<PAGE>
As filed with the Securities and Exchange Commission on August 4, 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. 30
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
Amendment No. 31
(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):
X immediately upon filing pursuant to paragraph (b) of Rule 485.
--
__ on DATE________, pursuant to paragraph (b) of Rule 485.
__ 60 days after filing pursuant to paragraph (a) of Rule 485.
__ on DATE________, pursuant to paragraph (b) of Rule 485.
Registrant has registered an indefinite number of shares under the Securities
Act of 1933 pursuant to Rule 24f-2(a) under the Investment Company Act of 1940
and filed a Rule 24f-2 Notice on February 21, 1997, for the fiscal year ended
December 31, 1996.
<PAGE>
WRL SERIES FUND, INC.
Emerging Growth Portfolio
Global Portfolio
Growth Portfolio
Cross Reference Sheet
<TABLE>
<CAPTION>
Form N-1A Location in
Item Number Prospectus
- ----------- -----------
Part A.
- ------
<S> <C>
Item 1. Cover Page ................................................... Cover Page
Item 2. Synopsis ..................................................... Not Applicable
Item 3. Condensed Financial Information .............................. Financial Highlights
Item 4. General Description of Registrant ............................ Other Information - The
Fund and Its Shares
Item 5. Management of the Fund ....................................... Management of the
Fund
Item 5.A. Management's Discussion of Fund Performance .................. Not Applicable
Item 6. Capital Stock and other Securities ........................... Other Information - The
Fund and Its Shares
Item 7. Purchase of Securities Being Offered ......................... Other Information -
Purchase and Redemption
of Shares; Valuation of
Shares
Item 8. Redemption or Repurchase ..................................... Other Information -
Purchase and
Redemption of
Shares
Item 9. Pending Legal Proceedings .................................... Not Applicable
Part B. Location in Statement
- ------- of Additional Information
-------------------------
Item 10. Cover Page ................................................... Cover Page
Item 11. Table of Contents ............................................ Table of Contents
Item 12. General Information and History .............................. Not Applicable
</TABLE>
i
<PAGE>
WRL SERIES FUND, INC.
Emerging Growth Portfolio
Global Portfolio
Growth Portfolio
Cross Reference Sheet (Continued)
<TABLE>
<CAPTION>
Location in
Statement of
Form N-1A Additional
Item Number Information
- ----------- ------------
<S> <C>
Item 13. Investment Objectives and Policies ........................... Investment Objectives
and Policies
Item 14. Management of the Registrant ................................. Management of the
Fund
Item 15. Control Persons and Principal
Holders of Securities ........................................ Purchase and
Redemption of
Shares
Item 16. Investment Advisory and Other
Services ..................................................... Management of the
Fund
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices............................................... and Brokerage
Item 18. Capital Stock and Other Securities ........................... Capital Stock of the
Fund
Item 19. Purchase, Redemption and Pricing of Purchase and
Securities Being Offered ..................................... Redemption of Shares
Item 20. Tax Status ................................................... Taxes
Item 21. Underwriter .................................................. Management of the
Fund - The Investment
Adviser - Distribution
Agreement
Item 22. Calculations of Yield Quotations of Calculation of
Performance Data ............................................. Performance Related
Information
Item 23. Financial Statements ......................................... Financial Statements
(incorporated by reference)
</TABLE>
ii
<PAGE>
PROSPECTUS
WRL SERIES FUND, INC.
EMERGING GROWTH PORTFOLIO
GLOBAL PORTFOLIO
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 Emerging Growth Portfolio, Global
Portfolio and the Growth Portfolio of the Fund (collectively, the "Portfolios"
and, individually, a "Portfolio").
The investment objective of the Emerging Growth portfolio is to seek capital
appreciation by investing primarily in common stocks of small and medium-sized
companies.
The investment objective of the Global Portfolio is to seek long-term growth
of capital in a manner consistent with the preservation of capital.
The investment objective of the Growth Portfolio is to seek growth of
capital.
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 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") serves as the investment
adviser ("Investment Adviser") to the Portfolios. Van Kampen American Capital
Asset Management, Inc. ("Van Kampen") serves as sub-adviser to the Emerging
Growth Portfolio and Janus Capital Corporation ("Janus Capital") serves as
sub-adviser to the Global Portfolio and the Growth Portfolio (each a "Sub-
Adviser" and collectively, "Sub-Advisers"). See "The Investment Adviser" and
"The Sub-Advisers."
This Prospectus sets forth concisely the information about the Portfolios
that prospective investors ought to know before investing. Investors should
read this Prospectus and retain it for future reference.
Additional information about the Fund, the Portfolios and 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
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 AUGUST 4, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Financial Highlights........................................................ 3
Performance Information..................................................... 5
The Portfolios in Detail.................................................... 7
Other Investment Policies and Restrictions.................................. 10
Portfolio Securities and Risk Factors....................................... 13
Management of the Fund...................................................... 26
Other Information........................................................... 30
Distribution and Taxes...................................................... 33
Appendix A--Brief Explanation of Rating Categories.......................... A-1
</TABLE>
- 2 -
<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's
Annual Report contains additional performance information for each Portfolio.
A copy of the Annual Report and SAI may be obtained without charge upon
request.
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. 5.
- 3 -
<PAGE>
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). .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...................... (.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>
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 OPERATIONS
Net investment income
(loss)............... .34 .26 .22 .28 .36 .27 .30 .19 .31 .21
Net realized and
unrealized gain
(loss) on
investments.......... 5.35 10.97 (2.41) .79 .52 10.75 (.33) 6.29 1.83 1.00
---------- ---------- -------- -------- -------- -------- -------- ------- ------- -------
Total Income (loss)
from operations..... 5.69 11.23 (2.19) 1.07 .88 11.02 (.03) 6.48 2.14 1.21
---------- ---------- -------- -------- -------- -------- -------- ------- ------- -------
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 net
realized gains on
investments.......... (1.99) (3.14) .00 (.37) (.95) (1.97) (.04) (1.41) .00 .00
Distributions in
excess of net
realized gains on
investments.......... .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(a)........ 17.96% 47.12% (8.31%) 3.97% 2.35% 59.79% (.22%) 47.04% 18.62% 10.90%
RATIOS AND SUPPLEMENTAL
DATA:
Net assets, at end of
period (in thousands). $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(b). .88% .86% .84% .87% .86% .90% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment
income (loss) to
average net assets(b). .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(a)............... 45.21% 130.48% 107.33% 77.91% 77.70% 7.27% 157.07% 123.80% 76.27% 222.13%
</TABLE>
* See Notes to Financial Highlights on p. 5.
- 4 -
<PAGE>
- --------
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>
Emerging Growth....... * * * 1.16% ** ** ** ** ** **
Global................ * * * * * ** ** ** ** **
Growth................ * * * * * * * 1.13% 1.49% 1.90%
</TABLE>
* 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 this Portfolio was March 1, 1993.
PERFORMANCE INFORMATION
The Fund may include quotations of a Portfolio's total return 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 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 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 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 a Portfolio held for a stated period of time as of a stated
ending date. When a Portfolio has been in operation for the stated period, the
total return for such period will be provided if performance information is
quoted. Total return quotations are expressed as average annual compound rates
of return for each of the periods quoted. They also reflect the deduction of a
proportionate share of a Portfolio's investment advisory fees and expenses,
and assume that all dividends and capital gains distributions during the
period are reinvested in the Portfolio when made.
The rates of return shown below depict the actual investment experience of
each of the Portfolios for the periods shown. 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 STANDARD & POOR'S
COMPOSITE STOCK INDEX (S&P 500), A WIDELY USED MEASURE OF MARKET PERFORMANCE.
AVERAGE ANNUAL COMPOUNDED RATES OF RETURN
FOR THE PERIODS ENDED ON DECEMBER 31, 1996
<TABLE>
<CAPTION>
FUND PORTFOLIO INCEPTION 10 YEARS 5 YEARS 1 YEAR INCEPTION DATE
-------------- --------- -------- ------- ------ ----------------
<S> <C> <C> <C> <C> <C>
Emerging Growth.............. 20.04% N/A N/A 18.88% March 1, 1993
Global....................... 20.82% N/A N/A 27.74% December 3, 1992
Growth....................... 17.66% 17.98% 11.11% 17.96% October 2, 1986
S&P 500...................... 15.46% 15.28% 15.22% 22.96%
</TABLE>
- 5 -
<PAGE>
PERFORMANCE SHOWN IN ADVERTISING
A Portfolio may disclose in advertisements, sales literature and reports to
Contract Owners or to prospective Contract Owners, total returns for the
Portfolios 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 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
portfolio. 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.
SUB-ADVISER PERFORMANCE
A portfolio may disclose in advertisements, supplemental sales literature,
and reports to Contract Owners 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").
ALTHOUGH THE SIMILAR SUB-ADVISER FUNDS 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 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 due to, among other things, certain
inherent differences between a Portfolio and the Similar Sub-Adviser Fund.
For the Emerging Growth Portfolio and the Global Portfolio the tables set
forth below show each Portfolio's respective Similar Sub-Adviser Fund, the
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.
- 6 -
<PAGE>
SIMILAR SUB-ADVISER FUND PERFORMANCE
<TABLE>
<CAPTION>
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)
Emerging Growth Van Kampen Class A 1,652,300 11.13(2) 15.21(2) 16.54(2)
Portfolio.............. American Capital 10/2/70
Emerging Growth
</TABLE>
- --------
(1) The Janus Worldwide Fund does not have a sales load.
(2) Total returns are for Class A shares of the Van Kampen American Capital
Emerging Growth Fund ("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 different total returns.
<TABLE>
<CAPTION>
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
Emerging Growth Van Kampen Class A 1,652,300 17.91 16.58 17.23
Portfolio.............. American Capital 10/2/70
Emerging Growth
</TABLE>
THE PERFORMANCE OF SIMILAR SUB-ADVISER FUNDS DOES NOT 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 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'S 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.
INVESTMENT OBJECTIVES AND POLICIES
Each Portfolio's investment objective and, unless otherwise noted, its
investment policies and techniques, may be changed by the Board of Directors
of the Fund (the "Fund's Board") without shareholder or Contract Owner
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 Contract Owner 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 Annuity Contract. More
information about each Portfolio's investment techniques and restrictions is
set forth in the SAI for the Portfolios, which is available without charge
upon request. There can be, of course, no assurance that each Portfolio will
achieve its investment objective.
- 7 -
<PAGE>
EMERGING GROWTH PORTFOLIO
The investment objective of the Emerging Growth Portfolio is to seek capital
appreciation.
The Portfolio seeks to achieve its investment objective by investing
primarily in common stocks of small and medium-sized companies. Under normal
conditions, at least 65% of the Portfolio's total assets will be invested in
common stocks of small and medium-sized companies, both domestic and foreign,
in the early stages of their life cycle, that the Sub-Adviser believes have
the potential to become major enterprises. Investments in such companies may
offer greater opportunities for growth of capital than larger, more
established companies, but also involve certain special risks. Emerging growth
companies often have limited product lines, markets, or financial resources,
and they may be dependent upon one or a few key people for management. The
securities of such companies may be subject to more abrupt or erratic market
movements than securities of larger, more established companies or the market
averages in general.
The Portfolio does not limit its investments to any single group or type of
security. The Portfolio does not intend to invest more than 5% of its net
assets in unseasoned companies or special situations involving new management,
special products and techniques, unusual developments, mergers or
liquidations. Investments in unseasoned companies and special situations often
involve much greater risks than are inherent in ordinary investments, because
securities of such companies may be more than likely to experience unexpected
fluctuations in price.
The Portfolio's primary approach is to seek what the Sub-Adviser believes to
be unusually attractive growth investments on an individual company basis. The
Portfolio may invest in securities that have above average volatility of price
movement. The Portfolio attempts to reduce overall exposure to risk from
declines in securities prices by spreading its investments over many different
companies in a variety of industries.
While the Portfolio invests primarily in common stocks, it may invest to a
limited extent in other securities such as preferred stocks, convertible
securities, warrants (up to 5% of assets), illiquid securities (up to 15% of
its net assets), repurchase agreements, restricted securities (up to 5% of
assets) and up to 20% of its total assets in securities of foreign issuers,
including American Depositary Receipts ("ADRs").
The Portfolio expects to utilize options on securities, futures contracts
and options thereon in several different ways, depending upon the status of
the Portfolio's investment portfolio and the Sub-Adviser's expectations
concerning the securities markets.
In times of stable or rising stock prices, the Portfolio generally seeks to
obtain maximum exposure to the stock market, i.e., to be "fully invested."
Even when the Portfolio is fully invested, the Sub-Adviser believes that
prudent management may require that at least a small portfolio of assets be
available as cash to honor redemption requests and for other short term needs.
The Portfolio may 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.
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GLOBAL PORTFOLIO
The investment objective of the Global Portfolio is to seek long-term growth
of capital in a manner consistent with preservation of capital.
The Portfolio seeks to achieve its investment objective by investing in
companies on a worldwide basis, regardless of country of organization or place
of principal business activity, as well as domestic and foreign governments,
government agencies and other governmental entities. Realization of income is
not a significant investment consideration and any income realized on the
Portfolio's investments will, therefore, be incidental to the Portfolio's
objective.
The Portfolio's assets will normally be invested in securities of issuers
from at least five different countries, including the United States. The
Portfolio may, on a temporary basis, invest all of its assets in less than
five, or even a single country. When recommending allocations of the
Portfolio's investments among regions and countries, the Portfolio's Sub-
Adviser considers various factors such as prospects for relative economic
growth among countries, regions or geographic areas; expected levels of
inflation; government policies influencing business conditions; and the
outlook for currency relationships.
Although it is the policy of the Portfolio to purchase and hold securities
for long-term capital growth in a manner consistent with preservation of
capital, changes in the Portfolio will generally be made when the Sub-Adviser
believes they are advisable, typically either as a result of a security having
reached a price objective or by reason of developments not foreseen at the
time of the security's purchase.
Because the sale of a security ordinarily will be made without reference to
the length of time the security has been held, a significant number of short-
term transactions may result. The rate of portfolio turnover will not be a
limiting factor when changes are deemed to be appropriate. However, certain
tax rules may restrict the Portfolio's ability to sell securities in some
circumstances when a security has been held for an insufficient length of
time. Increased portfolio turnover necessarily results in correspondingly
higher brokerage costs for the Portfolio. These are ultimately borne by the
Policyholders.
The Sub-Adviser seeks to reduce the risks associated with these
considerations through diversification and active professional management.
The Portfolio seeks to invest substantially all of its assets in common
stocks when the Sub-Adviser believes that the relevant market environment
favors profitable investing in equity securities. Common stock investments are
selected from industries and companies that the Sub-Adviser believes are
experiencing favorable demand for their products and services, and which
operate in a favorable competitive environment and regulatory climate.
Although the assets of the Portfolio are ordinarily invested in common
stocks at most times, the Portfolio may increase its cash position (up to 100%
of assets) when the Sub-Adviser is unable to locate investment opportunities
with desirable risk/reward characteristics. The Portfolio may invest in
Government securities, corporate bonds and debentures, bank obligations, high-
grade commercial paper, preferred stocks, certificates of deposits or other
securities of U.S. issuers. These investments will be made when the Sub-
Adviser perceives an opportunity for capital growth from such securities, or
to enable the Portfolio to receive a competitive return on its uninvested
cash.
The Portfolio's investments in debt securities will be made in securities of
U.S. and foreign companies, the U.S. Government, foreign governments, and U.S.
and foreign governmental agencies and instrumentalities and other government
entities. The Portfolio may invest up to 15% of its net assets in illiquid
securities.
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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).
GROWTH PORTFOLIO
The investment objective of the Portfolio is growth of capital.
The 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
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.
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 agree-
ments, 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 pur-
chased through ADRs, European Depositary Receipts ("EDRs") and Global Deposi-
tary Receipts ("GDRs,") as well as directly) and up to 5% in high-yield bonds.
OTHER INVESTMENT POLICIES AND RESTRICTIONS
The Portfolios are subject to certain other investment policies and
restrictions which are described in the SAI for the Portfolios. Unless
otherwise noted, the investment policies, techniques, and percentage
restrictions described below are non-fundamental and may be changed by the
Fund's Board without Contract Owner 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.
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.
DIVERSIFICATION AND CONCENTRATION
The Investment Company Act of 1940, as amended ("1940 Act") classifies
investment companies as either diversified or non-diversified.
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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.
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):
. 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.
. 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.
. As a fundamental policy governing concentration, no Portfolio will
invest more than 25% of its assets in any one particular industry, other
than U.S. Government securities.
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 3-5 for more information on
historical turnover rates.)
Changes in security holdings are made by a Portfolio's Sub-Adviser when it
is deemed necessary. Such changes may result from: liquidity needs; securities
having reached a price or yield objective; anticipated changes in interest
rates or the credit standing of an issuer; or developments not foreseen at the
time of the investment decision.
A Sub-Adviser may engage in a significant number of short-term transactions
if such investing serves 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.
BORROWING
Each Portfolio may borrow money from banks for temporary or emergency
purposes. The amount borrowed by each Portfolio shall not exceed 25% of its
total assets.
To secure borrowings, a Portfolio may not mortgage or pledge its securities
in amounts that exceed 15% of its net assets. (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.
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LENDING
Each Portfolio may lend securities to broker-dealers and financial
institutions to realize additional income; the Portfolios will not lend when,
as a result of such loan, more than 25% of 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 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.
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.
OTHER INVESTMENT COMPANIES
Each 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. Each 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. 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 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.
SPECIAL SITUATIONS
A Portfolio may invest in "special situations" from time to time. A special
situation arises when, in the opinion of a Portfolio's 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 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.
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PORTFOLIO SECURITIES AND RISK FACTORS
This section provides a more detailed description of some of the types of
securities and other instruments in which a Portfolio may invest. A Portfolio
may invest in these instruments to the extent permitted by its investment
objective, policies, and restrictions. NOT ALL OF THESE INSTRUMENTS ARE USED
BY EACH PORTFOLIO. A Portfolio is not limited by this discussion and may
invest in other types of instruments not precluded by the policies discussed
above. (See "The Portfolios, in Detail," p. 7, and the SAI for more
information regarding a Portfolio's investment objective and its policies,
that include limitations imposed on certain investments.)
EQUITY SECURITIES
Equity securities include common stocks, preferred stocks and securities
convertible into common stocks, such as rights, warrants and convertible debt
securities. Equity securities may also include certain equity-indexed
securities, the value of which is linked to a securities index (e.g., the S&P
500).
COMMON STOCK represents the basic ownership of a corporation. Common stocks
historically have provided the greatest long-term growth potential in a
company, but future results are not guaranteed. Owners of common stock share
directly in the success or failure of the business.
PREFERRED STOCK ranks senior to common stock and has certain fixed-income
features.
Preferred stockholders receive dividends before they are distributed to the
common stockholders.
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 equity security. Certain of these industries,
and the risks presented by such industries, are described below.
. GOLD STOCK AND GOLD BULLION--Gold stocks are equity securities of
companies 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.
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.
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. 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.
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.
. 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.
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 effect this industry.
. 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.
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.
. 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.
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.
. 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.
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<PAGE>
RISK FACTORS
During periods of economic or financial instability, the
securities of such companies are subject to extreme price
fluctuations, reflecting the high volatility of certain natural
resources, such as precious metals, during these periods. In
addition the instability of prices of these natural resources
may result in volatile earnings of related companies, which in
turn, may affect adversely the financial condition of such
companies.
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 the Emerging
Growth Portfolio's discussion of small-cap companies under the section "THE
PORTFOLIOS IN DETAIL."
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,
collateralized mortgage obligations ("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 Investors Service, Inc. ("Moody's") or BBB by
Standard & Poors Corporation ("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.)
RISK FACTORS
Investments in debt securities are generally subject to both credit risk
and market risk. Credit risk relates to the ability of the issuer to meet
interest or principal payments, or both, as they come due. Market risk
relates to the fact that the market values of the debt securities in which
the Portfolio invests generally will be affected by changes in the level of
interest rates. An increase in interest rates will tend to reduce the
market value of debt securities, whereas a decline in interest rates will
tend to increase their value.
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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.
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 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 issuer's balance sheet, hence, an issuer with
investment grade senior debt may issue convertible securities with ratings
less than investment grade or not rated.
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.
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 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.
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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, the 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 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, 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.
MONEY MARKET INSTRUMENTS
A 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
("CDs"), time deposits and bankers' acceptances of foreign or domestic banks,
domestic savings and loan associations and other banking institutions);
commercial paper; and repurchase agreements.
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.
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
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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.
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.
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.
FOREIGN BANK OBLIGATIONS
A Portfolio may invest in foreign bank obligations and obligations of
foreign branches of domestic banks. These investments prevent certain risks.
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.
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, each Portfolio may invest in
foreign securities through ADRs or American Depositary Shares ("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.
Each Portfolio 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.
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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, 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 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.
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
a 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.
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POLITICAL INSTABILITY. In some countries, political instability, war or
diplomatic developments could affect investments.
These risks may be greater in developing countries or in countries with
limited or developing markets. In particular, developing countries have
relatively unstable governments, economies based on only a few industries,
and securities markets that trade only a small number of securities. As a
result, securities of issuers located in developing countries may have
limited marketability and may be subject to abrupt or erratic price
fluctuations.
At times, a Portfolio's foreign securities may be listed on exchanges or
traded in markets which are open on days (such as Saturday) when the Portfolio
does not compute a price or accept orders for purchase, sale or exchange of
shares. As a result, the net asset value of the Portfolio may be significantly
affected by trading on days when Contract Owners 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.
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. A 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 Commodity Futures Trading Commission
("CFTC"), the aggregate initial margin and premiums required to establish any
non-hedging positions will not exceed 5% of the fair market value of a
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.
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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. 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 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.
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:
INACCURATE MARKET PREDICTIONS. If interest rates, securities prices or
currency markets do not move in the direction expected by a Sub-Adviser who
uses derivatives based on those measures, these instruments may fall in
their intended purpose and result in losses to a 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.
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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.
TAX CONSIDERATIONS. A Portfolio may have to delay closing out certain
derivative positions to avoid adverse tax consequences.
The risk of loss from investing in derivative instruments is potentially
unlimited.
FORWARD FOREIGN CURRENCY CONTRACTS
A forward 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.
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.
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. Each Sub-Adviser 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.)
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.
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WHEN-ISSUED, DELAYED SETTLEMENT AND FORWARD DELIVERY SECURITIES
Securities may be purchased and sold on a "when-issued," "delayed
settlement," or "forward (delayed) delivery" basis.
"When-issued" or "forward delivery" refers to securities whose terms are
available, and for which a market exists, but which are not available for
immediate delivery. When-issued or forward delivery transactions may be
expected to occur a month or more before delivery is due.
A Portfolio may engage in when-issued transactions to obtain what is
considered to be an advantageous price and yield at the time of the
transaction. When a Portfolio engages in when-issued 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.
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 on 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.
RISK FACTORS
At the time of settlement, the market value of the security may be more or
less than the purchase price. A 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.
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.
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
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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 15.
In addition, the mortgage securities market may be adversely affected by
changes in government regulation or tax policies.
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").
RISK FACTORS
REITs may subject a Portfolio to certain risks associated with the direct
ownership of real estate. These risks include, among others: possible
declines in the value of real estate; possible lack of availability of
mortgage funds; extended vacancies of properties; risks related to general
and local economic conditions; overbuilding; increases in competition,
property taxes and operating expenses; changes in zoning laws; costs
resulting from the clean-up of, and liability to third parties for damages
resulting from, environmental problems; casualty or condemnation losses;
uninsured damages from floods, earthquakes or other natural disasters;
limitations on and variations in rents; and changes in interest rates.
Investing in REITs involves certain unique risks, in addition to those
risks associated with investing in the real estate industry in general.
Equity REITs may be affected by changes in the value of the underlying
property owned by the REITs, while mortgage REITs may be affected by the
quality of any credit extended. REITs are dependent upon management skills,
are not diversified, and are subject to heavy cash flow dependency, default
by borrowers, self-liquidation and the possibilities of failing to qualify
for the exemption from tax for distributed income under the Code. REITs
(especially mortgage REITs) are also subject to interest rate risk. (See
"Debt Securities and Fixed-Income Investing," page 15).
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.
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.
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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.
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.)
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.
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.
RISK FACTORS
In the event an issuer of a variable rate master demand note defaulted on
its payment obligations, a Portfolio might be unable to dispose of the note
because of the absence of a
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secondary market and could, for this or other reasons, suffer a loss to the
extent of the default.
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.
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
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.
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 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
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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.
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. For the fiscal year ended December 31, 1996, each Portfolio
paid the Investment Adviser advisory fees of 0.80% of the average daily net
assets of such Portfolio.
The Investment Adviser has voluntarily undertaken, until at least April 30,
1998, to pay expenses on behalf of each Portfolio to the extent normal
operating expenses (including investment advisory fees but excluding interest,
taxes, brokerage fees, commissions and extraordinary charges) exceed, as a
percentage of each Portfolio's average daily net assets, 1.00%. For the fiscal
year ended December 31, 1996, the expenses of the Emerging Growth Portfolio,
the Global Portfolio and the Growth Portfolio, as a percentage of each
Portfolio's average daily net assets, were 0.94%, 0.99% and 0.88%,
respectively.
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 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
objective. 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.
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
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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 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 33770-2597. 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 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 each Portfolio, 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 a 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 a Portfolio. ISI allocates to a Portfolio
distribution expenses specifically attributable to the distribution of shares
of a Portfolio. Distribution expenses not specifically attributable to the
distribution of shares of a 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 incurred with respect to any
Portfolio during the fiscal year ending December 31, 1997. Prior to ISI
seeking reimbursement of future expenses, Contract Owners will be notified in
advance.
- 28 -
<PAGE>
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 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.
THE 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 its respective 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.
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. On May 31, 1997, Morgan Stanley Group Inc.
merged with Dean Witter, Discover & Co., a financial services company, to
create Morgan Stanley, Dean Witter, Discover & Co.
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 Van Kampen for over six years and portfolio manager for the Van
Kampen American Capital Emerging Growth Fund, Inc. since April, 1989.
JANUS CAPITAL CORPORATION
Janus Capital Corporation ("Janus Capital"), located at 100 Fillmore Street,
Denver, CO 80206, serves as the Sub-Adviser to the Growth 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, 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.
- 29 -
<PAGE>
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).
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.
SUB-ADVISERS COMPENSATION
Janus Capital receives monthly compensation from the Investment Adviser at
the annual rate of 0.40% of the average daily net assets of the Growth
Portfolio and 0.40% of the average daily net assets of the Global Portfolio.
Van Kampen receives monthly compensation at the annual rate of 0.40% of the
average daily net assets of the Emerging Growth Portfolio, less 50% of amount
of excess expenses paid by the Investment Adviser on behalf of the Emerging
Growth Portfolio pursuant to any expense limitation.
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.
Sub-Advisers may also from time to time place portfolio brokerage with their
affiliates in accordance with SEC regulations.
OTHER INFORMATION
JOINT TRADING ACCOUNTS
Subject to approval by the Fund's Board, the Growth 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 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 investments made by a
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-Advisers" in the SAI.)
- 30 -
<PAGE>
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.
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 Contract. Such charges are described in the prospectus for the
Contract.
VALUATION OF SHARES
Each Portfolio's net asset value per share is ordinarily determined, once
daily, as of the close of the regular session of business on the New York
Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day the
Exchange is open.
Net asset value of a Portfolio share is computed by dividing the value of
the net assets of the Portfolio by the total number of shares outstanding in
the Portfolio.
Except for money market instruments maturing in 60 days or less, securities
held by a 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. 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 Portfolios offer their 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 Portfolios'
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 Portfolios
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 will determine if a material conflict exists and what action, if
any, should be taken in response thereto. Such action could include the
- 31 -
<PAGE>
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 Fund's Board 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 a 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 a 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 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 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 a
Portfolio and are entitled to exercise the rights directly as described above.
If and to the extent required by law, Life Companies will vote a Portfolio's
shares held in the Separate Accounts, including 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 a 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 each Portfolio ends on December 31 of each year. The Fund
will send to the Portfolios' Contract Owners, at least semi-annually, reports
showing a 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, 200 Clarendon Street, 16th Floor, Boston, MA
02116, 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.
- 32 -
<PAGE>
DISTRIBUTION AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Each Portfolio intends to distribute substantially all of the net investment
income, if any. Dividends from investment income, if any, of a 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
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 a 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 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.
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 imposed by section 817(h) of the
Code and the regulations thereunder. These requirements are in addition to the
diversification requirements imposed on a 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 a 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 a 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 a
Portfolio to satisfy the section 817(h) requirements would result in taxation
of the Separate Accounts, the insurance companies, the
- 33 -
<PAGE>
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 Portfolios and its Contract Owners; see
the SAI for a more detailed discussion. Prospective Contract Owners are urged
to consult their tax advisors.
- 34 -
<PAGE>
APPENDIX A
BRIEF EXPLANATION OF RATING CATEGORIES
<TABLE>
<CAPTION>
BOND RATING EXPLANATION
----------- -----------
<S> <C> <C>
STANDARD & POOR'S AAA Highest rating; extremely strong capacity to pay
principal and interest.
CORPORATION 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
CC, CC, C issuer's capacity to meet 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 Aaa Highest quality, smallest degree of investment
risk.
SERVICE, INC. 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 reasonably 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.
EMERGING GROWTH PORTFOLIO
GLOBAL PORTFOLIO
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-ADVISERS:
Janus Capital Corporation Van Kampen American Capital Asset
100 Fillmore Street Management, Inc. One Parkview Plaza
Denver, CO 80206 Oakbrook Terrace, IL 60181
CUSTODIAN:
Investors Bank & Trust Company
200 Clarendon Street
16th Floor
Boston, MA 02116
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
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.
EMERGING GROWTH PORTFOLIO
GLOBAL PORTFOLIO
GROWTH PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but supplements
and should be read in conjunction with the Prospectus for the Emerging Growth
Portfolio, Global Portfolio and 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.
-------------------------------------------------
Investment Adviser:
WRL INVESTMENT MANAGEMENT, INC.
Sub-Advisers:
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
JANUS CAPITAL CORPORATION
-------------------------------------------------
The date of the Prospectus to which this Statement of Additional Information
relates and the date of this Statement of Additional Information is August 4,
1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT OF CROSS-REFERENCE TO
ADDITIONAL INFORMATION PAGE IN PROSPECTUS
------------------------- ------------------
<S> <C> <C>
INVESTMENT OBJECTIVES AND POLICIES 1 7-10
Investment Restrictions........... 3 10
Emerging Growth Portfolio....... 3 8
Global Portfolio................ 4 9
Growth Portfolio................ 6 10
Investment Policies............... 8 7
Lending......................... 8 12
Borrowing....................... 9 11
Foreign Securities.............. 9 18
Foreign Exchange Transactions... 9 18
Repurchase and Reverse
Repurchase Agreements.......... 9 16
U.S. Government Securities...... 10 17
Non-Investment Grade Debt Secu-
rities......................... 10 25
Convertible Securities.......... 11 16
Investments in Futures, Options
and Other
Derivative Instruments......... 12 20
Zero Coupon, Pay-In-Kind and
Step Coupon Securities......... 24 24
Warrants and Rights............. 25 26
Pass-Through Securities......... 25 23
Mortgage-Backed Securities...... 26 23
Asset-Backed Securities......... 26 23
Other Income Producing Securi-
ties........................... 26 N/A
Illiquid and Restricted/144A Se-
curities....................... 27 22
Other Investment Companies...... 28 12
Bank and Thrift Obligations..... 28 18
Management of the Fund............ 29 26
Directors and Officers.......... 29 26
The Investment Adviser.......... 32 26
Service Plans................... 33 29
The Sub-Advisers................ 34 29
Joint Trading Accounts.......... 35 30
Portfolio Transactions and Broker-
age.............................. 35 30
Portfolio Turnover.............. 35 11
Placement of Portfolio Broker-
age............................ 36 30
Purchase and Redemption of Shares. 38 31
Determination of Offering Price. 38 31
Net Asset Valuation............. 38 31
Calculation of Performance Related
Information...................... 39 5
Total Return.................... 39 5
Taxes............................. 39 33
Capital Stock of the Fund......... 41 31
Registration Statement............ 41 N/A
Financial Statements.............. 42 32
Other Information................. 42 30
Appendix A--Description of Portfo-
lio Securities................... A-1 N/A
</TABLE>
- 2 -
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Emerging Growth Portfolio, Global Portfolio
and Growth 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"), 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, each Portfolio's investment objective and,
unless otherwise noted, its investment policies and techniques, may be changed
by the Board of Directors of the Fund without approval of shareholders or
owners of the Policies or the Annuity Contracts (collectively, "Contract
Owners"). A change in the investment objective or policies of a 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.
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
the Portfolio. A complete statement of all such fundamental policies is set
forth below. State insurance laws and regulations may impose additional
limitations on a Portfolio's investments, including a Portfolio'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
EMERGING 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. 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).
- 3 -
<PAGE>
5. Lend any security or make any other loan if, as a result, more than 25%
of its total assets would be lent to other parties (but this limitation does
not apply to purchases of commercial paper, debt securities or repurchase
agreements).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:
(A) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short, provided that margin payments and other deposits in connection
with transactions in options, futures contracts and options on futures
contracts shall not be deemed to constitute selling securities short.
(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.
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,
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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 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.
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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 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.
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 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.
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).
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<PAGE>
Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:
(A) The Portfolio 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
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<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 more than 25% of its net assets at the time
of purchase in the securities of foreign issuers and obligors.
(I) The Portfolio may not invest in companies for the purpose of exercising
control or management.
(J) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.
Except with respect to borrowing money, if a percentage limitation set forth
above is complied with at the time of the investment, a subsequent change in
the percentage resulting from any change in value or of a Portfolio's net
assets will not result in a violation of such restriction. State laws and
regulations may impose additional limitations on borrowing, lending and use of
options, futures, and other derivative instruments. In addition, such laws and
regulations may require a Portfolio's investments in foreign securities to
meet additional diversification and other requirements.
INVESTMENT POLICIES
This section explains certain other Portfolio policies, subject to each
Portfolio's investment restrictions. PLEASE CAREFULLY REVIEW THE "INVESTMENT
RESTRICTIONS" FOR EACH PORTFOLIO LISTED ABOVE. For a complete discussion of
each Portfolio's investment policies and restrictions, also refer to the
Portfolios' Prospectus.
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.
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<PAGE>
Each Portfolio may also lend (or borrow) money to other funds that are
managed by its respective Sub-Adviser, provided each Portfolio seeks and
obtains permission from the SEC. (See "Other Investment Policies And
Restrictions--Borrowing" in the Prospectus for the Portfolios).
BORROWING
Subject to its investment restrictions, each Portfolio may borrow money from
banks for temporary or emergency purposes. For a complete discussion of
borrowing, see "Other Investments Policies And Restrictions--Borrowing" in
Prospectus for the Portfolios.
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 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 that are generally issued by
domestic banks, and which 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, 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 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 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 "Portfolio
Securities And Risk Factors--Foreign Securities" and "Portfolio Securities And
Risk Factors--Foreign Bank Obligations" in the Prospectus for the Portfolios.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
Subject to a Portfolio's investment restrictions and policies, a Portfolio
may enter into repurchase or reverse repurchase agreements.
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<PAGE>
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 a Portfolio to limit repurchase agreements to those parties
whose creditworthiness has been reviewed and found satisfactory by the Sub-
Adviser. (See "Repurchase and Reverse Repurchase Agreements," in the
Prospectus for the Portfolios.)
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 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.
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").
NON-INVESTMENT GRADE DEBT SECURITIES
Subject to limitations set forth in each 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 or 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
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securities' ratings are supported by an internal credit review, which the Sub-
Adviser will conduct in each such instance. Lower-grade debt securities
usually have moderate to poor protection of principal and interest payments,
have certain speculative characteristics and involve greater risk of default
or price declines due to changes in the issuer's creditworthiness than
investment-grade debt securities. Because the market for lower-grade debt
securities may be thinner and less active than for investment grade debt
securities, there may be 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.
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 timing 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
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Portfolio may invest are subject to the same rating criteria as the
Portfolio's investment in non-convertible debt securities.
INVESTMENTS IN FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS
The following investments are subject to limitations as set forth in each
Portfolio's investment restrictions and policies:
FUTURES CONTRACTS. A Portfolio may enter into contracts for the purchase or
sale for future delivery of equity or fixed-income securities, foreign
currencies or contracts based on financial indices, including interest rates
or indices of U.S. Government or foreign government securities or equity or
fixed-income securities ("futures contracts"). U.S. futures contracts are
traded on exchanges that have been designated "contract markets" by the
Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant ("FCM"), or brokerage firm, which is a member of
the relevant contract market. Through their clearing corporations, the
exchanges guarantee performance of the contracts as between the clearing
members of the exchange. Since all transactions in the futures market are made
through a member of, and are offset or fulfilled through a clearinghouse
associated with, the exchange on which the contracts are traded, a Portfolio
will incur brokerage fees when it buys or sells futures contracts.
When a Portfolio buys or sells a futures contract, it incurs a contractual
obligation to receive or deliver the underlying instrument (or a cash payment
based on the difference between the underlying instrument's closing price and
the price at which the contract was entered into) at a specified price on a
specified date. Transactions in futures contracts generally will not be made
other than to seek to hedge against potential changes in interest or currency
exchange rates or the prices of a security or a securities index which might
correlate with or otherwise adversely affect either the value of a Portfolio's
securities or the prices of securities which the Portfolio is considering
buying at a later date.
The buyer or seller of futures contracts is not required to deliver or pay
for the underlying instrument unless the contract is held until the delivery
date. However, both the buyer and seller are required to deposit "initial
margin" for the benefit of an FCM when the contract is entered into. Initial
margin deposits are equal to a percentage of the contract's value, as set by
the exchange on which the contract is traded, and may be maintained in cash or
certain high-grade liquid assets. If the value of either party's position
declines, that party will be required to make additional "variation margin"
payments with an FCM to settle the change in value on a daily basis. The party
that has a gain may be entitled to receive all or a portion of this amount.
Initial and variation margin payments are similar to good faith deposits or
performance bonds, unlike margin extended by a securities broker, and initial
and variation margin payments do not constitute purchasing securities on
margin for purposes of the Portfolio's investment limitations. In the event of
the bankruptcy of an FCM that holds margin on behalf of a Portfolio, the
Portfolio may be entitled to return of margin owed to the Portfolio only in
proportion to the amount received by the FCM's other customers. The
Portfolio's Sub-Adviser will attempt to minimize the risk by careful
monitoring of the creditworthiness of the FCM's with which the Portfolio does
business and by depositing margin payments in a segregated account with the
custodian when practical or otherwise required by law.
Although a Portfolio would hold cash and liquid assets in a segregated
account with a value sufficient to cover the Portfolio's open futures
obligations, the segregated assets would be 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
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remains open, the Portfolio's return could be diminished due to the
opportunity cost of foregoing other potential investments.
The acquisition or sale of a futures contract may occur, for example, when a
Portfolio holds or is considering purchasing equity securities and seeks to
protect itself from fluctuations in prices without buying or selling those
securities. For example, if prices were expected to decrease, a Portfolio
might sell equity index futures contracts, thereby hoping to offset a
potential decline in the value of equity securities in the Portfolio by a
corresponding increase in the value of the futures contract position held by
the Portfolio and thereby preventing a Portfolio's net asset value from
declining as much as it otherwise would have. A Portfolio also could seek to
protect against potential price declines by selling portfolio securities and
investing in money market instruments. However, since the futures market is
more liquid than the cash market, the use of futures contracts as an
investment technique allows a Portfolio to maintain a defensive position
without having to sell portfolio securities.
Similarly, when prices of equity securities are expected to increase,
futures contracts may be bought to attempt to hedge against the possibility of
having to buy equity securities at higher prices. This technique is sometimes
known as an anticipatory hedge. Since the fluctuations in the value of futures
contracts should be similar to those of equity securities, a Portfolio could
take advantage of the potential rise in the value of equity securities without
buying them until the market has stabilized. At the 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 Portfolios 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.
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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.
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.
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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 18. Transactions in options on futures contracts will generally not be
made other than to attempt to hedge against potential changes in interest
rates or currency exchange rates or the price of a security or a securities
index which might correlate with or otherwise adversely affect either the
value of the Portfolio's securities or the process of securities which the
Portfolio is considering buying at a later date.
The purchase of a call option on a futures contract may or may not be less
risky than ownership of the futures contract or the underlying instrument,
depending on the pricing of the option compared to either the price of the
futures contract upon which it is based or the price of the underlying
instrument. As with the purchase of futures contracts, when a Portfolio is not
fully invested it may buy a call option on a futures contract to attempt to
hedge against a market advance.
The writing of a call option on a futures contract may constitute a partial
hedge against declining prices of the security or foreign currency which is
deliverable under, or of the index comprising, the futures contract. If the
futures price at the expiration of the option is below the exercise price, the
Portfolio will retain the full amount of the option premium which provides a
partial hedge against any decline that may have occurred in the Portfolio's
holdings. The writing of a put option on a futures contract may constitute a
partial hedge against increasing prices of the security or foreign currency
which is deliverable under, or of the index comprising, the futures contract.
If the futures price at expiration of the option is higher than the exercise
price, the Portfolio will retain the full amount of the option premium which
provides a partial hedge against any increase in the price of securities which
the Portfolio is considering buying. If a call or put option a Portfolio has
written is exercised, the portfolio will incur loss which will be reduced by
the amount of the premium it received. Depending on the degree of correlation
between change in the value of its portfolio securities and changes in the
value of the futures positions, a Portfolio's losses from existing options on
futures may to some extent be reduced or increase by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is similar in some
respect to the purchase of protective put options on portfolio securities. For
example, a Portfolio may buy a put option on a futures 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. 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
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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 or
exposed to that currency) in exchange for another currency that the Sub-
Adviser expects to remain stable or to appreciate relative to the U.S. dollar.
Shifting a Portfolio's currency exposure from one foreign currency to another
removes the Portfolio's opportunity to profit from increases in the value of
the original currency and involves a risk of increased losses to the Portfolio
if the Portfolio's Sub-Adviser's projection of future exchange rates is
inaccurate.
A Portfolio also may enter into forward contracts to buy or sell at a later
date instruments in which a Portfolio may invest directly or on financial
indices based on those instruments. The market for those types of forward
contracts is developing and it is not currently possible to identify
instruments on which forward contracts might be created in the future.
A Portfolio will cover outstanding forward currency contracts by maintaining
liquid portfolio securities denominated in the currency underlying the forward
contract or the currency being hedged. To the extent that a Portfolio is not
able to cover its forward currency positions with underlying portfolio
securities, the Fund's custodian will segregate cash or other liquid assets
having a value equal to the aggregate amount of the Portfolio's commitments
under forward contracts entered into with respect to position hedges and
cross-hedges. If the value of the segregated securities declines, additional
cash or liquid assets will be segregated on a daily basis so that the value of
the account will be equal to the amount of the Portfolio's commitments with
respect to such contracts. As an alternative to maintaining all or part of the
segregated assets, a Portfolio may buy call options permitting the Portfolio
to buy the amount of foreign currency subject to the hedging transaction by a
forward sale contract or the Portfolio may buy put options permitting the
Portfolio to sell the amount of foreign currency subject to a forward buy
contract.
While forward contracts are not currently regulated by the CFTC, the CFTC
may in the future assert authority to regulate forward contracts. In such
event a Portfolio's ability to utilize
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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.
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
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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.
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.
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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 hold 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 hold (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 the 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
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the exercise price. If the options are not exercised and the price of the
underlying security declines, the amount of such decline will be offset by the
amount of premium received.
The writing of covered put options is similar in terms of risk and return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and a Portfolio's gain will be limited to the
premium received. If the market price of the underlying security declines or
otherwise is below the exercise price, the Portfolio may elect to close the
position or take delivery of the security at the exercise price and a
Portfolio's return will be the premium received from the put options minus the
amount by which the market price of the security is below the exercise price.
A Portfolio may buy put options to attempt to hedge against a decline in the
value of its securities. By using put options in this way, a Portfolio will
reduce any profit it might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.
A Portfolio may buy call options to attempt to hedge against an increase in
the price of securities that the Portfolio may buy in the future. The premium
paid for the call option plus any transaction costs will reduce the benefit,
if any, realized by a Portfolio upon exercise of the option, and, unless the
price of the underlying security rises sufficiently, the option may expire
worthless to the Portfolio.
In purchasing an option, a Portfolio would be in a position to realize a
gain if, during the option period, the price of the underlying security
increased (in the case of a call) or decreased (in the case of a put) by an
amount in excess of the premium paid and would realize a loss if the price of
the underlying security did not increase (in the case of a call) or decrease
(in the case of a put) during the period by more than the amount of the
premium. If a put or call option brought by a Portfolio were permitted to
expire without being sold or exercised, the Portfolio would lose the amount of
the premium.
Although they entitle the holder to buy equity securities, warrants on and
options to purchase equity securities do not entitle the holder to dividends
or voting rights with respect to the underlying securities, nor do they
represent any rights in the assets of the issuer of those securities.
INTEREST RATE SWAPS AND SWAP-RELATED PRODUCTS. In order to attempt to
protect the value of a Portfolio's investments from interest rate or currency
exchange rate fluctuations, a Portfolio may enter into interest rate swaps,
and may buy or sell interest rate caps and floors. A Portfolio expects to
enter into these transactions primarily to attempt to preserve a return or
spread on a particular investment or portion of its portfolio. A Portfolio
also may enter into these transactions to attempt to protect against any
increase in the price of securities the Portfolio may consider buying at a
later date. A Portfolio does not intend to use these transactions as a
speculative investment. Interest rate swaps involve the exchange by a
Portfolio with another party of their respective commitments to pay or receive
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.
- 21 -
<PAGE>
Swap and swap-related products are specialized OTC instruments and their use
involves risks specific to the markets in which they are entered into. A
Portfolio will usually enter into interest rate swaps on a net basis, i.e.,
the two payment streams are netted out, with the Portfolio receiving or
paying, as the case may be, only the net amount of the two payments. The net
amount of the excess, if any, of a Portfolio's obligations over its
entitlements with respect to each interest rate swap will be calculated on a
daily basis and an amount of cash or other liquid assets having an aggregate
net asset value of at least equal to the accrued excess will be segregated
with the Fund's custodian. If a Portfolio enters into an interest rate swap on
other than a net basis, the Portfolio would segregate assets in the full
amount accrued on a daily basis of the Portfolio's obligations with respect to
the swap. A Portfolio will not enter into any interest rate swap, cap or floor
transaction unless the unsecured senior debt or the claims-paying ability of
the other party thereto is rated in one of the three highest rating categories
of at least one nationally recognized statistical rating organization at the
time of entering into such transaction. A Portfolio's Sub-Adviser will monitor
the creditworthiness of all counterparties on an ongoing basis. If there is a
default by the other party to such a transaction, a Portfolio will have
contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. The Sub-Advisers have determined
that, as a result, the swap market has become relatively liquid. Caps and
floors are more recent innovations for which standardized documentation has
not yet been developed and, accordingly, they are less liquid than swaps. To
the extent a Portfolio sells (i.e., writes) caps and floors, it will segregate
with the custodian cash or other liquid assets having an aggregate net asset
value at least equal to the full amount, accrued on a daily basis, of the
Portfolio's obligations with respect to any caps or floors.
Interest rate swap transactions are subject to limitations set forth in each
Portfolio's policies. These transactions may in some instances involve the
delivery of securities or other underlying assets by a Portfolio or its
counterparty to collateralize obligations under the swap. Under the
documentation currently used in those markets, the risk of loss with respect
to interest rate swaps is limited to the net amount of the interest payments
that a Portfolio is contractually obligated to make. If the other party to an
interest rate swap that is not collateralized defaults, a Portfolio would risk
the loss of the net amount of the payments that the Portfolio contractually is
entitled to receive. A Portfolio may buy and sell (i.e., write) caps and
floors without limitation, subject to the segregated account requirement
described above.
In addition to the instruments, strategies and risks described in this
Statement of Additional Information and in the Prospectus, there may be
additional opportunities in connection with options, futures contracts,
forward currency contracts, and other hedging techniques, that become
available as each Portfolio's Sub-Adviser develops new techniques, as
regulatory authorities broaden the range of permitted transactions and as new
instruments and techniques are developed. A Sub-Adviser may use these
opportunities to the extent they are consistent with each Portfolio's
respective investment objective and are permitted by each Portfolio's
respective investment limitations and applicable regulatory requirements.
SPECIAL INVESTMENT CONSIDERATIONS AND RISKS. The successful use of the
investment practices described above with respect to futures contracts,
options on futures contracts, forward contracts, options on securities and on
foreign currencies, and swaps and swap-related products draws upon skills and
experience which are different from those needed to select 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
- 22 -
<PAGE>
contracts and options on futures contracts, there are no daily price
fluctuation limits with respect to options on currencies, forward contracts
and other negotiated or OTC instruments, and adverse market movements could
therefore continue to an unlimited extent over a period of time. In addition,
the correlation between movements in the price of the securities and
currencies hedged or used for cover will not be perfect and could produce
unanticipated losses.
A Portfolio's ability to dispose of its positions in the foregoing
instruments will depend on the availability of liquid markets in the
instruments. Markets in a number of the instruments are relatively new and
still developing, and it is impossible to predict the amount of trading
interest that may exist in those instruments in the future. Particular risks
exist with respect to the use of each of the foregoing instruments and could
result in such adverse consequences to a Portfolio as the possible loss of the
entire premium paid for an option bought by the Portfolio, the inability of
the Portfolio, as the writer of a covered call option, to benefit from the
appreciation of the underlying securities above the exercise price of the
option and the possible need to defer closing out positions in certain
instruments to avoid adverse tax consequences. As a result, no assurance can
be given that a Portfolio will be able to use those instruments effectively
for the purposes set forth above.
In connection with certain of its hedging transactions, assets must be
segregated with the Fund's custodian bank to ensure that the Portfolio will be
able to meet its obligations under these instruments. Assets held in a
segregated account generally may not be disposed of for so long as the
Portfolio maintains the positions giving rise to the segregation requirement.
Segregation of a large percentage of the Portfolio's assets could impede
implementation of the Portfolio's investment policies or the Portfolio's
ability to meet redemption requests or other current obligations.
ADDITIONAL RISKS OF OPTIONS ON FOREIGN CURRENCIES, FORWARD CONTRACTS AND
FOREIGN INSTRUMENTS. Unlike transactions entered into by a Portfolio in
futures contracts, options on foreign currencies and forward contracts are not
traded on contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by the SEC. To the contrary, such
instruments are traded through financial institutions acting as market-makers,
although foreign currency options are also traded OTC. In an OTC trading
environment, many of the protections afforded to exchange participants will
not be available. For example, there are no daily price fluctuation limits,
and adverse market movements could therefore continue to an unlimited extent
over a period of time. Although the buyer of an option cannot lose more than
the amount of the premium plus related transaction costs, this entire amount
could be lost. Moreover, an option writer and a buyer or seller of futures or
forward contracts could lose amounts substantially in excess of any premium
received or initial margin or collateral posted due to the potential
additional margin and collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges are available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the OCC, thereby reducing
the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the OTC market, potentially permitting a Portfolio to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign
- 23 -
<PAGE>
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.
ZERO COUPON, PAY-IN-KIND AND STEP COUPON SECURITIES
Subject to any limitations set forth in the policies and investment
restrictions for a Portfolio, a Portfolio may invest in zero coupon, pay-in-
kind or step coupon securities. Zero coupon and step coupon bonds are issued
and traded at a discount from their face amounts. They do not entitle the
holder to any periodic payment of interest prior to maturity or prior to a
specified date when the securities begin paying current interest. The discount
from the face amount or par value depends on the time remaining until cash
payments begin, prevailing interest rates, liquidity of the security and the
perceived credit quality of the issuer. Pay-in-kind securities may pay all or
a portion of their interest or dividends in the form of additional securities.
Because they do not pay current income, the price of pay-in-kind securities
can be very volatile when interest rates change.
Current Federal income tax law requires holders of zero coupon securities
and step coupon securities to report the portion of the original issue
discount on such securities that accrues that year as interest income, even
though the holders receive no cash payments of interest during the year. In
order to qualify as a "regulated investment company" under the Internal
Revenue Code, each Portfolio must distribute its investment company taxable
income, including the original issue discount accrued on zero coupon or step
coupon bonds. Because a Portfolio will not receive cash payments on a current
basis in respect of accrued original-issue discount on zero coupon bonds or
step coupon bonds during the period before interest payments begin, in some
years a Portfolio may have to distribute cash obtained from other sources in
order to satisfy the distribution requirements under the Code. A Portfolio
might obtain such cash from selling other portfolio holdings. These actions
are likely to reduce the assets to which a Portfolio's expenses could be
allocated and to reduce the rate of return for the Portfolio. In some
circumstances, such sales might be necessary in order to satisfy cash
distribution requirements even though investment considerations might
otherwise make it undesirable for the Portfolio to sell the securities at the
time.
Generally, the market prices of zero coupon, step coupon and pay-in-kind
securities are more volatile than the prices of securities that pay interest
periodically and in cash and are likely to respond to changes in interest
rates to a greater degree than other types of debt securities having similar
maturities and credit quality.
- 24 -
<PAGE>
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 does not necessarily change with the value of the
underlying securities and a warrant ceases to have value if it is not
exercised prior to the expiration date.
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. A 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
- 25 -
<PAGE>
security is guaranteed by FHLMC as to timely payment of principal and
interest, but is not backed by the full faith and credit of the U.S.
Government.
FNMA issues guaranteed mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owned on the underlying pool. This type of security is guaranteed by
FNMA as to timely payment of principal and interest, but it is not backed by
the full faith and credit of the U.S. Government.
MORTGAGE-BACKED SECURITIES
A Portfolio may invest in mortgage-backed securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, or institutions such
as banks, insurance companies, and savings and loans. Some of these
securities, such as Government National Mortgage Association ("GNMA")
certificates, are backed by the full faith and credit of the U.S. Treasury
while others, such as Federal Home Loan Mortgage Corporation ("Freddie Mac")
certificates, are not.
Mortgage-backed securities represent interests in a pool of mortgages.
Principal and interest payments made on the mortgages in the underlying
mortgage pool are passed through to the Portfolio. Unscheduled prepayments of
principal shorten the securities' weighted average life and may lower their
total return. The value of these securities also may change because of changes
in the market's perception of the creditworthiness of the federal agency or
private institution that issued them. In addition, the mortgage securities
market in general may be adversely affected by changes in governmental
regulation or tax policies.
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.
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
- 26 -
<PAGE>
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 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.)
ILLIQUID AND RESTRICTED/144A SECURITIES
A Portfolio may invest up to 15% of its net assets in illiquid securities
(i.e., securities that are not readily marketable).
In recent years, a large institutional market has developed for certain
securities that are not registered under the 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 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.
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<PAGE>
OTHER INVESTMENT COMPANIES
In accordance with certain provisions of the 1940 Act, a Portfolio may
invest up to 10% of its total assets, calculated at the time of purchase, in
the securities of money market funds, which are investment companies. The 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 invests, in addition
to the investment advisory fee and expenses paid by the Portfolio. However, if
the Growth 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.
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
- 28 -
<PAGE>
may or may not be subject to reserve requirements imposed by the Federal
Reserve System or by the state in which the branch is located if the branch is
licensed by that state. In addition, branches licensed by the Comptroller of
the Currency and branches licensed by certain states ("State Branches") may or
may not be required to: (i) pledge to the regulator, by depositing assets with
a designated bank within the state, an amount of its assets equal to 5% of its
total liabilities; and (ii) maintain assets within the state in an amount
equal to a specified percentage of the aggregate amount of liabilities of the
foreign bank payable at or through all of its agencies or branches within the
state. The deposits of State Branches may not necessarily be insured by the
FDIC.
A Portfolio may purchase obligations, or all or a portion of a package of
obligations, of smaller institutions that are Federally insured, provided the
obligation of any single institution does not exceed the Federal insurance
coverage of the obligation, presently $100,000.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below:
<TABLE>
<CAPTION>
NAME, RELATIONSHIP WITH PRINCIPAL OCCUPATION
THE FUND, AND ADDRESS (1) PAST FIVE YEARS
- ------------------------- --------------------
<S> <C>
PETER R. BROWN Chairman of the Board, Peter Brown Construction Company
(DOB 5/10/28) (construction contractors and engineers), Largo,
Director Florida (1963 - present); Trustee of IDEX Series Fund;
1475 South Belcher Road former Trustee of IDEX Fund, IDEX II Series Fund and
Largo, Florida 33771 IDEX Fund 3; Rear Admiral (Ret.) U.S. Navy Reserve,
Civil Engineer Corps.
CHARLES C. HARRIS Retired (1988 - present); Senior Vice President,
(DOB 7/15/30) Treasurer (1966 - 1988), Western Reserve Life Assurance
Director Co. of Ohio; Vice President, Treasurer (1968 - 1988),
35 Winston Drive Director (1968 -1987), Pioneer Western Corporation;
Clearwater, Florida Vice President of the Fund (1986 to December, 1990);
34616 Trustee of IDEX Series Fund; former Trustee of IDEX
Fund; IDEX II Series Fund and IDEX Fund 3.
RUSSELL A. KIMBALL, Jr. General Manager, Sheraton Sand Key Resort (resort
(DOB 8/17/44) hotel), Clearwater, Florida (1975 - present).
Director
1160 Gulf Boulevard
Clearwater Beach, Flor-
ida 34630
JOHN R. KENNEY Chairman of the Board of Directors (1982 - present),
(DOB 2/8/38) Chief Executive Officer (1982 - present), President
Chairman of the Board of (1978 - 1987 and December, 1992 - present), Director
Directors and President (1978 - present), Western Reserve Life Assurance Co. of
(2) 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,
(February, 1997 - present) AEGON Asset Management
Services, Inc. Largo, Florida; Chairman of the
</TABLE>
- 29 -
<PAGE>
<TABLE>
<CAPTION>
NAME, RELATIONSHIP WITH PRINCIPAL OCCUPATION
THE FUND, AND ADDRESS (1) PAST FIVE YEARS
- ------------------------- --------------------
<S> <C>
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;
Trustee and Chairman (September, 1996 - present) of
IDEX Series Fund, (investment companies), all of Largo,
Florida.
G. JOHN HURLEY Executive Vice President (June 1993 - present), Chief
(DOB 9/12/48) Operating Officer (March, 1994 - January, 1997) Western
Director and Executive Reserve Life Assurance Co. of Ohio; Director
Vice President (2) (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
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 Vice President and Controller (1987 - present),
(DOB 11/26/56) Treasurer (February, 1997 - present), Assistant Vice
Treasurer, Principal Fi- President and Assistant Controller (1983 - 1987),
nancial Officer (2) 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 Executive Vice President (June, 1993 - present), Chief
(DOB 10/21/46) Financial Officer (December, 1995 - present), Senior
Executive Vice President Vice President (1981 - June, 1993) and Actuary (1972 -
(2) 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.
</TABLE>
- 30 -
<PAGE>
<TABLE>
<CAPTION>
NAME, RELATIONSHIP WITH PRINCIPAL OCCUPATION
THE FUND, AND ADDRESS (1) PAST FIVE YEARS
- ------------------------- --------------------
<S> <C>
REBECCA A. FERRELL Vice President and Associate General Counsel (March,
(DOB 12/10/60) 1997 - present) Assistant Vice President and Counsel
Secretary, Vice Presi- (June, 1995 - March, 1997), Attorney (August, 1993 -
dent, and Counsel (2) 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, Vice President and Counsel of IDEX
Series Fund (September, 1996 - present), 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.
</TABLE>
- --------
(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.
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 Emerging
Growth Portfolio paid Directors' fees and expenses of $4,832; the Global
Portfolio paid $4,221; and the Growth Portfolio paid $8,449, 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
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. AND 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
</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. Deferred
compensation amounts will accumulate based on the value of Class A shares of a
portfolio of the 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 July 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.
- 31 -
<PAGE>
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 each 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 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 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 each 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 each Portfolio, see
"The Sub-Advisers", page 34.
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 each Portfolio
in the following amounts:
<TABLE>
<CAPTION>
ADVISORY FEES
YEAR ENDED
--------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
PORTFOLIO 1996 1995 1994
--------- ------------ ------------ ------------
<S> <C> <C> <C>
Emerging Growth Portfolio $ 2,985,089 $1,838,573 $1,262,170
Global Portfolio 3,468,535 2,075,054 1,600,706
Growth Portfolio 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 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
- 32 -
<PAGE>
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 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 each Portfolio to the extent normal
operating expenses (including investment advisory fees but excluding interest,
taxes, brokerage fees, commissions and extraordinary charges) exceed, as a
percentage of each Portfolio's average daily net assets, 1.00%. There were no
expenses paid by the Investment Adviser on behalf of the Portfolios for the
fiscal years ended December 31, 1996, 1995 and 1994, inasmuch as the normal
operating expenses of each Portfolio did not exceed the limitations described
above.
SERVICE PLANS
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. 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
- 33 -
<PAGE>
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 prospectuses and statements 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 incurred with respect to any Portfolio during the fiscal
year ending December 31, 1997. Prior to ISI seeking reimbursement of future
expenses, 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-ADVISERS
This discussion supplements the information provided about each Sub-Adviser
under the caption "Management of the Fund--The Sub-Advisers" in the
Prospectus.
Each Sub-Adviser serves, pursuant to a Sub-Advisory Agreement dated January
1, 1997 between WRL Management and the respective Sub-Adviser, on behalf of
each Portfolio. Each 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 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
terminates automatically in the event of assignment (within the meaning of the
1940 Act) or termination of the Investment Advisory Agreement.
- 34 -
<PAGE>
Pursuant to the Sub-Advisory Agreement, 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, each Sub-Adviser is responsible for
the actual management of their respective Portfolio(s) and for making
decisions to buy, sell or hold any particular security. Each 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 respective Portfolios.
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. Morgan Stanley Group, Inc. merged with Dean Witter, Discover & Co., a
financial services company, on May 31, 1997, to create Morgan Stanley, Dean
Witter, Discover & Co.
JANUS CAPITAL CORPORATION ("Janus Capital"), located at 100 Fillmore Street,
Denver, Colorado 80206, serves as Sub-Adviser to the Global and Growth
Portfolios and has been engaged in the management of the Janus funds since
1969. Janus Capital 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 Capital
approximately $60 billion as of July 1, 1997. Kansas City Southern Industries,
Inc. ("KCSI") owns 83% of Janus Capital. 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.
The method of computing each Sub-Adviser's fee is set forth in the
Prospectus. For the years ended December 31, 1996, 1995 and 1994, each Sub-
Adviser was paid fees in the amount of $1,492,545, $919,287 and $630,629,
respectively, for the Emerging Growth Portfolio; $1,734,268, $1,037,527 and
$801,005, respectively, for the Global Portfolio; and $5,568,661, $3,923,875
and $3,425,888, respectively, for the Growth Portfolio.
JOINT TRADING ACCOUNTS
As described in the Prospectus, the Global and Growth Portfolios and other
clients of Janus Capital 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 Janus Capital and certain of
its affiliates by the SEC. All joint account participants including each
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 each Portfolio in
withdrawing their assets from joint trading accounts.
PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TURNOVER
The information that follows supplements the information provided about
portfolio turnover under the caption "Other Investment Policies and
Restrictions--Portfolio Turnover" in the
- 35 -
<PAGE>
Prospectus. In computing the portfolio turnover rate for the Portfolios,
securities whose maturities or expiration dates at the time of acquisition are
one year or less are excluded. Subject to this exclusion, the turnover rate
for 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 year
ended December 31, 1996, 1995 and 1994:
PORTFOLIO TURNOVER RATES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
PORTFOLIO 1996 1995 1994
--------- ------ ------- -------
<S> <C> <C> <C>
Emerging Growth 80.02% 124.13% 72.62%
Global 88.31% 130.60% 192.06%
Growth 45.21% 130.48% 107.33%
</TABLE>
There are no fixed limitations regarding the portfolio turnover of the
Portfolios. Portfolio turnover rates are expected to fluctuate under
constantly changing economic conditions and market circumstances. Higher
turnover rates tend to result in higher brokerage fees. Securities initially
satisfying the basic policies and objective of 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, each Sub-Adviser
is primarily responsible for placement of a Portfolio's securities
transactions. In placing orders, it is the policy of a Portfolio to obtain the
most favorable net results, taking into account various factors, including
price, dealer spread or commissions, if any, size of the transaction and
difficulty of execution. While each Sub-Adviser generally will seek reasonably
competitive spreads or commissions, a Portfolio will not necessarily be paying
the lowest spread or commission available. A Portfolio does not have any
obligation to deal with any broker, dealer or group of brokers or dealers in
the execution of transactions in portfolio securities.
Decisions as to the assignment of portfolio brokerage business for a
Portfolio and negotiation of its commission rates are made by the Sub-Adviser,
whose policy is to obtain "best execution" (prompt and reliable execution at
the most favorable security price) of all portfolio transactions. In placing
portfolio transactions, the Sub-Adviser may give consideration to brokers who
provide supplemental investment research, in addition to such research
obtained for a flat fee, to the Sub-Adviser, and pay spreads or commissions to
such brokers or dealers furnishing such 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
- 36 -
<PAGE>
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 the 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. 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.
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 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 a Sub-Adviser deems the purchase
or sale of a security to be in the best interests of a Portfolio as well as
other accounts or companies, it may to the extent permitted by applicable laws
and regulations, but will not be obligated to, aggregate the securities to be
sold or purchased for the Portfolio with those to be sold or purchased for
such other accounts or companies in order to obtain favorable execution and
lower brokerage commissions. In that event, allocation of the securities
purchased or sold, as well as the expenses incurred in the transaction, will
be made by the Sub-Adviser in the manner it considers to be most equitable and
consistent with its fiduciary obligations to the Portfolio and to such other
accounts or companies. In some cases this procedure may adversely affect the
size of the position obtainable for a Portfolio.
The Board of Directors of the Fund periodically reviews the brokerage
placement practices of each Sub-Adviser on behalf of the Portfolios and
reviews the prices and commissions, if any, paid by the Portfolios to
determine if they were reasonable.
The Board of Directors of the Fund has authorized the Sub-Advisers to
consider sales of the Policies and Annuity Contracts issued by a broker-dealer
as a factor in the selection of broker-
- 37 -
<PAGE>
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; 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.
COMMISSION PAID BY THE PORTFOLIOS
<TABLE>
<CAPTION>
AFFILIATED BROKERAGE
AGGREGATE COMMISSIONS COMMISSIONS YEAR
YEAR ENDED DECEMBER 31 ENDED DECEMBER 31
----------------------------------- ----------------------
1996 1995 1994 1996 1995 1994
---------- ---------- ---------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Emerging Growth $ 415,717 $ 542,420 $ 317,287 N/A N/A N/A
Global 1,269,275 712,827(1) 241,051 N/A N/A N/A
Growth 720,978 1,577,115 1,466,443 N/A N/A $2,796
</TABLE>
- --------
(1) This figure is higher than 1994 due to the relative increase in the amount
of total assets invested in foreign securities.
PURCHASE AND REDEMPTION OF SHARES
DETERMINATION OF OFFERING PRICE
Shares of the Portfolios are currently sold only to the separate accounts
(the "Separate Accounts") to form the benefits under certain variable life
policies (the "Policies") and variable annuity contracts (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 Annuity Contracts. Such allocations 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 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 the
Portfolios" 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.
- 38 -
<PAGE>
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.
TOTAL RETURN
Total return quotations for each 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 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 a Portfolio when made. The calculations also
assume a complete redemption as of the end of the particular period.
Total return quotation calculations do not reflect charges or deductions
against the Separate Accounts or charges and deductions against the Policies
or Annuity Contracts. Accordingly, these rates of return do not illustrate how
actual investment performance will affect benefits under the Policies or
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.
TAXES
Shares of the Portfolios are offered to the Separate Accounts of PFL that
funds the Contracts. See the respective prospectuses for the Contracts for a
discussion of the special taxation of insurance companies with respect to the
Separate Account and the Contract, and the owner thereof.
Such Portfolio has qualified, and expects to continue to qualify, for
treatment as a regulated investment company ("RIC") under the Internal Revenue
Code of 1986, as amended (the "Code"). In order to qualify for that treatment,
a 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
- 39 -
<PAGE>
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 a 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 Contracts.
A Portfolio will not be subject to the 4% Federal excise tax imposed on RICs
that do not distribute substantially all their income and gains each calendar
year because that tax does not apply to a RIC whose only shareholders are
segregated asset accounts of life insurance companies held in connection with
variable annuity contracts and/or variable life insurance policies.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith by the
Portfolios. Income from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and income from
transactions in options, futures and forward contracts derived by a Portfolio
with respect to its business of investing in securities or foreign currencies,
will qualify as permissible income under the Income Requirement. However,
income from the disposition of options and futures contracts (other than those
on foreign currencies) will be subject to the Short-Short Limitation if they
are held for less than three months. Income from the disposition of foreign
currencies, and options, futures, and forward contracts on foreign currencies,
that are not directly related to a Portfolio's principal business of investing
in securities (or options and futures with respect 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 a 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 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, a 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.
- 40 -
<PAGE>
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, 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 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 foregoing is only a general summary of some of the important Federal
income tax considerations generally affecting a Portfolio and its Owners. No
attempt is made to present a complete explanation of the Federal tax treatment
of a 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. 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
Portfolio; Growth & Income Portfolio; Balanced Portfolio; Bond Portfolio;
Short-to-Intermediate Government Portfolio; Money Market Portfolio; C.A.S.E.
Growth & Income Portfolio; CA.S.E. Quality Growth Portfolio; Foreign Sector
Portfolio; US Sector Portfolio; Janus Balanced Portfolio; and U.S. Equity
Portfolio. ONLY THE PORTFOLIOS DESCRIBED IN THIS SAI ARE AVAILABLE THROUGH THE
CONTRACT YOU HAVE CHOSEN.
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.
- 41 -
<PAGE>
FINANCIAL STATEMENTS
The audited financial statements for each 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 each Portfolio of the Fund.
CUSTODIAN
Investors Bank & Trust Company ("IBT"), located at 200 Clarendon Street,
16th Floor, Boston, Massachusetts 02116, serves as the Fund's Custodian and
Dividend Disbursing Agent. IBT provides comprehensive asset administrative
services to the Fund 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.
- 42 -
<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.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 issues
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.
- --------
* Short-term Securities.
A-1
<PAGE>
10.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 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.
11.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.
12.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.
13.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.
A-2
<PAGE>
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
then 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.
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 payments that will be generated by
this security separately. Proprietary receipts, such as Certificates of
Accrual on Treasury Securities (CATS), Treasury
A-3
<PAGE>
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.
19. Bond Warrants. A bond 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.
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 a direct or indirect interest in specified equipment or equipment
leases (including, but not limited to, railroad rolling stock, planes,
trucking or shipping fleets, or other personal property).
A-4
<PAGE>
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. 30 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 1st day of
August, 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. 30 to its Registration Statement has been signed
below by the following persons in the capacities and on the dates
indicated:
<TABLE>
Signature and Title Date
- ------------------- ----
<S> <C>
/s/ John R. Kenney August 1, 1997
- ---------------------------------------
Chairman of the Board, Chief
Executive Officer and President
John R. Kenney
/s/ G. John Hurley August 1, 1997
- ---------------------------------------
Executive Vice President and Director
G. John Hurley
/s/ Peter R. Brown August 1, 1997
- ---------------------------------------
Director - Peter R. Brown *
/s/ Charles C. Harris August 1, 1997
- ----------------------------------------
Director - Charles C. Harris*
/s/ Russell A. Kimball, Jr. August 1, 1997
- ----------------------------------------
Director - Russell A. Kimball, Jr. *
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
/s/ Allan J. Hamilton August 1, 1997
- ----------------------------------------
Treasurer and Principal
Financial Officer
/s/ Kenneth P. Beil August 1, 1997
- ----------------------------------------
Vice President and
Principal Accounting Officer
Kenneth P. Beil
/s/ Thomas E. Pierpan August 1, 1997
- -----------------------------------------
* Signed by Thomas E. Pierpan
as Attorney-in-fact
</TABLE>
2
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements.
1. The audited Financial Statements of the Emerging Growth
Portfolio, Global Portfolio and Growth Portfolio in the 1996
Annual Report for the Fund are incorporated by reference
into the Statement of Additional Information for the
Emerging Growth, Global and Growth Portfolios. (Part B)
2. Audited Per Share Income and Capital Changes are included in
the Prospectus for the Portfolios. (Part A)
(b) Exhibits
1. (A)Articles of Incorporation of WRL Series Fund, Inc. (3)
(B)Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (3)
(C)Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (3)
(D)Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (3)
(E)Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (3)
(F)Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (3)
(G)Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (3)
(H)Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (4)
(I)Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (4)
(J)Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (5)
2. Bylaws of WRL Series Fund, Inc. (3)
3. Not applicable.
4. Not applicable.
5. (i) Investment Advisory Agreement on behalf of the
Portfolios of the WRL Series Fund, Inc. with WRL
Investment Management, Inc.
(ii) Form of Sub-Advisory Agreement on behalf of the
Growth, Bond and Global Portfolios of the Fund. (3)
(v) Form of Sub-Advisory Agreement on behalf of the
Emerging Growth Portfolio of the Fund. (3)
6. Distribution Agreement. (4)
7. Directors' Deferred Compensation Plan. (2)
8. Custodian Agreement. (4)
9. Administrative Services and Transfer Agency Agreement. (4)
C-1
<PAGE>
10. Opinion and consent of Thomas E. Pierpan, Esq. as to
legality of the securities being registered. (5)
11. Consent of Price Waterhouse LLP.
12. Not applicable.
13. Not applicable.
14. Not applicable.
15. Plan of Distribution. (6)
16. Schedules for Computations of Performance Quotations. (5)
17. Financial Data Schedules. (5)
18. Powers of Attorney. (5)
- ---------------------
(1) Previously filed with Post-Effective Amendment No. 19 to Form N-1A dated
April 21, 1995 and incorporated herein by reference.
(2) Previously filed with Post-Effective Amendment No. 23 to Form N-1A dated
April 19, 1996 and incorporated herein by reference.
(3) Previously filed with Post-Effective Amendment No. 25 to Form N-1A dated
October 17, 1996 and incorporated herein by reference.
(4) Previously filed with Post-Effective Amendment No. 26 to Form N-1A dated
December 26, 1996 and incorporated herein by reference.
(5) Previously filed with Post-Effective Amendment No. 28 to Form N-1A dated
April 24, 1997, and incorporated herein by reference.
(6) Previously filed with Post-Effective Amendment No. 29 to Form N-1A dated
June 30, 1997, 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, Global and Emerging Growth Portfolio
Common Stock are sold to Pooled Account No. 27 established by AUSA Life
Insurance Company, Inc.
Item 26. Number of Holders of Securities.
-------------------------------
<TABLE>
<CAPTION>
(2)
(1) Number of Record Holders
Title of Class as of July 20, 1997
-------------- -----------------------
<S> <C>
Growth Portfolio
Common Stock ($.01 par value) 4
Global Portfolio
Common Stock ($.01 par value) 3
Emerging Growth Portfolio
Common Stock ($.01 par value) 3
</TABLE>
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<PAGE>
Item 27. Indemnification.
----------------
Article VI of the By-Laws of WRL Series Fund, Inc. provides in its entirety as
follows:
Each director, officer, or employee (and his heirs, executors and
administrators) shall be indemnified by the Corporation against all
liability and expense incurred by reason of the fact that he is or was a
director, officer or employee of the corporation, to the full extent and
in any manner permitted by Maryland law, as in effect at any time,
provided that nothing herein shall be construed to protect any director,
officer or employee against any liability to the corporation or to its
security holders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office ("disabling conduct").
No indemnification of a director, officer or employee shall be made
pursuant to the preceding sentence unless there has been (a) a final
decision on the merits by a court or other body before whom the proceeding
was brought that the person to be indemnified ("indemnity") was not liable
by reason of disabling conduct or (b) in the absence of such a decision, a
reasonable determination, based upon a review of the facts, that the
indemnity was not liable by reason of disabling conduct by (i) the vote of
a majority of a quorum of directors who are neither "interested persons"
of the corporation, as defined in Section 2(a)(19) of the Investment
Company Act of 1940, nor parties to the proceeding ("non-interested, non-
party directors"), or (ii) an independent legal counsel in a written
opinion. Reasonable expenses incurred by each such director, officer or
employee may be paid by the corporation in advance of the final
disposition of any proceeding to which such person is a party, to the full
extent and under the circumstances permitted by Maryland law, provided
that such person undertakes to repay the advance unless it is ultimately
determined that he is entitled to indemnification and either (i) he
provides security for his undertaking, (ii) the corporation is insured
against losses by reason of any lawful advances or (iii) a majority of a
quorum of the non-interested, non-party directors, or an independent legal
counsel in a written opinion, determines, based on a review of readily
available facts, and there is reason to believe that such person
ultimately will be found entitled to indemnification. The corporation may
purchase and maintain insurance on behalf of any person who is or was a
director, officer or employee of the corporation against any liability
asserted against and incurred by such person in any such capacity or
arising out of such person's position, whether or not the corporation
would have the power to indemnify against such liability under the
provisions of this Article VI.
RULE 484 UNDERTAKING
--------------------
Insofar as indemnification for liability arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser.
-----------------------------------------------------
A. WRL Investment Management, Inc.
-------------------------------
WRL Investment Management, Inc. ("WRL Management") is principally
engaged in offering investment advisory services.
The only business, professions, vocations or employments of a
substantial nature of Messrs. Kenney, Hurley and Yaeger, directors of
WRL Management, are described in the Statement of Additional
Information under the section entitled "Management of the Fund."
Additionally, the following describes the principal occupations of
other persons who serve as executive officers of WRL Management:
Kenneth P. Beil, President and Treasurer, is Vice President, Fund
Operations and Principal Accounting Officer of the WRL Series Fund,
Inc., Vice President of Western Reserve Life Assurance Co. of Ohio
("Western Reserve Life") and President of WRL Investment Services,
Inc.; William H.
C-3
<PAGE>
Geiger, Esq., Secretary, is Assistant Secretary of the WRL Series Fund,
Inc., Senior Vice President, Secretary, General Counsel and Group Vice
President - Compliance of Western Reserve Life, and Assistant Secretary
of WRL Investment Services, Inc.; and Thomas E. Pierpan, Esq., Vice
President and General Counsel, is Vice President and Assistant
Secretary of the WRL Series Fund, Inc., Vice President, Associate
General Counsel and Assistant Secretary of Western Reserve Life, and
Vice President, Secretary and General Counsel of WRL Investment
Services, Inc.
B. Growth and Global Portfolios: Sub-Adviser - Janus Capital Corporation
----------------------------------------------------------------------
Janus Capital Corporation, the Sub-Adviser to the Growth and Global
Portfolios of the WRL Series Fund, Inc. is majority-owned by Kansas
City Southern Industries, Inc.
Janus Capital Corporation also serves as sub-adviser to certain of the
mutual funds within the IDEX Group and as investment adviser or sub-
adviser to other mutual funds, and for private and retirement accounts.
Thomas H. Bailey, Trustee, Chairman and President of Janus Investment
Fund and Janus Aspen Series, Chairman, Director and President of the
Sub-Adviser and Chairman and Director of IDEX Management, Inc., has no
business, profession, vocation or employment of a substantial nature
other than his positions with IDEX Management, Inc. and Janus Capital
Corporation. James P. Craig, Executive Vice President 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. Michael Stolper, a Director
of Janus Capital Corporation, is President of Stolper & Company, 525
"B" Street, 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, 9300 Ward
Parkway, 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. 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. On May 31, 1997, Morgan
Stanley Group Inc. merged with Dean Witter, Discover & Co., a financial
services company.
Don G. Powell, Chairman and Director of the Van Kampen American Capital
Asset Management, Inc. ("Sub-Adviser") and Chairman 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, and Van Kampen American Capital Investment Advisory Corp. ("VK
Advisor") and is Executive Vice President of VKAC; Ronald A.
C-4
<PAGE>
Nyberg, Executive Vice President, General Counsel and Director of the
Sub-Adviser, and Executive Vice President and General Counsel of VKAC;
William R. Rybak, Executive Vice President, CFO and Director of Sub-
Adviser and Executive Vice President and CFO of VKAC; Alan T.
Sachtleben, Executive Vice President of the Sub-Adviser and the VK
Advisor; and Peter W. Hegel, Executive Vice President of the Sub-
Adviser and VK Advisor.
Item 29. Principal Underwriters.
-----------------------
(a) The Registrant entered into a Distribution Agreement with
InterSecurities, Inc. ("ISI"), whose address is P.O. Box 9053,
Clearwater, FL 34618-9053, to act as the principal underwriter of Fund
Shares. ISI also serves as an investment adviser and principal
underwriter to the IDEX Series Fund and as principal underwriter to the
WRL Series Life Account and the WRL Series Annuity Account.
(b) Directors and Officers of Principal Underwriter:
<TABLE>
<CAPTION>
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
- --------------------------- ------------------------ ----------------------
<S> <C> <C>
John R. Kenney* Chairman and Director Chairman and President
G. John Hurley* Director, President and Director and Executive
CEO Vice President
William H. Geiger* Director and Secretary Assistant Secretary
Rebecca A. Ferrell* Assistant Vice President, Secretary, Vice
Counsel and Assistant President and Counsel
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, and N/A
Associate Counsel
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 N/A
Treasurer
Kristy L. Dowd* Vice President - Project N/A
Development
Diane Rogers* Assistant Vice President N/A
Ronald T. Klimas* Assistant Vice President N/A
Russell W. Crooks* Assistant Vice President N/A
Margaret Cullem-Fiore Assistant Vice President N/A
and Associate Counsel
</TABLE>
C-5
<PAGE>
<TABLE>
<S> <C> <C>
Gregory Limardi* Assistant Vice President 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
Stephen R. Breininger* Assistant Vice President N/A
James Kiely* Assistant Secretary N/A
Laura Schneider* Assistant Secretary N/A
</TABLE>
---------------
*201 Highland Avenue, Largo, Florida 33770
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 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, 200 Clarendon Street, 16th
Floor, Boston, MA 02111.
Item 31. Management Services.
--------------------
Not applicable
Item 32. Undertakings.
-------------
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-6
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Exhibits Filed with
Post-Effective Amendment No. 30 to
Registration Statement
on Form N-1A
WRL Series Fund, Inc.
Registration No. 33-507
<PAGE>
Exhibit Index
Exhibit Description
No. of Exhibit
-------- ----------
5.(i) Investment Advisory Agreement on behalf of the Portfolios of WRL
Series Fund, Inc. with WRL Investment Management, Inc.
11. Consent of Price Waterhouse LLP.
<PAGE>
EXHIBIT 5(i)
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 &
Omissions Coverage and Directors and Officers Coverage, in accordance
with the provisions of the 1940 Act and the rules thereunder;
(k) services for shareholders, including allocable telephone and
personnel expenses;
(l) brokerage commissions and all other expenses in connection with
execution of portfolio transactions, including interest:
(m) all federal, state and local taxes (including stamp, excise,
income and franchise taxes) and the preparation and filing of all
returns and reports in connection therewith;
(n) costs of certificates and the expenses of delivering such
certificates to the purchasers of shares relating thereto;
(o) expenses of local representation in Maryland;
(p) fees and/or expenses payable pursuant to any plan of
distribution adopted with respect to the Fund in accordance with
Section 12(b) of the 1940 Act and Rule 12b-1 thereunder;
(q) expenses of shareholders' meetings and of preparing, printing
and distributing notices, proxy statements and reports to
shareholders;
(r) expenses of preparing and filing reports with federal and state
regulatory authorities;
(s) all costs and expenses, including fees and disbursements, of
counsel and auditors, filing and renewal fees and printing costs in
connection with the filing of any required amendments, supplements or
renewals of registration statement, qualifications or prospectuses
under the Securities Act of 1933 and the securities laws of any
states or territories subsequent to the effectiveness of the initial
registration statement under the Securities Act of 1933;
(t) all costs involved in preparing and printing prospectuses of
the Fund;
(u) extraordinary expenses; and
(v) all other expenses properly payable by the Fund or the
Portfolios.
Page 3
<PAGE>
5. Treatment of Investment Advice. With respect to the Portfolios, the
-------------------------------
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.
/s/ Priscilla I. Hechler By: /s/ John R. Kenney
- ------------------------ -----------------------------------
Assistant Vice President Chairman of the Board and President
and Assistant Secretary
ATTEST: WRL INVESTMENT MANAGEMENT, INC.
/s/ Priscilla I. Hechler By: /s/ Kenneth P. Beil
- ------------------------------ ---------------------
Assistant Vice President President and Treasurer
and Assistant Secretary
/697advis.doc/
Page 5
<PAGE>
Schedule A
SCHEDULE EFFECTIVE JUNE 16, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF MONTHLY EFFECTIVE DATE/TERMINATION
PORTFOLIO AVERAGE DAILY NET DATE
ASSETS
<S> <C> <C>
January 1, 1997/
0.80% January 1, 1999
Growth
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 DATE/TERMINATION
PORTFOLIO AVERAGE DAILY NET DATE
ASSETS
<S> <C> <C>
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
</TABLE>
<PAGE>
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 constituting parts of this Post-Effective
Amendment No. 30 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 references to us under
the heading "Independent Accountants" in the Prospectus and Statement of
Additional Information.
Price Waterhouse LLP
Kansas City, Missouri
August 4, 1997
