviser. WRL Management and the Sub-Adviser are also authorized to consider
sales of individual and group life insurance policies and/or variable annuity
contract issued by Western Reserve Life Assurance Co. of Ohio by a broker-dealer
as a factor in selecting broker-dealers to execute the Portfolio's securities
transactions, provided that in placing portfolio business with such
broker-dealers, WRL Management and the Sub-Adviser shall seek the best execution
of each transaction and all such brokerage placement shall be consistent with
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. Notwithstanding the foregoing, the Fund shall retain the right to direct
the placement of all securities transactions of the Portfolios, and the
Directors may establish policies or guidelines to be followed by WRL Management
and the Sub-Advisers in placing securities transactions for each Portfolio
pursuant to the foregoing provisions. WRL Management shall report on the
placement of portfolio transactions each quarter to the Directors of the Fund.
7. LIMITATION ON EXPENSES OF THE PORTFOLIOS. If the insurance or
securities laws, regulations or policies of any state in which shares of the
Portfolios are qualified for sale limit the operation and management expenses
(collectively referred to as "Normal Operating Expenses" and as described
below), WRL Management will pay on behalf of the Portfolios the amount by which
such expenses exceed the lowest of such state limitations (the "Expense
Limitation"). Normal Operating Expenses include, but are not limited to, the
fees of the Portfolios' investment adviser, the compensation of its custodian,
registrar, auditors and legal counsel, printing expenses, expenses incurred in
complying with all laws applicable to the sale of shares of the Portfolios and
any compensation, fees, or reimbursement which the Portfolios pay to Directors
of the Fund who are not interested persons (as that phrase is defined in Section
2(a)(19) of the 1940 Act) of WRL Management, but excluding all interest and all
federal, state and local taxes (such as stamp, excise, income, franchise and
similar taxes). If Normal Operating Expenses exceed in any year the Expense
Limitation of the Fund, WRL Management shall pay for those excess expenses on
behalf of the Portfolios in the year in which they are incurred. Expenses of the
Portfolios shall be calculated and accrued monthly. If at the end of any month
the accrued expenses of the Portfolios exceed a pro rata portion of the
above-described Expense Limitation, based upon the average daily net asset value
of the Portfolios from the beginning of the fiscal year through the end of the
month for which calculation is made, the amount of such excess shall be paid by
WRL Management on behalf of the Portfolios and such excess amounts shall
continue to be paid until the end of a month when such accrued expenses are less
than the pro rata portion of such Expense Limitation. Any necessary final
adjusting payments, whether from WRL Management to the Portfolios or from the
Portfolios to WRL Management, shall be made as soon as reasonably practicable
after the end of the fiscal year.
Page 4
<PAGE>
8. TERMINATION. This Agreement may be terminated at any time, without
penalty, by the Directors of the Fund or by the shareholders of each Portfolio
acting by vote of at least a majority of its outstanding voting securities (as
that phrase is defined in Section 2(a)(42) of the 1940 Act) provided in either
case that 60 days' written notice of termination be given to WRL Management at
its principal place of business. This Agreement may be terminated by WRL
Management at any time by giving 60 days' written notice of termination to the
Fund, addressed to its principal place of business.
9. ASSIGNMENT. This Agreement shall terminate automatically in the
event of any assignment (as the term is defined in Section 2(a)(4) of the 1940
Act) of this Agreement.
10.TERM. This Agreement shall continue in effect, unless sooner
terminated in accordance with its terms, as provided for each Portfolio on
Schedule A, and shall continue in effect from year to year thereafter provided
such continuance is specifically approved at least annually by the vote of a
majority of the Directors of the Fund who are not parties hereto or interested
persons (as that term is defined in Section 2(a)(19) of the 1940 Act) of any
such party, cast in person at a meeting called for the purpose of voting on the
approval of the terms of such renewal, and by either the Directors of the Fund
or the affirmative vote of a majority of the outstanding voting securities of
each Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act).
11. AMENDMENTS. This Agreement may be amended only with the approval of
the affirmative vote of a majority of the outstanding voting securities of each
Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act) and
the approval by the vote of a majority of Directors of the Fund who are not
parties hereto or interested persons (as that phrase is defined in Section
2(a)(19) of the 1940 Act of 1940) of any such party, cast in person at a meeting
called for the purpose of voting on the approval of such amendment, unless
otherwise permitted in accordance with the 1940 Act.
12. PRIOR AGREEMENTS. This Agreement constitutes the entire agreement
between the parties hereto and supersedes in its entirety any and all previous
agreements between the parties relative to the subject matter hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
ATTEST: WRL SERIES FUND, INC.
By:
- --------------------------------- -----------------------------------
Assistant Vice President Chairman of the Board and President
and Assistant Secretary
ATTEST: WRL INVESTMENT MANAGEMENT, INC.
By:
- --------------------------------- -----------------------------------
Assistant Vice President President and Treasurer
and Assistant Secretary
Page 5
<PAGE>
Schedule A
SCHEDULE EFFECTIVE JUNE 16, 1997
PERCENTAGE OF MONTHLY EFFECTIVE
PORTFOLIO AVERAGE DAILY DATE/TERMINATION DATE
NET ASSETS
January 1, 1997/
Growth 0.80% January 1, 1999
January 1, 1997/
Bond 0.50% January 1, 1999
January 1, 1997/
Global 0.80% January 1, 1999
January 1, 1997/
Money Market 0.40% January 1, 1999
Short-to-Intermediate 0.60% January 1, 1997/
Government January 1, 1999
January 1, 1997/
Emerging Growth 0.80% January 1, 1999
January 1, 1997/
Equity-Income 0.80% January 1, 1999
January 1, 1997/
Balanced 0.80% January 1, 1999
January 1, 1997/
Aggressive Growth 0.80% January 1, 1999
January 1, 1997/
Utility 0.75% January 1, 1999
January 1, 1997/
Tactical Asset Allocation 0.80% January 1, 1999
January 1, 1997/
Value Equity 0.80% January 1, 1999
January 1, 1997/
C.A.S.E. Growth 0.80% January 1, 1999
January 1, 1997/
C.A.S.E. Quality Growth 0.80% January 1, 1999
January 1, 1997/
C.A.S.E. Growth & Income 0.80% January 1, 1999
<PAGE>
PERCENTAGE OF MONTHLY EFFECTIVE
PORTFOLIO AVERAGE DAILY DATE/TERMINATION DATE
NET ASSETS
June 16, 1997/
Global Sector 0.80% January 1, 1999
June 16, 1997/
Foreign Sector 0.80% January 1, 1999
June 16, 1997/
US Sector 0.80% January 1, 1999
January 1, 1997/
International Equity 1.00% January 1, 1999
January 1, 1997/
U.S. Equity 0.80% January 1, 1999
EXHIBIT 5(XII)
FORM OF SUB-ADVISORY AGREEMENT ON BEHALF OF THE
US SECTOR, GLOBAL SECTOR, AND FOREIGN SECTOR PORTFOLIOS OF THE FUND
<PAGE>
SUB-ADVISORY AGREEMENT
BETWEEN
WRL INVESTMENT MANAGEMENT, INC.
AND
MERIDIAN INVESTMENT MANAGEMENT CORPORATION
SUB-ADVISORY AGREEMENT, made as of the 16th day of June, 1997, between WRL
Investment Management, Inc. ("Investment Adviser"), a corporation organized and
existing under the laws of the State of Florida and Meridian Investment
Management Corporation ("Sub-Adviser"), a corporation organized and existing
under the laws of the State of Colorado.
WHEREAS, the Investment Adviser has entered into an Investment Advisory
Agreement dated as of the 1st day of January, 1997, as amended June 16, 1997
("Advisory Agreement") with the WRL Series Fund, Inc. ("Fund"), a Maryland
corporation which is engaged in business as an open-end investment company
registered under the Investment Company Act of 1940, as amended ("1940 Act");
and
WHEREAS, the Fund is authorized to issue shares of the Global Sector, US
Sector and Foreign Sector Portfolios ("Portfolios"), each a separate series of
the Fund;
WHEREAS, the Sub-Adviser is engaged principally in the business of
rendering investment advisory services and is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended ("Advisers Act");
and
WHEREAS, the Investment Adviser desires to retain the Sub-Adviser as
sub-adviser to furnish certain investment advisory services to the Investment
Adviser with respect to the Portfolios and the Sub-Adviser is willing to furnish
such services;
NOW, THEREFORE, in consideration of the premises and mutual promises herein
set forth, the parties hereto agree as follows:
1. APPOINTMENT.
Investment Adviser hereby appoints the Sub-Adviser as its investment
sub-adviser with respect to the Portfolios for the period and on the terms set
forth in this Agreement. The Sub-Adviser accepts such appointment and agrees to
render the services herein set forth, for the compensation herein provided.
2. DUTIES OF THE SUB-ADVISER.
A. INVESTMENT SUB-ADVISORY SERVICES. Subject to the supervision of the
Fund's Board of Directors ("Board") and the Investment Adviser, the Sub-Adviser
shall act as the investment sub-adviser and shall supervise and direct the
investments of the Portfolios in accordance with each Portfolio's investment
objective, policies, and restrictions as provided in the Fund's Prospectus and
Statement of Additional Information, as currently in effect and as amended or
supplemented from time to time (hereinafter referred to as the "Prospectus"),
and such other limitations as directed by the appropriate officers of the
Investment Adviser or the Fund by notice in writing to the Sub-Adviser. The
Sub-Adviser shall obtain and evaluate such information relating to the economy,
industries, businesses, securities markets, and securities as it may deem
necessary or useful in the discharge of its obligations hereunder and shall
formulate and implement a continuing program for the management of the assets
and resources of the Portfolios in a manner consistent with each Portfolio's
investment objective, policies, and
<PAGE>
restrictions. In furtherance of this duty, the Sub-Adviser, on behalf of the
Portfolios, is authorized, in its discretion and without prior consultation with
the Portfolios or the Investment Adviser, to:
(1) buy, sell, exchange, convert, lend, and otherwise trade in any
stocks, bonds and other securities or assets; and
(2) place orders and negotiate the commissions (if any) for the
execution of transactions in securities or other assets with or
through such brokers, dealers, underwriters or issuers as the
Sub-Adviser may select.
B. ADDITIONAL DUTIES OF SUB-ADVISER. In addition to the above,
Sub-Adviser shall:
(1) furnish continuous investment information, 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;
(2) cause its officers to attend meetings of the Fund and furnish oral
or written reports, as the Fund may reasonably require, in order to
keep the Fund and its officers and Board fully informed as to the
condition of the investment securities of the Portfolios, the
investment recommendations of the Sub-Adviser, and the investment
considerations which have given rise to those recommendations; and
(3) furnish such quantitative investment research, statistical and
analytical information and reports as may reasonably be required by
the Fund from time to time; and
C. FURTHER DUTIES OF SUB-ADVISER. In all matters relating to the
performance of this Agreement, the Sub-Adviser shall act in conformity
with the Fund's Articles of Incorporation and By-Laws, as each may be
amended or supplemented, and currently effective Registration
Statement (as defined below) and with the written instructions and
directions of the Board and the Investment Adviser, and shall comply
with the requirements of the 1940 Act, the Advisers Act, the rules
thereunder, and all other applicable federal and state laws and
regulations.
3. COMPENSATION.
For the services provided and the expenses assumed by the Sub-Adviser
pursuant to this Agreement, the Sub-Adviser shall receive a monthly investment
management fee equal to 50% of the fees received by the Investment Adviser for
each Portfolio. The management fee shall be payable by the Investment Adviser
monthly to the Sub-Adviser upon receipt by the Investment Adviser from the
Portfolios of advisory fees payable to the Investment Adviser. If this Agreement
becomes effective or terminates before the end of any month, the investment
management fee for the period from the effective date to the end of such month
or from the beginning of such month to the date of termination, as the case may
be, shall be pro-rated according to the pro-ration which such period bears to
the full month in which such effectiveness or termination occurs.
4. DUTIES OF THE INVESTMENT ADVISER.
A. The Investment Adviser shall continue to have responsibility for
all services to be provided to the Portfolios pursuant to the Advisory Agreement
and shall oversee and review the Sub-Adviser's performance of its duties under
this Agreement.
2
<PAGE>
B. The Investment Adviser has furnished the Sub-Adviser with copies of
each of the following documents and will furnish to the Sub-Adviser at its
principal office all future amendments and supplements to such documents, if
any, as soon as practicable after such documents become available:
(1) The Articles of Incorporation of the Fund, as filed with
the State of Maryland, as in effect on the date hereof and as
amended from time to time ("Articles");
(2) The By-Laws of the Fund as in effect on the date hereof
and as amended from time to time ("By-Laws");
(3) Certified resolutions of the Board of the Fund authorizing
the appointment of the Investment Adviser and the Sub-Adviser and
approving the form of the Advisory Agreement and this Agreement;
(4) The Fund's Registration Statement under the 1940 Act and
the Securities Act of 1933, as amended, on Form N-1A, as filed
with the Securities and Exchange Commission ("SEC") relating to
the Portfolios and its shares and all amendments thereto
("Registration Statement");
(5) The Notification of Registration of the Fund under the
1940 Act on Form N-8A as filed with the SEC and any amendments
thereto;
(6) The Portfolios' Prospectus (as defined above); and
(7) A certified copy of any publicly available financial
statement or report prepared for the Fund by certified or
independent public accountants, and copies of any financial
statements or reports made by the Portfolios to its shareholders
or to any governmental body or securities exchange.
The Investment Adviser shall furnish the Sub-Adviser with any further
documents, materials or information that the Sub-Adviser may reasonably request
to enable it to perform its duties pursuant to this Agreement.
C. During the term of this Agreement, the Investment Adviser shall
furnish to the Sub-Adviser at its principal office all prospectuses, proxy
statements, reports to shareholders, sales literature, or other material
prepared for distribution to shareholders of the Portfolios or the public, which
refer to the Sub-Adviser or investment companies or other advisory accounts
advised or sponsored by the Sub-Adviser in any way, prior to the use thereof,
and the Investment Adviser shall not use any such materials if the Sub-Adviser
reasonably objects in writing fifteen business days (or such other time as may
be mutually agreed) after receipt thereof.
5. BROKERAGE.
A. The Sub-Adviser agrees that, in placing orders with
broker-dealers for the purchase or sale of portfolio securities, it shall
attempt to obtain quality execution at favorable security prices (best price and
execution); provided that, on behalf of the Fund, the Sub-Adviser may, in its
discretion, agree to pay a broker-dealer that furnishes brokerage or research
services as such services are defined under Section 28(e) of the Securities
Exchange Act of 1934, as amended ("1934 Act"), a higher commission than that
which might have been charged by another broker-dealer for effecting the same
transactions, if the Sub-Adviser determines in good faith that such commission
is reasonable in relation to the brokerage and research services provided by the
broker-dealer, viewed in terms of either that particular transaction
3
<PAGE>
or the overall responsibilities of the Sub-Adviser with respect to the accounts
as to which it exercises investment discretion (as such term is defined under
Section 3(a)(35) of the 1934 Act). In no instance will portfolio securities be
purchased from or sold to the Sub-Adviser, or any affiliated person thereof,
except in accordance with the federal securities laws and the rules and
regulations thereunder.
B. On occasions when the Sub-Adviser deems the purchase or sale of
a security to be in the best interest of the Fund as well as other clients of
the Sub-Adviser, the Sub-Adviser, to the extent permitted by applicable laws and
regulations, may, but shall be under no obligation to, aggregate the securities
to be purchased or sold to attempt to obtain a more favorable price or lower
brokerage commissions and efficient execution. In such event, allocation of the
securities so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Sub-Adviser in the manner the Sub-Adviser
considers to be the most equitable and consistent with its fiduciary obligations
to the Fund and to its other clients.
C. In addition to the foregoing, the Sub-Adviser agrees that orders
with broker-dealers for the purchase or sale of portfolio securities by the
Portfolios shall be placed in accordance with the standards set forth in the
Advisory Agreement.
6. OWNERSHIP OF RECORDS.
The Sub-Adviser shall maintain all books and records required to be
maintained by the Sub-Adviser pursuant to the 1940 Act and the rules and
regulations promulgated thereunder with respect to transactions on behalf of the
Fund. In compliance with the requirements of Rule 31a-3 under the 1940 Act, the
Sub-Adviser hereby agrees: (i) that all records that it maintains for the Fund
are the property of the Fund, (ii) to preserve for the periods prescribed by
Rule 31a-2 under the 1940 Act any records that it maintains for the Fund and
that are required to be maintained by Rule 31a-1 under the 1940 Act and (iii)
agrees to surrender promptly to the Fund any records that it maintains for the
Fund upon request by the Fund; provided, however, the Sub-Adviser may retain
copies of such records.
7. REPORTS.
The Sub-Adviser shall furnish to the Board or the Investment Adviser, or
both, as appropriate, such information, reports, evaluations, analyses and
opinions as the Sub-Adviser and the Board or the Investment Adviser, as
appropriate, may mutually agree upon from time to time.
8. SERVICES TO OTHERS CLIENTS.
Nothing contained in this Agreement shall limit or restrict (i) the freedom
of the Sub-Adviser, or any affiliated person thereof, to render investment
management and corporate administrative services to other investment companies,
to act as investment manager or investment counselor to other persons, firms, or
corporations, or to engage in any other business activities, or (ii) the right
of any director, officer, or employee of the Sub-Adviser, who may also be a
director, officer, or employee of the Fund, to engage in any other business or
to devote his or her time and attention in part to the management or other
aspects of any other business, whether of a similar nature or a dissimilar
nature.
9. REPRESENTATIONS OF SUB-ADVISER.
The Sub-Adviser represents, warrants, and agrees as follows:
A. The Sub-Adviser: (i) is registered as an investment adviser under
the Advisers Act and will continue to be so registered for so long as this
Agreement remains in effect; (ii) is not prohibited by
4
<PAGE>
the 1940 Act or the Advisers Act from performing the services contemplated by
this Agreement; (iii) has met, and will continue to meet for so long as this
Agreement remains in effect, any applicable federal or state requirements, or
the applicable requirements of any regulatory or industry self-regulatory
agency, necessary to be met in order to perform the services contemplated by
this Agreement; (iv) has the authority to enter into and perform the services
contemplated by this Agreement; and (v) will immediately notify the Investment
Adviser of the occurrence of any event that would disqualify the Sub-Adviser
from serving as an investment adviser of an investment company pursuant to
Section 9 (a) of the 1940 Act or otherwise.
B. The Sub-Adviser has adopted a written code of ethics complying with
the requirements of Rule 17j-1 under the 1940 Act and, if it has not already
done so, will provide the Investment Adviser and the Fund with a copy of such
code of ethics, together with evidence of its adoption.
C. The Sub-Adviser has provided the Investment Adviser and the Fund
with a copy of its Form ADV as most recently filed with the SEC and will,
promptly after filing any amendment to its Form ADV with the SEC, furnish a copy
of such amendment to the Investment Adviser.
10. TERM OF AGREEMENT.
This Agreement shall become effective upon the date first above written,
provided that this Agreement shall not take effect unless it has first been
approved (i) by a vote of a majority of those Directors of the Fund who are not
parties to this Agreement or interested persons of any such party, cast in
person at a meeting called for the purpose of voting on such approval, and (ii)
by vote of a majority of each Portfolio's outstanding voting securities. Unless
sooner terminated as provided herein, this Agreement shall continue in effect
until January 1, 1999. Thereafter, this Agreement shall continue in effect from
year to year, with respect to the Portfolios, subject to the termination
provisions and all other terms and conditions hereof, so long as such
continuation shall be specifically approved at least annually (a) by either the
Board, or by vote of a majority of the outstanding voting securities of each
Portfolio; and (b) in either event, by the vote, cast in person at a meeting
called for the purpose of voting on such approval, of a majority of the
Directors of the Fund who are not parties to this Agreement or interested
persons of any such party. The Sub-Adviser shall furnish to the Fund, promptly
upon its request such information as may reasonably be necessary to evaluate the
terms of this Agreement or any extension, renewal, or amendment hereof.
11. TERMINATION OF AGREEMENT.
Notwithstanding the foregoing, this Agreement may be terminated at any
time, without the payment of any penalty, by vote of the Board or by a vote of a
majority of the outstanding voting securities of each Portfolio on at least 60
days' prior written notice to the Sub-Adviser. This Agreement may also be
terminated by the Investment Adviser: (i) on at least 60 days' prior written
notice to the Sub-Adviser, without the payment of any penalty; or (ii) if the
Sub-Adviser becomes unable to discharge its duties and obligations under this
Agreement. The Sub-Adviser may terminate this Agreement at any time, or preclude
its renewal without the payment of any penalty, on at least 60 days' prior
notice to the Investment Adviser. This Agreement shall terminate automatically
in the event of its assignment or upon termination of the Advisory Agreement.
12. AMENDMENT OF AGREEMENT.
No provision of this Agreement may be changed, waived, discharged, or
terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge, or termination is
sought, and no amendment of this Agreement shall be effective until
5
<PAGE>
approved by vote of a majority of each Portfolio's outstanding voting
securities, unless otherwise permitted in accordance with the 1940 Act.
13. MISCELLANEOUS.
A. GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the State of Maryland without giving effect to the conflicts of laws
principles thereof, and the 1940 Act. To the extent that the applicable laws of
the State of Maryland conflict with the applicable provisions of the 1940 Act,
the latter shall control.
B. CAPTIONS. The captions contained in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
C. ENTIRE AGREEMENT. This Agreement represents the entire agreement and
understanding of the parties hereto and shall supersede any prior agreements
between the parties relating to the subject matter hereof, and all such prior
agreements shall be deemed terminated upon the effectiveness of this Agreement.
D. INTERPRETATION. Nothing herein contained shall be deemed to require
the Fund to take any action contrary to its Articles or By-Laws, or any
applicable statutory or regulatory requirement to which it is subject or by
which it is bound, or to relieve or deprive the Board of its responsibility for
and control of the conduct of the affairs of the Fund.
E. DEFINITIONS. Any question of interpretation of any term of
provision of this Agreement having a counterpart in or otherwise derived from a
term or provision of the 1940 Act shall be resolved by reference to such term or
provision of the 1940 Act and to interpretations thereof, if any, by the United
States courts or, in the absence of any controlling decision of any such court,
by rules, regulations, or orders of the SEC validly issued pursuant to the 1940
Act. As used in this Agreement, the terms "majority of the outstanding voting
securities," "affiliated person," "interested person," "assignment," "broker,"
"investment adviser," "net assets," "sale," "sell," and "security" shall have
the same meaning as such terms have in the 1940 Act, subject to such exemption
as may be granted by the SEC by any rule, regulation, or order. Where the effect
of a requirement of the federal securities laws reflected in any provision of
this Agreement is made less restrictive by a rule, regulation, or order of the
SEC, whether of special or general application, such provision shall be deemed
to incorporate the effect of such rule, regulation, or order, unless the
Investment Adviser and the Sub-Adviser agree to the contrary.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized signatories as of the date and year first
above written.
Attest: WRL INVESTMENT MANAGEMENT, INC.
________________________ By: ________________________
Assistant Secretary Name: Kenneth P. Beil
Title: President and Treasurer
Attest: MERIDIAN INVESTMENT MANAGEMENT
CORPORATION
________________________ By ________________________
Name:
Title:
7
EXHIBIT 11
CONSENT OF PRICE WATERHOUSE LLP
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information of the WRL Series Fund, Inc. constituting
parts of this Post-Effective Amendment No. 28 to the Registration Statement on
Form N-1A (the "Registration Statement") of our report dated January 31, 1997,
relating to the financial statements and financial highlights appearing in the
December 31, 1996 Annual Report of the WRL Series Fund, Inc., which is also
incorporated by reference into the Registration Statement. We also consent to
the incorporation by reference in the Prospectus and Statement of Additional
Information of the C.A.S.E. Growth, C.A.S.E. Growth & Income, and C.A.S.E.
Quality Growth portfolios (the "C.A.S.E. Portfolios") of the WRL Series Fund,
Inc. constituting parts of the Registration Statement of our report dated
January 31, 1997, relating to the financial statements and financial highlights
appearing in the December 31, 1996 Annual Report of the C.A.S.E. Portfolios,
which is also incorporated by reference into the Registration Statement. We also
consent to the incorporation by reference in the Prospectus and Statement of
Additional Information of the Global Sector, US Sector, and Foreign Sector
portfolios (the "Sector Portfolios") of the WRL Series Fund, Inc. constituting
parts of the Registration Statement of our report dated January 31, 1997,
relating to the financial statements and financial highlights appearing in the
December 31, 1996 Annual Report of the Sector Portfolios, which is also
incorporated by reference into the Registration Statement. We further consent to
the references to us under the heading "Independent Accountants" in each
Prospectus and each Statement of Additional Information.
PRICE WATERHOUSE LLP
Kansas City, Missouri
April 18, 1997
EXHIBIT 16
SCHEDULES FOR COMPUTATIONS OF
PERFORMANCE QUOTATIONS
<PAGE>
WRL SERIES FUND, INC.
MONEY MARKET PORTFOLIO
COMPUTATION OF AVERAGE ANNUAL TOTAL RETURN
THE FORMULA USED TO CALCULATE TOTAL RETURN IS:
T=((ERV + P)1/N) - 1
WHERE: T= Average Annual Total Return
ERV= Ending redeemable value of the initial investment
for the period shown
P= $1,000.00 initial investment
N= Number of years
FOR THE ONE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= 5.03%
ERV= $1,053.00
P= $1,000.00 initial investment
N= 1
FOR THE FIVE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= 3.86%
ERV= $1,208.49
P= $1,000.00
N= 5
FOR THE TEN YEAR PERIOD ENDED DECEMBER 31, 1996:
T= 4.99%
ERV= $1,627.34
P= $1,000.00
N= 10
1
EXHIBIT 16
<PAGE>
FOR THE PERIOD OCTOBER 2, 1986 THROUGH DECEMBER 31, 1996:
T= 4.98%
ERV= $1,645.67
P= $1,000.00
N= 10.25
2
EXHIBIT 16
<PAGE>
WRL SERIES FUND, INC.
BOND PORTFOLIO
COMPUTATION OF AVERAGE ANNUAL TOTAL RETURN
THE FORMULA USED TO CALCULATE TOTAL RETURN IS:
T=((ERV + P)1/N) - 1
WHERE: T= Average Annual Total Return
ERV= Ending redeemable value of the initial investment
for the period shown
P= $1,000.00 initial investment
N= Number of years
FOR THE ONE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= 0.14%
ERV= $1,001.40
P= $1,000.00 initial investment
N= 1
FOR THE FIVE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= 6.77%
ERV= $1,387.54
P= $1,000.00
N= 5
FOR THE TEN YEAR PERIOD ENDED DECEMBER 31, 1996:
T= 7.40%
ERV= $2,041.94
P= $1,000.00
N= 10
3
EXHIBIT 16
<PAGE>
FOR THE PERIOD OCTOBER 2, 1986 THROUGH DECEMBER 31, 1996:
T= 7.63%
ERV= $2,124.79
P= $1,000.00
N= 10.25
4
EXHIBIT 16
<PAGE>
WRL SERIES FUND, INC.
GROWTH PORTFOLIO
COMPUTATION OF AVERAGE ANNUAL TOTAL RETURN
THE FORMULA USED TO CALCULATE TOTAL RETURN IS:
T=((ERV + P)1/N) - 1
WHERE: T= Average Annual Total Return
ERV= Ending redeemable value of the initial investment
for the period shown
P= $1,000.00 initial investment
N= Number of years
FOR THE ONE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= 17.96%
ERV= $1,179.60
P= $1,000.00 initial investment
N= 1
FOR THE FIVE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= 11.11%
ERV= $1,693.42
P= $1,000.00
N= 5
FOR THE TEN YEAR PERIOD ENDED DECEMBER 31, 1996:
T= 17.98%
ERV= $5,224.97
P= $1,000.00
N= 10
5
EXHIBIT 16
<PAGE>
FOR THE PERIOD OCTOBER 2, 1986 THROUGH DECEMBER 31, 1996:
T= 17.66%
ERV= $5,295.97
P= $1,000.00
N= 10.25
6
EXHIBIT 16
<PAGE>
WRL SERIES FUND, INC.
SHORT TO INTERMEDIATE GOVERNMENT PORTFOLIO
COMPUTATION OF AVERAGE ANNUAL TOTAL RETURN
THE FORMULA USED TO CALCULATE TOTAL RETURN IS:
T=((ERV + P)1/N) - 1
WHERE: T= Average Annual Total Return
ERV= Ending redeemable value of the initial investment
for the period shown
P= $1,000.00 initial investment
N= Number of years
FOR THE ONE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= 3.48%
ERV= $1,034.80
P= $1,000.00 initial investment
N= 1
FOR THE FIVE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 5
FOR THE TEN YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 10
7
EXHIBIT 16
<PAGE>
FOR THE PERIOD DECEMBER 3, 1992 THROUGH DECEMBER 31, 1996:
T= 5.18%
ERV= $1,228.82
P= $1,000.00
N= 4.08
8
EXHIBIT 16
<PAGE>
WRL SERIES FUND, INC.
GLOBAL PORTFOLIO
COMPUTATION OF AVERAGE ANNUAL TOTAL RETURN
THE FORMULA USED TO CALCULATE TOTAL RETURN IS:
T=((ERV + P)1/N) - 1
WHERE: T= Average Annual Total Return
ERV= Ending redeemable value of the initial investment
for the period shown
P= $1,000.00 initial investment
N= Number of years
FOR THE ONE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= 27.74%
ERV= $1,277.40
P= $1,000.00 initial investment
N= 1
FOR THE FIVE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 5
FOR THE TEN YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 10
9
EXHIBIT 16
<PAGE>
FOR THE PERIOD DECEMBER 3, 1992 THROUGH DECEMBER 31, 1996:
T= 20.82%
ERV= $2,163.35
P= $1,000.00
N= 4.08
10
EXHIBIT 16
<PAGE>
WRL SERIES FUND, INC.
STRATEGIC TOTAL RETURN PORTFOLIO
(formerly Equity-Income Portfolio)
COMPUTATION OF AVERAGE ANNUAL TOTAL RETURN
THE FORMULA USED TO CALCULATE TOTAL RETURN IS:
T=((ERV + P)1/N) - 1
WHERE: T= Average Annual Total Return
ERV= Ending redeemable value of the initial investment
for the period shown
P= $1,000.00 initial investment
N= Number of years
FOR THE ONE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= 15.00%
ERV= $1,150.00
P= $1,000.00 initial investment
N= 1
FOR THE FIVE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 5
FOR THE TEN YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 10
11
EXHIBIT 16
<PAGE>
FOR THE PERIOD MARCH 1, 1993 THROUGH DECEMBER 31, 1996:
T= 13.36%
ERV= $1,618.55
P= $1,000.00
N= 3.84
12
EXHIBIT 16
<PAGE>
WRL SERIES FUND, INC.
EMERGING GROWTH PORTFOLIO
COMPUTATION OF AVERAGE ANNUAL TOTAL RETURN
THE FORMULA USED TO CALCULATE TOTAL RETURN IS:
T=((ERV + P)1/N) - 1
WHERE: T= Average Annual Total Return
ERV= Ending redeemable value of the initial investment
for the period shown
P= $1,000.00 initial investment
N= Number of years
FOR THE ONE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= 18.88%
ERV= $1,188.80
P= $1,000.00 initial investment
N= 1
FOR THE FIVE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 5
FOR THE TEN YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 10
13
EXHIBIT 16
<PAGE>
FOR THE PERIOD MARCH 1, 1993 THROUGH DECEMBER 31, 1996:
T= 20.04%
ERV= $2,016.56
P= $1,000.00
N= 3.84
14
EXHIBIT 16
<PAGE>
WRL SERIES FUND, INC.
AGGRESSIVE GROWTH PORTFOLIO
COMPUTATION OF AVERAGE ANNUAL TOTAL RETURN
THE FORMULA USED TO CALCULATE TOTAL RETURN IS:
T=((ERV + P)1/N) - 1
WHERE: T= Average Annual Total Return
ERV= Ending redeemable value of the initial investment
for the period shown
P= $1,000.00 initial investment
N= Number of years
FOR THE ONE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= 10.45%
ERV= $1,104.50
P= $1,000.00 initial investment
N= 1
FOR THE FIVE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 5
FOR THE TEN YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 10
15
<PAGE>
FOR THE PERIOD MARCH 1, 1994 THROUGH DECEMBER 31, 1996:
T= 15.50%
ERV= $1,505.68
P= $1,000.00
N= 2.84
16
EXHIBIT 16
<PAGE>
WRL SERIES FUND, INC.
BALANCED PORTFOLIO
COMPUTATION OF AVERAGE ANNUAL TOTAL RETURN
THE FORMULA USED TO CALCULATE TOTAL RETURN IS:
T=((ERV + P)1/N) - 1
WHERE: T= Average Annual Total Return
ERV= Ending redeemable value of the initial investment
for the period shown
P= $1,000.00 initial investment
N= Number of years
FOR THE ONE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= 10.72%
ERV= $1,107.20
P= $1,000.00 initial investment
N= 1
FOR THE FIVE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 5
FOR THE TEN YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 10
17
EXHIBIT 16
<PAGE>
FOR THE PERIOD MARCH 1, 1994 THROUGH DECEMBER 31, 1996:
T= 8.19%
ERV= $1,250.52
P= $1,000.00
N= 2.84
18
EXHIBIT 16
<PAGE>
WRL SERIES FUND, INC.
GROWTH & INCOME PORTFOLIO
(formerly Utility Portfolio)
COMPUTATION OF AVERAGE ANNUAL TOTAL RETURN
THE FORMULA USED TO CALCULATE TOTAL RETURN IS:
T=( (ERV + P)1/N) - 1
WHERE: T= Average Annual Total Return
ERV= Ending redeemable value of the initial investment
for the period shown
P= $1,000.00 initial investment
N= Number of years
FOR THE ONE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= 11.64%
ERV= $1,116.40
P= $1,000.00 initial investment
N= 1
FOR THE FIVE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 5
FOR THE TEN YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 10
19
EXHIBIT 16
<PAGE>
FOR THE PERIOD MARCH 1, 1994 THROUGH DECEMBER 31, 1996:
T= 10.69%
ERV= $1,334.34
P= $1,000.00
N= 2.84
20
EXHIBIT 16
<PAGE>
WRL SERIES FUND, INC.
TACTICAL ASSET ALLOCATION PORTFOLIO
COMPUTATION OF AVERAGE ANNUAL TOTAL RETURN
THE FORMULA USED TO CALCULATE TOTAL RETURN IS:
T=( (ERV + P)1/N) - 1
WHERE: T= Average Annual Total Return
ERV= Ending redeemable value of the initial investment
for the period shown
P= $1,000.00 initial investment
N= Number of years
FOR THE ONE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= 14.42%
ERV= $1,144.20
P= $1,000.00 initial investment
N= 1
FOR THE FIVE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 5
FOR THE TEN YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 10
21
EXHIBIT 16
<PAGE>
FOR THE PERIOD JANUARY 3, 1995 THROUGH DECEMBER 31, 1996:
T= 17.27%
ERV= $1,373.04
P= $1,000.00
N= 1.99
22
EXHIBIT 16
<PAGE>
WRL SERIES FUND, INC.
C.A.S.E. GROWTH PORTFOLIO
COMPUTATION OF AVERAGE ANNUAL TOTAL RETURN
THE FORMULA USED TO CALCULATE TOTAL RETURN IS:
T=( (ERV + P)1/N) - 1
WHERE: T= Average Annual Total Return
ERV= Ending redeemable value of the initial investment
for the period shown
P= $1,000.00 initial investment
N= Number of years
FOR THE ONE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= 17.50%
ERV= $1,175.00
P= $1,000.00 initial investment
N= 1
FOR THE FIVE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 5
FOR THE TEN YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 10
23
EXHIBIT 16
<PAGE>
FOR THE PERIOD MAY 1, 1995 THROUGH DECEMBER 31, 1996:
T= 23.22%
ERV= $1,417.22
P= $1,000.00
N= 1.67
24
EXHIBIT 16
<PAGE>
WRL SERIES FUND, INC.
C.A.S.E. GROWTH & INCOME PORTFOLIO
COMPUTATION OF AVERAGE ANNUAL TOTAL RETURN
THE FORMULA USED TO CALCULATE TOTAL RETURN IS:
T=( (ERV + P)1/N) - 1
WHERE: T= Average Annual Total Return
ERV= Ending redeemable value of the initial investment
for the period shown
P= $1,000.00 initial investment
N= Number of years
FOR THE ONE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= 19.22%
ERV= $1,192.20
P= $1,000.00 initial investment
N= 1
FOR THE FIVE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 5
FOR THE TEN YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 10
25
EXHIBIT 16
<PAGE>
FOR THE PERIOD MAY 1, 1995 THROUGH DECEMBER 31, 1996:
T= 20.66%
ERV= $1,368.39
P= $1,000.00
N= 1.67
26
EXHIBIT 16
<PAGE>
WRL SERIES FUND, INC.
C.A.S.E. QUALITY GROWTH PORTFOLIO
COMPUTATION OF AVERAGE ANNUAL TOTAL RETURN
THE FORMULA USED TO CALCULATE TOTAL RETURN IS:
T=( (ERV + P)1/N) - 1
WHERE: T= Average Annual Total Return
ERV= Ending redeemable value of the initial investment
for the period shown
P= $1,000.00 initial investment
N= Number of years
FOR THE ONE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= 17.54%
ERV= $1,175.40
P= $1,000.00 initial investment
N= 1
FOR THE FIVE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 5
FOR THE TEN YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 10
27
EXHIBIT 16
<PAGE>
FOR THE PERIOD MAY 1, 1995 THROUGH DECEMBER 31, 1996:
T= 18.89%
ERV= $1,335.04
P= $1,000.00
N= 1.67
28
EXHIBIT 16
<PAGE>
WRL SERIES FUND, INC.
GLOBAL SECTOR PORTFOLIO
COMPUTATION OF AVERAGE ANNUAL TOTAL RETURN
THE FORMULA USED TO CALCULATE TOTAL RETURN IS:
T=( (ERV + P)1/N) - 1
WHERE: T= Average Annual Total Return
ERV= Ending redeemable value of the initial investment
for the period shown
P= $1,000.00 initial investment
N= Number of years
FOR THE ONE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00 initial investment
N= 1
FOR THE FIVE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 5
FOR THE TEN YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 10
29
EXHIBIT 16
<PAGE>
FOR THE PERIOD MAY 1, 1996 THROUGH DECEMBER 31, 1996:
T= 6.08%
ERV= $1,040.34
P= $1,000.00
N= .67
30
EXHIBIT 16
<PAGE>
WRL SERIES FUND, INC.
US SECTOR PORTFOLIO
COMPUTATION OF AVERAGE ANNUAL TOTAL RETURN
THE FORMULA USED TO CALCULATE TOTAL RETURN IS:
T=( (ERV + P)1/N) - 1
WHERE: T= Average Annual Total Return
ERV= Ending redeemable value of the initial investment
for the period shown
P= $1,000.00 initial investment
N= Number of years
FOR THE ONE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00 initial investment
N= 1
FOR THE FIVE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 5
FOR THE TEN YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 10
31
EXHIBIT 16
<PAGE>
FOR THE PERIOD MAY 1, 1996 THROUGH DECEMBER 31, 1996:
T= 4.25%
ERV= $1,028.28
P= $1,000.00
N= .67
32
EXHIBIT 16
<PAGE>
WRL SERIES FUND, INC.
FOREIGN SECTOR PORTFOLIO
COMPUTATION OF AVERAGE ANNUAL TOTAL RETURN
THE FORMULA USED TO CALCULATE TOTAL RETURN IS:
T=( (ERV + P)1/N) - 1
WHERE: T= Average Annual Total Return
ERV= Ending redeemable value of the initial investment
for the period shown
P= $1,000.00 initial investment
N= Number of years
FOR THE ONE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00 initial investment
N= 1
FOR THE FIVE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 5
FOR THE TEN YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 10
33
EXHIBIT 16
<PAGE>
FOR THE PERIOD MAY 1, 1996 THROUGH DECEMBER 31, 1996:
T= 3.44%
ERV= $1,022.92
P= $1,000.00
N= .67
34
EXHIBIT 16
<PAGE>
WRL SERIES FUND, INC.
VALUE EQUITY PORTFOLIO
COMPUTATION OF AVERAGE ANNUAL TOTAL RETURN
THE FORMULA USED TO CALCULATE TOTAL RETURN IS:
T=((ERV + P)1/N) - 1
WHERE: T= Average Annual Total Return
ERV= Ending redeemable value of the initial investment
for the period shown
P= $1,000.00 initial investment
N= Number of years
FOR THE ONE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00 initial investment
N= 1
FOR THE FIVE YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 5
FOR THE TEN YEAR PERIOD ENDED DECEMBER 31, 1996:
T= N/A
ERV= N/A
P= $1,000.00
N= 10
35
EXHIBIT 16
<PAGE>
FOR THE PERIOD MAY 1, 1996 THROUGH DECEMBER 31, 1996:
T= 13.19%
ERV= $1,086.55
P= $1,000.00
N= .67
36
EXHIBIT 16
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATMENTS OF WRL SERIES FUND, INC. MONEY MARKET PORTFOLIO FOR THE PERIOD ENDED
DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000778207
<NAME> WRL SERIES FUND, INC.
<SERIES>
<NUMBER> 01
<NAME> MONEY MARKET PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 121,460
<INVESTMENTS-AT-VALUE> 121,460
<RECEIVABLES> 730
<ASSETS-OTHER> 2
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 122,192
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 78
<TOTAL-LIABILITIES> 78
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 122,114
<SHARES-COMMON-STOCK> 122,114
<SHARES-COMMON-PRIOR> 80,544
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 121,114
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,602
<OTHER-INCOME> 0
<EXPENSES-NET> 528
<NET-INVESTMENT-INCOME> 5,074
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 5,074
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,074)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 177,545
<NUMBER-OF-SHARES-REDEEMED> (141,048)
<SHARES-REINVESTED> 5,074
<NET-CHANGE-IN-ASSETS> 41,571
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 437
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 437
<AVERAGE-NET-ASSETS> 100,911
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.05)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.52
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF WRL SERIES FUND, INC. BOND PORTFOLIO, FOR THE PERIOD ENDED
DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000778207
<NAME> WRL SERIES FUND, INC.
<SERIES>
<NUMBER> 02
<NAME> BOND PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 81,085
<INVESTMENTS-AT-VALUE> 94,651
<RECEIVABLES> 1,229
<ASSETS-OTHER> 23,118
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 118,998
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 23,239
<TOTAL-LIABILITIES> 95,759
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 101,821
<SHARES-COMMON-STOCK> 8,943
<SHARES-COMMON-PRIOR> 8,548
<ACCUMULATED-NII-CURRENT> 162
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5,935)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (290)
<NET-ASSETS> 95,759
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,235
<OTHER-INCOME> 0
<EXPENSES-NET> 602
<NET-INVESTMENT-INCOME> 5,633
<REALIZED-GAINS-CURRENT> 1,597
<APPREC-INCREASE-CURRENT> (7,255)
<NET-CHANGE-FROM-OPS> (25,361)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,477)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 114,390
<NUMBER-OF-SHARES-REDEEMED> (131,404)
<SHARES-REINVESTED> 4,477
<NET-CHANGE-IN-ASSETS> (12,537)
<ACCUMULATED-NII-PRIOR> 18
<ACCUMULATED-GAINS-PRIOR> (7,532)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 475
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 475
<AVERAGE-NET-ASSETS> 94,589
<PER-SHARE-NAV-BEGIN> 11.35
<PER-SHARE-NII> 0.64
<PER-SHARE-GAIN-APPREC> (0.64)
<PER-SHARE-DIVIDEND> (0.64)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.71
<EXPENSE-RATIO> 0.64
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF WRL SERIES FUND, INC. GROWTH PORTFOLIO, FOR THE PERIOD ENDED
DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000778207
<NAME> WRL SERIES FUND, INC
<SERIES>
<NUMBER> 03
<NAME> GROWTH PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 905,833
<INVESTMENTS-AT-VALUE> 1,537,381
<RECEIVABLES> 13,714
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 104,659
<TOTAL-ASSETS> 1,655,754
<PAYABLE-FOR-SECURITIES> 24,012
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 104,333
<TOTAL-LIABILITIES> 128,345
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,113,048
<SHARES-COMMON-STOCK> 43,639
<SHARES-COMMON-PRIOR> 37,749
<ACCUMULATED-NII-CURRENT> 2,199
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 11,145
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 401,017
<NET-ASSETS> 1,527,409
<DIVIDEND-INCOME> 8,201
<INTEREST-INCOME> 17,595
<OTHER-INCOME> 0
<EXPENSES-NET> 12,170
<NET-INVESTMENT-INCOME> 13,626
<REALIZED-GAINS-CURRENT> 90,854
<APPREC-INCREASE-CURRENT> 116,259
<NET-CHANGE-FROM-OPS> 220,739
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,488)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,282
<NUMBER-OF-SHARES-REDEEMED> (2,400)
<SHARES-REINVESTED> 515
<NET-CHANGE-IN-ASSETS> (1,213)
<ACCUMULATED-NII-PRIOR> 575
<ACCUMULATED-GAINS-PRIOR> 4,821
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11,137
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 12,174
<AVERAGE-NET-ASSETS> 1,386,277
<PER-SHARE-NAV-BEGIN> 31.66
<PER-SHARE-NII> 0.34
<PER-SHARE-GAIN-APPREC> 5.35
<PER-SHARE-DIVIDEND> (0.35)
<PER-SHARE-DISTRIBUTIONS> (1.99)
<RETURNS-OF-CAPITAL> (0.01)
<PER-SHARE-NAV-END> 35.00
<EXPENSE-RATIO> 0.88
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF WRL SERIES FUND, INC. SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO,
FOR THE PERIOD ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000778207
<NAME> WRL SERIES FUND, INC.
<SERIES>
<NUMBER> 04
<NAME> SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 25,673
<INVESTMENTS-AT-VALUE> 25,788
<RECEIVABLES> 332
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 26,120
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 22
<TOTAL-LIABILITIES> 22
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 26,252
<SHARES-COMMON-STOCK> 2,547
<SHARES-COMMON-PRIOR> 2,265
<ACCUMULATED-NII-CURRENT> 64
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (359)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (115)
<NET-ASSETS> 26,098
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,532
<OTHER-INCOME> 0
<EXPENSES-NET> 188
<NET-INVESTMENT-INCOME> 1,344
<REALIZED-GAINS-CURRENT> 69
<APPREC-INCREASE-CURRENT> (544)
<NET-CHANGE-FROM-OPS> 869
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1282)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1250
<NUMBER-OF-SHARES-REDEEMED> (1092)
<SHARES-REINVESTED> 125
<NET-CHANGE-IN-ASSETS> 2,510
<ACCUMULATED-NII-PRIOR> 4
<ACCUMULATED-GAINS-PRIOR> 430
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 149
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 188
<AVERAGE-NET-ASSETS> 24,741
<PER-SHARE-NAV-BEGIN> 10.42
<PER-SHARE-NII> 0.56
<PER-SHARE-GAIN-APPREC> (0.21)
<PER-SHARE-DIVIDEND> (0.53)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.24
<EXPENSE-RATIO> 0.76
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF WRL SERIES FUND, INC. GLOBAL PORTFOLIO, FOR THE PERIOD ENDED
DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000778207
<NAME> WRL SERIES FUND, INC.
<SERIES>
<NUMBER> 05
<NAME> GLOBAL PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 435,858
<INVESTMENTS-AT-VALUE> 524,966
<RECEIVABLES> 12,839
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 62,337
<TOTAL-ASSETS> 600,142
<PAYABLE-FOR-SECURITIES> 3,118
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 62,204
<TOTAL-LIABILITIES> 65,322
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 434,774
<SHARES-COMMON-STOCK> 29,523
<SHARES-COMMON-PRIOR> 18,659
<ACCUMULATED-NII-CURRENT> 2,119
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 5,571
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 92,060
<NET-ASSETS> 534,820
<DIVIDEND-INCOME> 5,571
<INTEREST-INCOME> 1,289
<OTHER-INCOME> 0
<EXPENSES-NET> 4,260
<NET-INVESTMENT-INCOME> 1,967
<REALIZED-GAINS-CURRENT> 51,505
<APPREC-INCREASE-CURRENT> 45,462
<NET-CHANGE-FROM-OPS> 98,934
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,164)
<DISTRIBUTIONS-OF-GAINS> (39,910)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,475
<NUMBER-OF-SHARES-REDEEMED> (2,137)
<SHARES-REINVESTED> 2,527
<NET-CHANGE-IN-ASSETS> 245,314
<ACCUMULATED-NII-PRIOR> (804)
<ACCUMULATED-GAINS-PRIOR> 611
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,469
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,264
<AVERAGE-NET-ASSETS> 431,203
<PER-SHARE-NAV-BEGIN> 15.52
<PER-SHARE-NII> 0.08
<PER-SHARE-GAIN-APPREC> 4.20
<PER-SHARE-DIVIDEND> (0.04)
<PER-SHARE-DISTRIBUTIONS> (1.64)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.12
<EXPENSE-RATIO> 0.99
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF WRL SERIES FUND, INC. EQUITY INCOME PORTFOLIO, FOR THE PERIOD
ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000778207
<NAME> WRL SERIES FUND, INC.
<SERIES>
<NUMBER> 06
<NAME> EQUITY INCOME PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 337,451
<INVESTMENTS-AT-VALUE> 391,018
<RECEIVABLES> 2,436
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 8,140
<TOTAL-ASSETS> 401,594
<PAYABLE-FOR-SECURITIES> 2,903
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,550
<TOTAL-LIABILITIES> 11,453
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 335,005
<SHARES-COMMON-STOCK> 27,923
<SHARES-COMMON-PRIOR> 19,962
<ACCUMULATED-NII-CURRENT> 290
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 100
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 53,567
<NET-ASSETS> 390,141
<DIVIDEND-INCOME> 5,865
<INTEREST-INCOME> 5,284
<OTHER-INCOME> 0
<EXPENSES-NET> 2,787
<NET-INVESTMENT-INCOME> 8,362
<REALIZED-GAINS-CURRENT> 13,599
<APPREC-INCREASE-CURRENT> 21,360
<NET-CHANGE-FROM-OPS> 43,321
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,090)
<DISTRIBUTIONS-OF-GAINS> (13,149)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,995
<NUMBER-OF-SHARES-REDEEMED> (1,548)
<SHARES-REINVESTED> 1,514
<NET-CHANGE-IN-ASSETS> 43,321
<ACCUMULATED-NII-PRIOR> 18
<ACCUMULATED-GAINS-PRIOR> 550
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,462
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,788
<AVERAGE-NET-ASSETS> 307,857
<PER-SHARE-NAV-BEGIN> 12.86
<PER-SHARE-NII> 0.37
<PER-SHARE-GAIN-APPREC> 1.56
<PER-SHARE-DIVIDEND> (0.82)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.97
<EXPENSE-RATIO> 0.91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF WRL SERIES FUND, INC. EMERGING GROWTH PORTFOLIO, FOR THE PERIOD
ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000778207
<NAME> WRL SERIES UND, INC.
<SERIES>
<NUMBER> 07
<NAME> EMERGING GROWTH PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 322,364
<INVESTMENTS-AT-VALUE> 428,522
<RECEIVABLES> 3,762
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 70,825
<TOTAL-ASSETS> 503,109
<PAYABLE-FOR-SECURITIES> 64
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 71,591
<TOTAL-LIABILITIES> 71,655
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 322,392
<SHARES-COMMON-STOCK> 23,371
<SHARES-COMMON-PRIOR> 17,758
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,671
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 106,158
<NET-ASSETS> 431,454
<DIVIDEND-INCOME> 1,187
<INTEREST-INCOME> 1,426
<OTHER-INCOME> 0
<EXPENSES-NET> 3,502
<NET-INVESTMENT-INCOME> (892)
<REALIZED-GAINS-CURRENT> 20,857
<APPREC-INCREASE-CURRENT> 37,787
<NET-CHANGE-FROM-OPS> 57,752
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (18,936)
<DISTRIBUTIONS-OTHER> (17)
<NUMBER-OF-SHARES-SOLD> 7,201
<NUMBER-OF-SHARES-REDEEMED> (2,616)
<SHARES-REINVESTED> 1,028
<NET-CHANGE-IN-ASSETS> 142,935
<ACCUMULATED-NII-PRIOR> 17
<ACCUMULATED-GAINS-PRIOR> 750
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,985
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,503
<AVERAGE-NET-ASSETS> 371,406
<PER-SHARE-NAV-BEGIN> 16.25
<PER-SHARE-NII> (0.04)
<PER-SHARE-GAIN-APPREC> 3.10
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.85)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.46
<EXPENSE-RATIO> 0.94
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF WRL SERIES FUND, INC. AGRESSIVE GROWTH PORTFOLIO, FOR THE PERIOD
ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000778207
<NAME> WRL SERIES FUND, INC.
<SERIES>
<NUMBER> 08
<NAME> AGRESSIVE GROWTH PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 188,216
<INVESTMENTS-AT-VALUE> 221,346
<RECEIVABLES> 1,786
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 11,776
<TOTAL-ASSETS> 234,908
<PAYABLE-FOR-SECURITIES> 2,325
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 12,031
<TOTAL-LIABILITIES> 14,356
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 185,878
<SHARES-COMMON-STOCK> 15,556
<SHARES-COMMON-PRIOR> 11,965
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,389
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 33,130
<NET-ASSETS> 220,552
<DIVIDEND-INCOME> 942
<INTEREST-INCOME> 748
<OTHER-INCOME> 0
<EXPENSES-NET> 1873
<NET-INVESTMENT-INCOME> (191)
<REALIZED-GAINS-CURRENT> 8,280
<APPREC-INCREASE-CURRENT> 11,230
<NET-CHANGE-FROM-OPS> 19,319
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (3,787)
<DISTRIBUTIONS-OTHER> (2,670)
<NUMBER-OF-SHARES-SOLD> 7,309
<NUMBER-OF-SHARES-REDEEMED> (4,189)
<SHARES-REINVESTED> 471
<NET-CHANGE-IN-ASSETS> 62,081
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (433)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,530
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,873
<AVERAGE-NET-ASSETS> 190,824
<PER-SHARE-NAV-BEGIN> 13.25
<PER-SHARE-NII> (0.01)
<PER-SHARE-GAIN-APPREC> 1.38
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.44)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.18
<EXPENSE-RATIO> 0.98
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF WRL SERIES FUND, INC. BALANCED PORTFOLIO, FOR THE PERIOD ENDED
DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000778207
<NAME> WRL SERIES FUND, INC
<SERIES>
<NUMBER> 09
<NAME> BALANCED PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 44,143
<INVESTMENTS-AT-VALUE> 49,030
<RECEIVABLES> 380
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 5,720
<TOTAL-ASSETS> 55,130
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,799
<TOTAL-LIABILITIES> 5,799
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 44,079
<SHARES-COMMON-STOCK> 4,329
<SHARES-COMMON-PRIOR> 2,926
<ACCUMULATED-NII-CURRENT> 122
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 200
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,887
<NET-ASSETS> 49,331
<DIVIDEND-INCOME> 669
<INTEREST-INCOME> 952
<OTHER-INCOME> 0
<EXPENSES-NET> 383
<NET-INVESTMENT-INCOME> 1,238
<REALIZED-GAINS-CURRENT> 1,348
<APPREC-INCREASE-CURRENT> 1,733
<NET-CHANGE-FROM-OPS> 4,319
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,118)
<DISTRIBUTIONS-OF-GAINS> (421)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,800
<NUMBER-OF-SHARES-REDEEMED> (532)
<SHARES-REINVESTED> 136
<NET-CHANGE-IN-ASSETS> 18,216
<ACCUMULATED-NII-PRIOR> 2
<ACCUMULATED-GAINS-PRIOR> (727)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 315
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 383
<AVERAGE-NET-ASSETS> 39,366
<PER-SHARE-NAV-BEGIN> 10.63
<PER-SHARE-NII> 0.34
<PER-SHARE-GAIN-APPREC> 0.80
<PER-SHARE-DIVIDEND> (0.28)
<PER-SHARE-DISTRIBUTIONS> (0.10)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.39
<EXPENSE-RATIO> 0.97
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF WRL SERIES FUND, INC. UTILITY PORTFOLIO, FOR THE PERIOD ENDED
DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000778207
<NAME> WRL SERIES FUND, INC
<SERIES>
<NUMBER> 10
<NAME> UTILITY PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 35,699
<INVESTMENTS-AT-VALUE> 39,181
<RECEIVABLES> 377
<ASSETS-OTHER> 3,107
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 42,665
<PAYABLE-FOR-SECURITIES> 1,306
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,244
<TOTAL-LIABILITIES> 4,550
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 33,919
<SHARES-COMMON-STOCK> 3,240
<SHARES-COMMON-PRIOR> 2,212
<ACCUMULATED-NII-CURRENT> 153
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 529
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,482
<NET-ASSETS> 38,115
<DIVIDEND-INCOME> 1,341
<INTEREST-INCOME> 119
<OTHER-INCOME> 0
<EXPENSES-NET> 310
<NET-INVESTMENT-INCOME> 1,149
<REALIZED-GAINS-CURRENT> 1,515
<APPREC-INCREASE-CURRENT> 937
<NET-CHANGE-FROM-OPS> 3,601
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (996)
<DISTRIBUTIONS-OF-GAINS> (982)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,646
<NUMBER-OF-SHARES-REDEEMED> (786)
<SHARES-REINVESTED> 168
<NET-CHANGE-IN-ASSETS> 13,508
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (4)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 231
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 311
<AVERAGE-NET-ASSETS> 30,785
<PER-SHARE-NAV-BEGIN> 11.12
<PER-SHARE-NII> 0.42
<PER-SHARE-GAIN-APPREC> 0.87
<PER-SHARE-DIVIDEND> (0.33)
<PER-SHARE-DISTRIBUTIONS> (0.32)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.76
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF WRL SERIES FUND, INC. TACTICAL PORTFOLIO, FOR THE PERIOD ENDED
DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000778207
<NAME> WRL SERIES FUND, INC.
<SERIES>
<NUMBER> 11
<NAME> TACTICAL PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 189,172
<INVESTMENTS-AT-VALUE> 205,407
<RECEIVABLES> 856
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 14,799
<TOTAL-ASSETS> 221,062
<PAYABLE-FOR-SECURITIES> 587
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 14,303
<TOTAL-LIABILITIES> 14,890
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 188,040
<SHARES-COMMON-STOCK> 16,349
<SHARES-COMMON-PRIOR> 10,488
<ACCUMULATED-NII-CURRENT> 234
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,500
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,235
<NET-ASSETS> 206,172
<DIVIDEND-INCOME> 1,577
<INTEREST-INCOME> 4,413
<OTHER-INCOME> 0
<EXPENSES-NET> 1,458
<NET-INVESTMENT-INCOME> 4,532
<REALIZED-GAINS-CURRENT> 5,223
<APPREC-INCREASE-CURRENT> 9,997
<NET-CHANGE-FROM-OPS> 19,752
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,542)
<DISTRIBUTIONS-OF-GAINS> (3,723)
<DISTRIBUTIONS-OTHER> (16)
<NUMBER-OF-SHARES-SOLD> 11,298
<NUMBER-OF-SHARES-REDEEMED> (6,097)
<SHARES-REINVESTED> 660
<NET-CHANGE-IN-ASSETS> 85,641
<ACCUMULATED-NII-PRIOR> 10
<ACCUMULATED-GAINS-PRIOR> 250
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,308
<INTEREST-EXPENSE> 4,413
<GROSS-EXPENSE> 5,990
<AVERAGE-NET-ASSETS> 162,771
<PER-SHARE-NAV-BEGIN> 11.49
<PER-SHARE-NII> 0.33
<PER-SHARE-GAIN-APPREC> 1.33
<PER-SHARE-DIVIDEND> (0.30)
<PER-SHARE-DISTRIBUTIONS> (0.24)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.61
<EXPENSE-RATIO> 0.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF WRL SERIES FUND, INC. C.A.S.E. GROWTH PORTFOLIO, FOR THE PERIOD
ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000778207
<NAME> WRL SERIES FUND, INC.
<SERIES>
<NUMBER> 12
<NAME> C.A.S.E. GROWTH PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 19,785
<INVESTMENTS-AT-VALUE> 21,347
<RECEIVABLES> 38
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 5,196
<TOTAL-ASSETS> 26,581
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 21
<TOTAL-LIABILITIES> 21
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 24,766
<SHARES-COMMON-STOCK> 7,122
<SHARES-COMMON-PRIOR> 221
<ACCUMULATED-NII-CURRENT> 12
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 200
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,561
<NET-ASSETS> 26,560
<DIVIDEND-INCOME> 91
<INTEREST-INCOME> 116
<OTHER-INCOME> 0
<EXPENSES-NET> 105
<NET-INVESTMENT-INCOME> 103
<REALIZED-GAINS-CURRENT> 630
<APPREC-INCREASE-CURRENT> 1,514
<NET-CHANGE-FROM-OPS> 2,247
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (95)
<DISTRIBUTIONS-OF-GAINS> (430)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,821
<NUMBER-OF-SHARES-REDEEMED> (102)
<SHARES-REINVESTED> 39
<NET-CHANGE-IN-ASSETS> 23,981
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 5
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 84
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 179
<AVERAGE-NET-ASSETS> 10,871
<PER-SHARE-NAV-BEGIN> 11.66
<PER-SHARE-NII> 0.12
<PER-SHARE-GAIN-APPREC> 1.92
<PER-SHARE-DIVIDEND> (0.05)
<PER-SHARE-DISTRIBUTIONS> (0.23)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.42
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF WRL SERIES FUND, INC. C.A.S.E. GROWTH & INCOME PORTFOLIO, FOR THE
PERIOD ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000778207
<NAME> WRL SERIES FUND, INC.
<SERIES>
<NUMBER> 13
<NAME> C.A.S.E. GROWTH & INCOME PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 1,628
<INVESTMENTS-AT-VALUE> 1,879
<RECEIVABLES> 8
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 160
<TOTAL-ASSETS> 2,047
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3
<TOTAL-LIABILITIES> 3
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,761
<SHARES-COMMON-STOCK> 160
<SHARES-COMMON-PRIOR> 96
<ACCUMULATED-NII-CURRENT> 10
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 20
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 252
<NET-ASSETS> 2,044
<DIVIDEND-INCOME> 39
<INTEREST-INCOME> 12
<OTHER-INCOME> 0
<EXPENSES-NET> 24
<NET-INVESTMENT-INCOME> 28
<REALIZED-GAINS-CURRENT> 103
<APPREC-INCREASE-CURRENT> 175
<NET-CHANGE-FROM-OPS> 306
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (18)
<DISTRIBUTIONS-OF-GAINS> (83)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 75
<NUMBER-OF-SHARES-REDEEMED> (19)
<SHARES-REINVESTED> 8
<NET-CHANGE-IN-ASSETS> 961
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 14
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 57
<AVERAGE-NET-ASSETS> 1,718
<PER-SHARE-NAV-BEGIN> 11.28
<PER-SHARE-NII> 0.20
<PER-SHARE-GAIN-APPREC> 1.98
<PER-SHARE-DIVIDEND> (0.12)
<PER-SHARE-DISTRIBUTIONS> (0.55)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.79
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF WRL SERIES FUND, INC. C.A.S.E. QUALITY GROWTH PORTFOLIO, FOR THE
PERIOD ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000778207
<NAME> WRL SERIES FUND, INC.
<SERIES>
<NUMBER> 14
<NAME> C.A.S.E. QUALITY GROWTH PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 1,629
<INVESTMENTS-AT-VALUE> 1,844
<RECEIVABLES> 3
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 8
<TOTAL-ASSETS> 1,855
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2
<TOTAL-LIABILITIES> 2
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,624
<SHARES-COMMON-STOCK> 151
<SHARES-COMMON-PRIOR> 106
<ACCUMULATED-NII-CURRENT> 2
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 215
<NET-ASSETS> 1,853
<DIVIDEND-INCOME> 24
<INTEREST-INCOME> 7
<OTHER-INCOME> 0
<EXPENSES-NET> 21
<NET-INVESTMENT-INCOME> 9
<REALIZED-GAINS-CURRENT> 66
<APPREC-INCREASE-CURRENT> 190
<NET-CHANGE-FROM-OPS> 265
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10)
<DISTRIBUTIONS-OF-GAINS> (53)
<DISTRIBUTIONS-OTHER> (4)
<NUMBER-OF-SHARES-SOLD> 61
<NUMBER-OF-SHARES-REDEEMED> (22)
<SHARES-REINVESTED> 5368
<NET-CHANGE-IN-ASSETS> 397
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 25
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 13
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 56
<AVERAGE-NET-ASSETS> 1,569
<PER-SHARE-NAV-BEGIN> 10.84
<PER-SHARE-NII> 0.07
<PER-SHARE-GAIN-APPREC> 1.83
<PER-SHARE-DIVIDEND> (0.09)
<PER-SHARE-DISTRIBUTIONS> (0.36)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.29
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF WRL SERIES FUND, INC. MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO,
FOR THE PERIOD ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000778207
<NAME> WRL SERIES FUND, INC
<SERIES>
<NUMBER> 15
<NAME> MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> MAY-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 6,064
<INVESTMENTS-AT-VALUE> 6,336
<RECEIVABLES> 55
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 612
<TOTAL-ASSETS> 7,003
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 17
<TOTAL-LIABILITIES> 17
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,679
<SHARES-COMMON-STOCK> 662
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 13
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 16
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 271
<NET-ASSETS> 6,986
<DIVIDEND-INCOME> 24
<INTEREST-INCOME> 57
<OTHER-INCOME> 0
<EXPENSES-NET> 58
<NET-INVESTMENT-INCOME> 23
<REALIZED-GAINS-CURRENT> 42
<APPREC-INCREASE-CURRENT> 271
<NET-CHANGE-FROM-OPS> 336
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12)
<DISTRIBUTIONS-OF-GAINS> (24)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 788
<NUMBER-OF-SHARES-REDEEMED> (129)
<SHARES-REINVESTED> 3
<NET-CHANGE-IN-ASSETS> 6,986
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 26
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 58
<AVERAGE-NET-ASSETS> 3,662
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.06
<PER-SHARE-GAIN-APPREC> 0.55
<PER-SHARE-DIVIDEND> (0.02)
<PER-SHARE-DISTRIBUTIONS> (0.04)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.55
<EXPENSE-RATIO> 2.37
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF WRL SERIES FUND, INC. MERIDIAN/INVESCO US SECTOR PORTFOLIO,
FOR THE PERIOD ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000778207
<NAME> WRL SERIES FUND, INC.
<SERIES>
<NUMBER> 16
<NAME> MERIDIAN/INVESCO US SECTOR PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> MAY-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 1,594
<INVESTMENTS-AT-VALUE> 1,702
<RECEIVABLES> 3
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 403
<TOTAL-ASSETS> 2,108
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8
<TOTAL-LIABILITIES> 8
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,000
<SHARES-COMMON-STOCK> 201
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (9)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 108
<NET-ASSETS> 2,100
<DIVIDEND-INCOME> 6
<INTEREST-INCOME> 5
<OTHER-INCOME> 0
<EXPENSES-NET> 29
<NET-INVESTMENT-INCOME> (19)
<REALIZED-GAINS-CURRENT> (9)
<APPREC-INCREASE-CURRENT> 108
<NET-CHANGE-FROM-OPS> 80
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 202
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2,100
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 29
<AVERAGE-NET-ASSETS> 925
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> (0.21)
<PER-SHARE-GAIN-APPREC> 0.64
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.43
<EXPENSE-RATIO> 4.76
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF WRL SERIES FUND, INC. MERIDIAN/INVESCO FOREIGN SECTOR PORTFOLIO,
FOR THE PERIOD ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000778207
<NAME> WRL SERIES FUND, INC.
<SERIES>
<NUMBER> 17
<NAME> MERIDIAN/INVESCO FOREIGN SECTOR PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> MAY-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 1,317
<INVESTMENTS-AT-VALUE> 1,346
<RECEIVABLES> 1
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 140
<TOTAL-ASSETS> 1,487
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10
<TOTAL-LIABILITIES> 10
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,437
<SHARES-COMMON-STOCK> 146
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 29
<NET-ASSETS> 1,477
<DIVIDEND-INCOME> 9
<INTEREST-INCOME> 4
<OTHER-INCOME> 0
<EXPENSES-NET> 35
<NET-INVESTMENT-INCOME> (23)
<REALIZED-GAINS-CURRENT> 36
<APPREC-INCREASE-CURRENT> 29
<NET-CHANGE-FROM-OPS> 42
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (28)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 143
<NUMBER-OF-SHARES-REDEEMED> (1)
<SHARES-REINVESTED> 3
<NET-CHANGE-IN-ASSETS> 1,477
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 8
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 35
<AVERAGE-NET-ASSETS> 1,134
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> (0.20)
<PER-SHARE-GAIN-APPREC> 0.54
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.20)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.14
<EXPENSE-RATIO> 4.68
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF WRL SERIES FUND, INC. VALUE EQUITY PORTFOLIO, FOR THE PERIOD ENDED
DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000778207
<NAME> WRL SERIES FUND, INC
<SERIES>
<NUMBER> 18
<NAME> VALUE EQUITY PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> MAY-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 46,269
<INVESTMENTS-AT-VALUE> 49,594
<RECEIVABLES> 55
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 49,649
<PAYABLE-FOR-SECURITIES> 214
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 41
<TOTAL-LIABILITIES> 255
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 45,988
<SHARES-COMMON-STOCK> 4,384
<SHARES-COMMON-PRIOR> 326
<ACCUMULATED-NII-CURRENT> 32
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 5
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,325
<NET-ASSETS> 49,394
<DIVIDEND-INCOME> 209
<INTEREST-INCOME> 124
<OTHER-INCOME> 0
<EXPENSES-NET> 139
<NET-INVESTMENT-INCOME> 193
<REALIZED-GAINS-CURRENT> 73
<APPREC-INCREASE-CURRENT> 3,325
<NET-CHANGE-FROM-OPS> 3,591
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (49)
<DISTRIBUTIONS-OF-GAINS> (11,919)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,438
<NUMBER-OF-SHARES-REDEEMED> (2,236)
<SHARES-REINVESTED> 739
<NET-CHANGE-IN-ASSETS> 105,870
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 112
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 153
<AVERAGE-NET-ASSETS> 21,657
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.10
<PER-SHARE-GAIN-APPREC> 1.23
<PER-SHARE-DIVIDEND> (0.04)
<PER-SHARE-DISTRIBUTIONS> (0.02)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.27
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
