PROSPECTUS
WRL SERIES FUND, INC.
201 Highland Avenue
Largo, Florida 33770-2597
Telephone: (800) 851-9777
(813) 585-6565
WRL Series Fund, Inc. (the "Fund") is a diversified, open-end management
investment company consisting of twenty-two separate series or investment
portfolios. The Fund is registered under the Investment Company Act of 1940,
as amended (the "1940 Act"). This Prospectus pertains to sixteen of the
Portfolios of the Fund: Aggressive Growth Portfolio, Emerging Growth
Portfolio, International Equity Portfolio, Global Sector Portfolio, Global
Portfolio, Growth Portfolio, C.A.S.E. Growth Portfolio, U.S. Equity
Portfolio, Value Equity Portfolio, Tactical Asset Allocation Portfolio,
Equity-Income Portfolio, Utility Portfolio, Balanced Portfolio, Bond
Portfolio, Short-to-Intermediate Government Portfolio and Money Market
Portfolio (the "Portfolios"). For a brief description of these Portfolios,
see "Portfolios At A Glance" on page 8.
Shares of the Fund's Portfolios are currently sold only to separate accounts
(the "Separate Accounts") of Western Reserve Life Assurance Co. of Ohio
("WRL"), PFL Life Insurance Company ("PFL"), and AUSA Life Insurance Company,
Inc. ("AUSA") (WRL, PFL, and AUSA together, the "Life Companies") to fund the
benefits under certain individual flexible premium variable life insurance
policies (the "Policies") and individual and group variable annuity contracts
(the "Annuity Contracts"). The Life Companies are affiliates. The Separate
Accounts, which may or may not be registered with the Securities and Exchange
Commission (the "SEC"), invest in shares of one or more of the Portfolios in
accordance with the allocation instructions received from holders of the
Policies and the Annuity Contracts (collectively, the "Policyholders"). Such
allocation rights are further described in the prospectuses or disclosure
documents for the Policies and the Annuity Contracts. A particular Portfolio
of the Fund may not be available under the Policy or Annuity Contract you
have chosen or may not be available in your state due to certain state
insurance law considerations. The prospectus or disclosure document for the
particular Policy or Annuity Contract you have chosen will indicate the
Portfolios which are generally available under the applicable Policy or
Annuity Contract and should be read in conjunction with this Prospectus.
This Prospectus sets forth concisely the information about the Portfolios
that prospective investors ought to know before investing. Investors should
read this Prospectus and retain it for future reference.
Additional information about the Fund and the Portfolios has been filed with
the SEC and is available upon request without charge by calling or writing
the Fund. The Statement of Additional Information (the "SAI") pertaining to
the Portfolios bears the same date as this Prospectus and is incorporated by
reference into this Prospectus in its entirety.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, A BANK OR OTHER FINANCIAL INSTITUTION, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT PROSPECTUS OR DISCLOSURE
DOCUMENT FOR THE APPLICABLE VARIABLE ANNUITY CONTRACT OR FLEXIBLE PREMIUM
VARIABLE LIFE INSURANCE POLICY. ALL PROSPECTUSES SHOULD BE READ AND RETAINED
FOR FUTURE REFERENCE.
AN INVESTMENT IN THE MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR GUARANTEED
BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE PORTFOLIO WILL
BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
Prospectus Dated January 1, 1997
<PAGE>
WRL SERIES FUND, INC.
201 Highland Avenue
Largo, Florida 33770-2597
Telephone (813) 585-6565
(800) 851-9777
FINANCIAL HIGHLIGHTS ...................................................... 1
PORTFOLIOS AT A GLANCE .................................................... 8
PERFORMANCE INFORMATION ................................................... 11
THE PORTFOLIOS IN DETAIL .................................................. 12
MANAGEMENT OF THE FUND .................................................... 36
OTHER INFORMATION ......................................................... 45
DISTRIBUTIONS AND TAXES ................................................... 47
i
<PAGE>
FINANCIAL HIGHLIGHTS
The information in the tables below is taken from each Portfolio's audited
financial statements, which have been incorporated by reference into the SAI.
(The information for the period 1/1/96 - 6/30/96 is unaudited.) The tables
provide information for one share of capital stock outstanding during the
respective Portfolio's fiscal periods ended on December 31 of each year. Expense
and income ratios and portfolio turnover rates have been annualized for periods
of less than one year. Total returns for periods of less than one year are not
annualized. A Fund Annual Report and Semi-Annual Report contain additional
performance information for each Portfolio. A copy of the Annual Report and
Semi-Annual Report may be obtained without charge upon request.
GROWTH PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER 31,
1/1/96 TO -------------------------------------------------------------------------------------
6/30/96 1995 1994 1993 1992 1991 1990 1989 1988
----------- ---------- -------- -------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD ....... $ 31.66 $ 23.81 $ 26.25 $ 25.83 $ 26.26 $ 17.48 $ 17.85 $ 12.97 $ 11.14
INCOME FROM
INVESTMENT OPERATIONS
NET INVESTMENT INCOME . .18 .26 .22 .28 .36 .27 .30 .19 .31
NET GAINS (LOSSES) ON
SECURITIES (BOTH
REALIZED
AND UNREALIZED) ........ 4.65 10.97 (2.41) .79 .52 10.75 (.33) 6.29 1.83
---------- ---------- ------- ------- ------- -------- -------- ------ -------
TOTAL INCOME (LOSS) FROM
INVESTMENT OPERATIONS . 4.83 11.23 (2.19) 1.07 .88 11.02 (.03) 6.48 2.14
---------- ---------- -------- -------- ------- -------- -------- ------ -------
LESS DISTRIBUTIONS
DIVIDENDS (FROM NET
INVESTMENT INCOME) ...... (.06) (.24) (.22) (.28) (.36) (.27) (.30) (.19) (.31)
DISTRIBUTIONS (FROM
CAPITAL GAINS) .......... .00 (3.14) .00 (.37) (.95) (1.97) (.04) (1.41) .00
---------- ---------- -------- -------- -------- -------- -------- ------ -------
DISTRIBUTIONS IN EXCESS
OF CAPITAL GAINS ........ .00 .00 (.03) .00 .00 .00 .00 .00 .00
---------- ---------- -------- -------- -------- -------- -------- ------- -------
TOTAL DISTRIBUTIONS ....... (.06) (3.38) (.25) (.65) (1.31) (2.24) (.34) (1.60) (.31)
---------- ---------- -------- -------- -------- -------- -------- ------- -------
NET ASSET VALUE,
END OF PERIOD ............ $ 36.43 $ 31.66 $ 23.81 $ 26.25 $ 25.83 $ 26.26 $ 17.48 $ 17.85 $ 12.97
========== ========== ======== ======== ======== ======== ======== ======= =======
TOTAL RETURN* .............. 15.25% 47.12% (8.31%) 3.97% 2.35% 59.79% (.22%) 47.04% 18.62%
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD
(000 OMITTED) ............ $1,436,248 $1,195,174 $814,383 $934,810 $711,422 $393,511 $129,057 $74,680 $28,497
RATIO OF EXPENSES TO
AVERAGE NET ASSETS** ..... .82% .86% .84% .87% .86% .90% 1.00% 1.00% 1.00%
RATIO OF NET INVESTMENT
INCOME TO AVERAGE
NET ASSETS ............... 1.06% .90% .88% 1.07% 1.44% 1.21% 2.06% 1.18% 2.50%
RATIO OF COMMISSION
PAID TO NUMBER
OF SHARES ................ 4.44% N/A N/A N/A N/A N/A N/A N/A N/A
PORTFOLIO TURNOVER RATE ... 19.58% 130.48% 107.33% 77.91% 77.70% 7.27% 157.01% 123.80% 76.27%
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
10/2/86 TO
1987 12/31/86
------- -----------
<S> <C> <C>
NET ASSET VALUE, $ 10.14 $ 10.00
BEGINNING OF PERIOD ......
INCOME FROM
INVESTMENT OPERATIONS .21 .00
NET INVESTMENT INCOME
NET GAINS (LOSSES) ON
SECURITIES (BOTH
REALIZED 1.00 .14
AND UNREALIZED) ....... ------- ---------
TOTAL INCOME (LOSS) FROM 1.21 .14
INVESTMENT OPERATIONS ------- ---------
LESS DISTRIBUTIONS
DIVIDENDS (FROM NET (.21) .00
INVESTMENT INCOME) .....
DISTRIBUTIONS (FROM .00 .00
CAPITAL GAINS) ......... ------- ---------
DISTRIBUTIONS IN EXCESS .00 .00
OF CAPITAL GAINS ....... ------- ---------
(.21) .00
TOTAL DISTRIBUTIONS ...... ------- ---------
NET ASSET VALUE, $ 11.14 $ 10.14
END OF PERIOD ........... ======= =========
10.90% 5.84%
TOTAL RETURN* .............
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD $15,815 $ 716
(000 OMITTED) ...........
RATIO OF EXPENSES TO 1.00% .19%
AVERAGE NET ASSETS** ....
RATIO OF NET INVESTMENT
INCOME TO AVERAGE 1.84% .03%
NET ASSETS ..............
RATIO OF COMMISSION
PAID TO NUMBER N/A N/A
OF SHARES ............... 222.13% 8.55%
PORTFOLIO TURNOVER RATE ..
</TABLE>
* THE TOTAL RETURN SHOWN FOR 1986 IS FOR THE THREE MONTH PERIOD ENDED
DECEMBER 31, 1986, AND IS NOT ANNUALIZED. THE TOTAL RETURN OF THE PORTFOLIO
REFLECTS THE ADVISORY FEE AND ALL OTHER PORTFOLIO EXPENSES AND INCLUDES
REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS; IT DOES NOT REFLECT THE
CHARGES AGAINST THE CORRESPONDING SUB-ACCOUNTS OR THE CHARGES AND
DEDUCTIONS UNDER THE APPLICABLE POLICY OR ANNUITY CONTRACT; INCLUDING THESE
CHARGES WOULD REDUCE TOTAL RETURN FIGURES FOR ALL PERIODS SHOWN.
** RATIO IS NOT ANNUALIZED AND IS NET OF ADVISORY FEE WAIVER FOR THE PERIODS
ENDED DECEMBER 31, 1986, 1987, 1988 AND 1989, FOR WHICH PERIODS THE
ANNUALIZED RATIO OF EXPENSES TO AVERAGE NET ASSETS WOULD HAVE BEEN 6.76%,
1.90%, 1.49% AND 1.13%, RESPECTIVELY, ABSENT THE ADVISORY FEE WAIVER BY
WESTERN RESERVE LIFE.
1
<PAGE>
BOND PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER 31,
1/1/96 TO ----------------------------------------------------------------------------
6/30/96 1995 1994 1993 1992 1991 1990 1989 1988
----------- ------- ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD ........ $ 11.35 $ 9.80 $ 11.24 $ 11.18 $ 11.18 $ 9.91 $ 10.07 $ 9.29 $ 9.22
INCOME FROM
INVESTMENT OPERATIONS
NET INVESTMENT INCOME ... .33 .69 .63 .72 .75 .86 .79 .75 .90
NET GAINS (LOSSES) ON
SECURITIES (BOTH REALIZED
AND UNREALIZED) .......... (.82) 1.55 (1.44) .95 .32 1.30 (.16) .78 .07
------- ------- ------- ------- ------- ------- ------- ------ ------
TOTAL INCOME (LOSS) FROM
INVESTMENT OPERATIONS ... (.49) 2.24 (.81) 1.67 1.07 2.16 .63 1.53 .97
------- ------- ------- ------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS )
DIVIDENDS (FROM NET
INVESTMENT INCOME) ........ (.29) (.69) (.63) (.72) (.75) (.86) (.79) (.75) (.90
DISTRIBUTIONS (FROM
CAPITAL GAINS) ............ .00 .00 .00 (.89) (.32) (.03) .00 .00 .00)
------- ------- ------- ------- ------- ------- ------- ------ ------
TOTAL DISTRIBUTIONS ....... (.29) (.69) (.63) (1.61) (1.07) (.89) (.79) (.75) (.90
------- ------- ------- ------- ------- ------- ------- ------ ------
NET ASSET VALUE,
END OF PERIOD .............. $ 10.57 $ 11.35 $ 9.80 $ 11.24 $ 11.18 $ 11.18 $ 9.91 $10.07 $ 9.29%
======= ======= ======= ======= ======= ======= ======= ====== ======
TOTAL RETURN* ................ (4.18%) 22.99% (6.94%) 13.38% 6.79% 18.85% 6.21% 14.65% 7.73
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD
(000 OMITTED) .............. $91,650 $96,972 $71,064 $90,715 $56,820 $22,291 $10,143 $7,025 $3,372
RATIO OF EXPENSES TO
AVERAGE NET ASSETS** ....... .55% .61% .59% .64% .70% .70% .69% .70% .70%
RATIO OF NET INVESTMENT
INCOME TO AVERAGE NET ASSETS 5.99% 6.45% 5.94% 5.94% 6.49% 8.02% 8.82% 8.60% 8.96%
RATIO OF COMMISSION PAID TO
NUMBER OF SHARES ........... N/A N/A N/A N/A N/A N/A N/A N/A N/A
PORTFOLIO TURNOVER RATE ..... 54.89% 120.54% 131.73% 149.02% 80.73% 33.47% 18.09% 23.26% 21.54%
</TABLE>
PERIOD FROM
10/2/86 TO
1987 12/31/86
------- -----------
NET ASSET VALUE,
BEGINNING OF PERIOD ........ $ 10.28 $ 10.00
INCOME FROM
INVESTMENT OPERATIONS
NET INVESTMENT INCOME ... .25 .13
NET GAINS (LOSSES) ON
SECURITIES (BOTH REALIZED
AND UNREALIZED) .......... (.89) .15
------- -------
TOTAL INCOME (LOSS) FROM
INVESTMENT OPERATIONS ... (.64) .28
------- -------
LESS DISTRIBUTIONS
DIVIDENDS (FROM NET
INVESTMENT INCOME) ........ (.38) .00
DISTRIBUTIONS (FROM
CAPITAL GAINS) ............ .04 .00
------- -------
TOTAL DISTRIBUTIONS ....... (.42) .00
------- -------
NET ASSET VALUE,
END OF PERIOD .............. $ 9.22 $ 10.28
======= =======
TOTAL RETURN* ................ (5.66%) 11.49%
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD
(000 OMITTED) .............. $ 1,400 $ 127
RATIO OF EXPENSES TO
AVERAGE NET ASSETS** ....... .86% .12%
RATIO OF NET INVESTMENT
INCOME TO AVERAGE NET ASSETS 7.17% 1.51%
RATIO OF COMMISSION PAID TO
NUMBER OF SHARES ........... N/A N/A
PORTFOLIO TURNOVER RATE ..... 134.76% 123.68%
<TABLE>
<CAPTION>
GLOBAL PORTFOLIO
PERIOD FROM YEAR ENDED DECEMBER 31, PERIOD FROM
1/1/96 TO ----------------------------------- 12/3/92 TO
6/30/96 1995 1994 1993 12/31/92
------------ ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .................... $ 15.52 $ 13.12 $ 13.62 $ 10.16 $10.00
Income From Investment Operations
Net Investment Income (Loss) ....................... .09 .10 .10 .04 (.02)
Net Gains on Securities (both realized and unrealized) 3.05 2.91 .10 3.72 .18
--------- --------- --------- ------- -------
Total Income From Investment Operations .............. 3.14 3.01 .20 3.76 .16
--------- --------- --------- ------- -------
Less Distributions
Dividends (from net investment income) ................. (.02) .00 (.10) (.04) .00
Dividends in excess of net investment income .......... .00 .00 (.01) .00 .00
Distributions (from capital gains) ..................... .00 (.61) (.56) (.26) .00
Distributions in excess of capital gains ............... .00 (.00) (.03) .00 .00
--------- --------- --------- ------- -------
Total Distributions .................................. (.02) (.61) (.70) (.30) .00
--------- --------- --------- ------- -------
Net Asset Value, End of Period .......................... $ 18.64 $ 15.52 $ 13.12 $ 13.62 $ 10.16
========= ======== ========= ======= =======
Total Return*** ......................................... 20.28% 23.06% .25% 35.05% 1.62%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) ................. $ 445,040 $ 289,506 $ 261,778 $99,094 $ 508
--------- --------- --------- ------- -------
Ratio of Expenses to Average Net Assets**** ............. .91% .99% 1.01% 1.09% 2.48%
Ratio of Net Investment Income to Average Net Assets ... 1.04% .75% .73% .30% (2.23%)
Ratio of Commission paid to number of shares ........... 1.86% N/A N/A N/A N/A
Portfolio Turnover Rate ................................. 45.45% 130.60% 192.06% 79.93% .00%
</TABLE>
* THE TOTAL RETURN SHOWN FOR 1986 IS FOR THE THREE MONTH PERIOD ENDED
DECEMBER 31, 1986 AND IS NOT ANNUALIZED. THE TOTAL RETURN OF THE
PORTFOLIO REFLECTS THE ADVISORY FEE AND ALL OTHER PORTFOLIO EXPENSES AND
INCLUDES REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS; IT DOES NOT
REFLECT THE CHARGES AGAINST THE CORRESPONDING SUB-ACCOUNTS OR THE
CHARGES AND DEDUCTIONS UNDER THE APPLICABLE POLICY OR ANNUITY CONTRACT;
INCLUDING THESE CHARGES WOULD REDUCE TOTAL RETURN FIGURES FOR ALL
PERIODS SHOWN.
** RATIO IS NOT ANNUALIZED AND IS NET OF ADVISORY FEE WAIVER FOR THE
PERIODS ENDED DECEMBER 31, 1986, 1987,1988, 1989 AND 1991, FOR WHICH
PERIODS THE ANNUALIZED RATIO OF EXPENSES TO AVERAGE NET ASSETS WOULD
HAVE BEEN 6.37% 2.12%, 1.07%, 0.82% AND 0.82%, RESPECTIVELY, ABSENT THE
ADVISORY FEE WAIVER BY WESTERN RESERVE LIFE.
*** THE TOTAL RETURN SHOWN FOR 1992 IS FOR THE PERIOD FROM DECEMBER 3, 1992
THROUGH DECEMBER 31, 1992, AND IS NOT ANNUALIZED. THE TOTAL RETURN OF
THE PORTFOLIO REFLECTS THE ADVISORY FEE AND ALL OTHER PORTFOLIO EXPENSES
AND INCLUDES REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS; IT DOES NOT
REFLECT THE CHARGES AGAINST THE CORRESPONDING SUB-ACCOUNTS OR THE
CHARGES AND DEDUCTIONS UNDER THE APPLICABLE POLICY OR ANNUITY CONTRACT.
**** RATIO IS ANNUALIZED FOR THE PERIOD ENDED DECEMBER 31, 1992.
2
<PAGE>
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER 31,
1/1/96 TO -----------------------------------------------------------------------------
6/30/96 1995 1994 1993 1992 1991 1990 1989 1988
----------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income .......... .02 .05 .04 .02 .03 .05 .07 .07 .05
Net Gains on
Securities (both realized
and unrealized) ................. .00 .00 .00 .00 .00 .00 .00 .00 .00
------- ------- ------- ------- ------- ------- ------- ------ ------
Total Income From
Investment Operations .......... .02 .05 .04 .02 .03 .05 .07 .07 .05
------- ------- ------- ------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS
Dividends (from net
investment income) ............... (.02) (.05) (.04) (.02) (.03) (.05) (.07) (.07) (.05)
Distributions (from capital gains) .00 .00 .00 .00 .00 .00 .00 .00 .00
------- ------- ------- ------- ------- ------- ------- ------ ------
Total Distributions ............. (.02) (.05) (.04) (.02) .(03) (.05) (.07) (.07) (.05)
------- ------- ------- ------- ------- ------- ------- ------ ------
Net Asset Value,
End of Period ..................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= ======= ======= ====== ======
Total Return* ....................... 2.49% 5.40% 3.44% 2.45% 3.03% 5.25% 7.09% 8.09% 5.77%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000 omitted) ................... $97,959 $80,544 $93,081 $45,782 $45,600 $33,695 $24,931 $6,233 $5,114
Ratio of Expenses to
Average Net Assets** .............. .53% .56% .60% .66% .70% .70% .66% .70% .70%
Ratio of Net Investment
Income to Average Net Assets ...... 5.04% 5.30% 3.59% 2.41% 2.99% 5.07% 7.09% 7.82% 6.26%
Ratio of Commission paid
to number of shares ............... N/A N/A N/A N/A N/A N/A N/A N/A N/A
Portfolio Turnover Rate ............. N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
PERIOD FROM
10/2/86 TO
1987 12/31/86
------ -----------
Net Asset Value,
Beginning of Period ............... $1.00 $1.00
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income .......... .04 .01
Net Gains on
Securities (both realized
and unrealized) ................. .00 .00
Total Income From
Investment Operations ........ .04 .01
----- -----
LESS DISTRIBUTIONS
Dividends (from net (.04) (.01)
investment income) ............... ----- -----
Distributions (from capital gains) .00 .00
Total Distributions ............. (.04) (.01)
----- -----
Net Asset Value,
End of Period .................... $1.00 $1.00
===== =====
Total Return* ....................... 4.56% 1.14%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000 omitted) ................... $ 582 $ 101
Ratio of Expenses to
Average Net Assets** .............. .89% .12%
Ratio of Net Investment
Income to Average Net Assets ...... 4.83% 1.14%
Ratio of Commission paid
to number of shares ............... N/A N/A
Portfolio Turnover Rate ............. N/A N/A
SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER 31, PERIOD FROM
1/1/96 TO --------------------------------- 12/3/92 TO
6/30/96 1995 1994 1993 12/31/92
-------------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............................. $ 10.42 $ 9.72 $ 10.30 $ 10.02 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) ................................ .28 .60 .50 .36 .02
Net Gains (Losses) on Securities (both realized and unrealized) (.29) .70 (.58) .29 .02
---------- ------ ------ ------- -------
Total Income (Loss) From Investment Operations ................ (.01) 1.30 (.08) .65 .04
---------- ------ ------ ------- -------
LESS DISTRIBUTIONS
Dividends (from net investment income) .......................... (.17) (.60) (.50) (.35) (.02)
Distributions (from capital gains) .............................. .00 .00 .00 (.02) .00
---------- ------ ------ ------- -------
Total Distributions ........................................... (.17) (.60) (.50) (.37) (.02)
---------- ------ ------ ------- -------
Net Asset Value, End of Period ................................... $ 10.24 $10.42 $ 9.72 $ 10.30 $10.02
========== ====== ====== ======= =======
Total Return*** .................................................. (.12%) 13.54% (.43%) 4.58% .45%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) ........................ $ 24,836 $23,588 $20,356 $24,864 $2,509
Ratio of Expenses to Average Net Assets**** ...................... .69% .78% 0.81% 1.00% 1.00%
Ratio of Net Investment Income to Average Net Assets ............ 5.46% 5.84% 4.95% 3.44% 3.24%
Ratio of Commission paid to number of shares ..................... N/A N/A N/A N/A N/A
Portfolio Turnover Rate .......................................... 26.87% 51.82% 93.70% 28.64% .00%
</TABLE>
* THE TOTAL RETURN SHOWN FOR 1986 IS FOR THE THREE MONTH PERIOD ENDED
DECEMBER 31, 1986 AND IS NOT ANNUALIZED. THE TOTAL RETURN OF THE
PORTFOLIO REFLECTS THE ADVISORY FEE AND ALL OTHER PORTFOLIO EXPENSES AND
INCLUDES REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS; IT DOES NOT
REFLECT THE CHARGES AGAINST THE CORRESPONDING SUB-ACCOUNTS OR THE
CHARGES AND DEDUCTIONS UNDER THE APPLICABLE POLICY OR ANNUITY CONTRACT;
INCLUDING THESE CHARGES WOULD REDUCE TOTAL RETURN FIGURES FOR ALL
PERIODS SHOWN.
** RATIO IS NOT ANNUALIZED AND IS NET OF ADVISORY FEE WAIVER FOR THE
PERIODS ENDED DECEMBER 31, 1986, 1987, 1988, AND 1989, FOR WHICH PERIODS
THE ANNUALIZED RATIO OF EXPENSES TO AVERAGE NET ASSETS WOULD HAVE BEEN
6.33%, 1.63%, 1.16% AND 0.84%, RESPECTIVELY, ABSENT THE ADVISORY FEE
WAIVER BY WESTERN RESERVE LIFE.
*** THE TOTAL RETURN SHOWN FOR 1992 IS FOR THE PERIOD FROM DECEMBER 3, 1992
THROUGH DECEMBER 31, 1992, AND IS NOT ANNUALIZED. THE TOTAL RETURN OF
THE PORTFOLIO REFLECTS THE ADVISORY FEE AND ALL OTHER PORTFOLIO EXPENSES
AND INCLUDES REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS; IT DOES NOT
REFLECT THE CHARGES AGAINST THE CORRESPONDING SUB-ACCOUNTS OR THE
CHARGES AND DEDUCTIONS UNDER THE APPLICABLE POLICY OR ANNUITY CONTRACT.
**** RATIO IS ANNUALIZED AND IS NET OF ADVISORY FEE WAIVER FOR YEARS 1993 AND
1992, FOR WHICH PERIODS THE ANNUALIZED RATIO OF EXPENSES TO AVERAGE NET
ASSETS WOULD HAVE BEEN 1.02% AND 1.41%, RESPECTIVELY, ABSENT THE
ADVISORY FEE WAIVER BY WESTERN RESERVE LIFE.
3
<PAGE>
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED PERIOD FROM
1/1/96 TO DECEMBER 31, 3/1/94 TO
6/30/96 1995 12/31/94
----------- -------------- -----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ............................ $10.63 $ 9.24 $ 10.00
Income From Investment Operations
Net Investment Income .......................................... .18 .44 .34
Net Gains (Losses) on Securities (both realized and unrealized) .19 1.38 (.76)
------- ------- ------
Total Income (Loss) From Investment Operations ................ .37 1.82 (.42)
------- ------- ------
Less Distributions
Dividends (from net investment income) ......................... (.07) (.43) (.34)
Distributions (from capital gains) ............................. .00 .00 .00
------- ------- ------
Total Distributions ............................................ .07 (.43) (.34)
------- ------- ------
Net Asset Value, End of Period .................................. $ 10.93 $ 10.63 $ 9.24
======= ======= =======
Total Return* ................................................... 3.35% 19.80% (5.73%)
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) ......................... $39,654 $31,114 $19,422
Ratio of Expenses to Average Net Assets** ....................... .87% .97% 1.00%
Ratio of Net Investment Income to Average Net Assets ........... 3.11% 4.38% 4.27%
Ratio of Commission paid to number of shares .................... .21% N/A N/A
Portfolio Turnover Rate ......................................... 47.40% 98.55% 57.73%
</TABLE>
EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER 31, PERIOD FROM
1/1/96 TO ------------------------ 3/31/93 TO
6/30/96 1995 1994 12/31/86
------------ ----------- ----------- --------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............................ $ 16.25 $ 11.55 $ 12.47 $ 10.00
Income From Investment Operations
Net Investment Income (Loss) ................................. .00 .01 .01 (.04)
Net Gains (Losses) on Securities (both realized and unrealized) 2.93 5.42 (.92) 2.51
--------- -------- -------- -------
Total Income (Loss) From Investment Operations ................ 2.93 5.43 (.91) 2.47
--------- -------- ------- -------
Less Distributions
Dividends (from net investment income) ......................... .00 .00 (.01) .00
Distributions (from capital gains) ............................. .00 (.73) .00 .00
--------- -------- ------- -------
Total Distributions ........................................... .00 (.73) (.01) .00
--------- -------- ------- -------
Net Asset Value, End of Period .................................. $ 19.18 $ 16.25 $ 11.55 $12.47
========= ======== ======= =======
Total Return*** ................................................. 18.09% 46.79% (7.36%) 24.71%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) ....................... $387,576 $288,519 $182,650 $102,472
Ratio of Expenses to Average Net Assets**** ..................... .83% .91% .92% 1.00%
Ratio of Net Investment Income to Average Net Assets ........... (.14%) .03% .06% (.30%)
Ratio of Commission paid to number of shares .................... 5.77% N/A N/A N/A
Portfolio Turnover Rate ......................................... 40.39% 124.13% 72.62% 12.79%
</TABLE>
* THE TOTAL RETURN SHOWN FOR 1994 IS FOR THE TEN MONTH PERIOD ENDED
DECEMBER 31, 1994, AND IS NOT ANNUALIZED. THE TOTAL RETURN OF THE
PORTFOLIO REFLECTS THE ADVISORY FEE AND ALL OTHER PORTFOLIO EXPENSES AND
INCLUDES REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS; IT DOES NOT
REFLECT THE CHARGES AGAINST THE CORRESPONDING SUB-ACCOUNTS OR THE
CHARGES AND DEDUCTIONS UNDER THE APPLICABLE POLICY OR ANNUITY CONTRACT;
INCLUDING THESE CHARGES WOULD REDUCE TOTAL RETURN FIGURES FOR ALL
PERIODS SHOWN.
** RATIO IS ANNUALIZED AND IS NET OF ADVISORY FEE WAIVER FOR THE PERIOD
ENDED DECEMBER 31, 1994, FOR WHICH PERIOD THE ANNUALIZED RATIO OF
EXPENSES TO AVERAGE NET ASSETS WOULD HAVE BEEN 1.34% ABSENT THE ADVISORY
FEE WAIVER BY WESTERN RESERVE LIFE.
*** THE TOTAL RETURN SHOWN FOR 1993 IS FOR THE TEN MONTH PERIOD ENDED
DECEMBER 31, 1993, AND IS NOT ANNUALIZED. THE TOTAL RETURN OF THE
PORTFOLIO REFLECTS THE ADVISORY FEE AND ALL OTHER PORTFOLIO EXPENSES AND
INCLUDES REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS; IT DOES NOT
REFLECT THE CHARGES AGAINST THE CORRESPONDING SUB-ACCOUNTS OR THE
CHARGES AND DEDUCTIONS UNDER THE APPLICABLE POLICY OR ANNUITY CONTRACT.
**** RATIO IS ANNUALIZED AND IS NET OF ADVISORY FEE WAIVER FOR THE PERIOD
ENDED DECEMBER 31, 1993, FOR WHICH PERIOD THE ANNUALIZED RATIO OF
EXPENSES TO AVERAGE NET ASSETS WOULD HAVE BEEN 1.16% ABSENT THE ADVISORY
FEE WAIVER BY WRL.
4
<PAGE>
EQUITY-INCOME PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER 31, PERIOD FROM
1/1/96 TO ------------------------ 3/1/93 TO
6/30/96 1995 1994 12/31/93
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................ $ 12.86 $ 10.90 $ 11.23 $ 10.00
Income From Investment Operations
Net Investment Income ............................ .18 .37 .31 .19
Net Gains or (Losses) on
Securities (both realized and unrealized) ........ .71 2.33 (.33) 1.33
-------- -------- ------- -------
Total Income (Loss) From Investment Operations ... .89 2.70 (.02) 1.52
-------- -------- ------- -------
Less Distributions
Dividends (from net investment income) ........... (.09) (.37) (.31) (.19)
Distributions (from capital gains) ................. .00 (.37) .00 (.10)
-------- -------- ------- -------
Total Distributions ............................... (.09) (.74) (.31) (.29)
-------- -------- -------- -------
Net Asset Value, End of Period ...................... $ 13.66 $ 12.86 $ 10.90 $ 11.23
======== ======== ======== =======
Total Return* ....................................... 6.91% 24.66% (.53%) 13.49%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) ........... $302,736 $256,806 $183,867 $90,560
Ratio of Expenses to Average Net Assets** .......... .83% .87% .89% 1.00%
Ratio of Net Investment Income to Average Net Assets 2.73% 3.07% 2.78% 1.70%
Ratio of Commission paid to number of shares ....... 5.68% N/A N/A N/A
Portfolio Turnover Rate ............................. 19.24% 52.59% 53.50% 27.41%
</TABLE>
AGGRESSIVE GROWTH PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM YEAR PERIOD FROM
1/1/96 TO ENDED 3/1/94 TO
6/30/96 12/31/95 12/31/94
----------- -------- -----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ................ $ 13.25 $ 9.86 $ 10.00
Income From Investment Operations
Net Investment Income (Loss) ..................... (.01) (.06) .02
Net Gains (Losses) on
Securities (both realized and unrealized) ........ .77 3.96 (.14)
-------- --------- -------
Total Income (Loss) From Investment Operations ... .76 3.90 (.12)
-------- --------- -------
Less Distributions
Dividends (from net investment income ............ .00 .00 (.02)
Distributions (from capital gains) ................. .00 (.51) .00
-------- --------- -------
Total Distributions ............................... .00 (.51) (.02)
-------- --------- -------
Net Asset Value, End of Period ...................... $ 14.0 $ 13.25 $ 9.86
======== ========= =======
Total Return*** ..................................... 5.74 38.02% (1.26%)
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) ........... $188,998 $ 158,534 $ 38,826
Ratio of Expenses to Average Net Assets**** ........ .84 1.07% 1.00%
Ratio of Net Investment Income to Average Net Assets (.1 (.48%) 0.20%
Ratio of Commission paid to number of shares ....... 7.20% N/A N/A
Portfolio Turnover Rate ............................. 49.72 108.04% 89.73%
</TABLE>
* THE TOTAL RETURN SHOWN FOR 1993 IS FOR THE TEN MONTH PERIOD ENDED
DECEMBER 31, 1993, AND IS NOT ANNUALIZED. THE TOTAL RETURN OF THE
PORTFOLIO REFLECTS THE ADVISORY FEE AND ALL OTHER PORTFOLIO EXPENSES AND
INCLUDES REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS; IT DOES NOT REFLECT
THE CHARGES AGAINST THE CORRESPONDING SUB-ACCOUNTS OR THE CHARGES AND
DEDUCTIONS UNDER THE APPLICABLE POLICY OR ANNUITY CONTRACT; INCLUDING
THESE CHARGES WOULD REDUCE TOTAL RETURN FIGURES FOR ALL PERIODS SHOWN.
** RATIO IS ANNUALIZED AND IS NET OF ADVISORY FEE WAIVER FOR THE PERIOD
ENDED DECEMBER 31, 1993, FOR WHICH PERIOD THE ANNUALIZED RATIO OF
EXPENSES TO AVERAGE NET ASSETS WOULD HAVE BEEN 1.12% ABSENT THE ADVISORY
FEE WAIVER BY WESTERN RESERVE LIFE (SEE NOTE 2 TO THE FINANCIAL
STATEMENTS).
*** THE TOTAL RETURN SHOWN FOR 1994 IS FOR THE TEN MONTH PERIOD ENDED
DECEMBER 31, 1994, AND IS NOT ANNUALIZED. THE TOTAL RETURN OF THE
PORTFOLIO REFLECTS THE ADVISORY FEE AND ALL OTHER PORTFOLIO EXPENSES AND
INCLUDES REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS; IT DOES NOT REFLECT
THE CHARGES AGAINST THE CORRESPONDING SUB-ACCOUNTS OR THE CHARGES AND
DEDUCTIONS UNDER THE APPLICABLE POLICY OR ANNUITY CONTRACT.
**** RATIO IS ANNUALIZED AND NET OF ADVISORY FEE WAIVER FOR THE PERIOD ENDED
DECEMBER 31, 1994, FOR WHICH PERIOD THE ANNUALIZED RATIO OF EXPENSES TO
AVERAGE NET ASSETS WOULD HAVE BEEN 1.18% ABSENT THE ADVISORY FEE WAIVER
BY WESTERN RESERVE LIFE.
5
<PAGE>
TACTICAL ASSET ALLOCATION PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
1/1/96 TO 1/3/95 TO
6/30/96 12/31/95
----------- ----------
<S> <C> <C>
Net Asset Value, Beginning of Period ................ $ 11.49 $ 10.00
Income From Investment Operations
Net Investment Income .......................... .18 .41
Net Gains (Losses) on Securities
(both realized and unrealized) .................. .38 1.93
-------- ---------
Total Income From Investment Operations ......... .56 2.34
-------- ---------
Less Distributions
Dividends (from net investment income) .......... (.07) (.41)
Distributions (from capital gains) ................ .00 (.44)
-------- ----------
Total Distributions .............................. (.07) (.85)
-------- ---------
Net Asset Value, End of Period ...................... $ 11.98 $ 11.49
======== =========
Total Return* ....................................... 4.81% 20.09%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) ........... $186,157 $ 120,531
Ratio of Expenses to Average Net Assets ............. .83% .93%
Ratio of Net Investment Income to Average Net Assets 3.01% 3.76%
Ratio of Commission paid to number of shares ....... 4.83% N/A
Portfolio Turnover Rate ............................. 20.57% 38.68%
</TABLE>
UTILITY PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED PERIOD FROM
1/1/96 TO DECEMBER 31, 3/1/94 TO
6/30/96 1995 12/31/94
------------ ----------- ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ................ $ 11.12 $ 9.30 $ 10.00
Income From Investment Operations
Net Investment Income ............................ .18 .46 .43
Net Gains (Losses) on Securities
(both realized and unrealized) ................... .33 1.93 (.70)
--------- ------- ------
Total Income (Loss) From
Investment Operations ........................... .51 2.39 (.27)
--------- ------- ------
Less Distributions
Dividends (from net investment income) ........... (.08) (.46) (.43)
Distributions (from capital gains) ................. .00 (.11) .00
--------- ------- ------
Total Distributions ............................... (.08) (.57) (.43)
--------- ------- ------
Net Asset Value, End of Perid ....................... $ 11.55 $ 11.12 $ 9.30
========= ======= =======
Total Return** ...................................... 4.47% 25.25% (4.58%)
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) ........... $31,375 $24,607 $10,482
Ratio of Expenses to Average Net Assets*** ......... .88% 1.00% 1.00%
Ratio of Net Investment Income to Average Net Assets 3.19% 4.56% 5.36%
Ratio of Commission paid to number of shares ....... 4.83% N/A N/A
Portfolio Turnover Rate ............................. 41.38% 78.34% 36.13%
</TABLE>
* THE TOTAL RETURN SHOWN FOR 1995 IS FOR THE PERIOD FROM JANUARY 3, 1995
TO DECEMBER 31, 1995, AND IS NOT ANNUALIZED. THE TOTAL RETURN OF THE
PORTFOLIO REFLECTS THE ADVISORY FEE AND ALL OTHER PORTFOLIO EXPENSES AND
INCLUDES REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS; IT DOES NOT
REFLECT THE CHARGES AGAINST THE CORRESPONDING SUB-ACCOUNTS OR THE
CHARGES AND DEDUCTIONS UNDER THE APPLICABLE POLICY OR ANNUITY CONTRACT;
INCLUDING THESE CHARGES WOULD REDUCE TOTAL RETURN FIGURES FOR ALL
PERIODS SHOWN.
** THE TOTAL RETURN SHOWN FOR 1994 IS FOR THE TEN MONTH PERIOD ENDED
DECEMBER 31, 1994, AND IS NOT ANNUALIZED. THE TOTAL RETURN OF THE
PORTFOLIO REFLECTS THE ADVISORY FEE AND ALL OTHER PORTFOLIO EXPENSES AND
INCLUDES REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS; IT DOES NOT
REFLECT THE CHARGES AGAINST THE CORRESPONDING SUB-ACCOUNTS OR THE
CHARGES AND DEDUCTIONS UNDER THE APPLICABLE POLICY OR ANNUITY CONTRACT.
*** RATIO IS ANNUALIZED AND NET OF ADVISORY FEE WAIVER FOR THE PERIODS ENDED
DECEMBER 31, 1994 AND 1995, FOR WHICH PERIODS THE ANNUALIZED RATIO OF
EXPENSES TO AVERAGE NET ASSETS WOULD HAVE BEEN 1.90% AND 1.08%,
RESPECTIVELY, ABSENT THE ADVISORY FEE WAIVER BY WESTERN RESERVE LIFE.
6
<PAGE>
C.A.S.E. GROWTH PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
1/1/96 TO 5/1/95 TO
6/30/96 12/31/95
----------- -----------
<S> <C> <C>
Net Asset Value, Beginning of Period ............................. $ 11.66 $ 10.00
Income From Investment Operations
Net Investment Income ....................................... .05 .12
Net Gains (Losses) on Securities (both realized and unrealized) .74 2.49
-------- -------
Total Income (Loss) From Investment Operations ................ .79 2.61
-------- -------
Less Distributions
Dividends (from net investment income) ....................... .00 (.12)
Distributions (from net realized gains) ........................ .00 (.83)
-------- -------
Total Distributions ........................................... .00 (.95)
-------- -------
Net Asset Value, End of Period ................................... $12.45 $ 11.66
======== =======
Total Return* .................................................... 6.77% 20.65%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) ........................ $7,347 $ 2,578
Ratio of Expenses to Average Net Assets** ........................ 1.65% 1.00%
Ratio of Net Investment Income to Average Net Assets ............ .79% 1.02%
Ratio of Commission paid to number of shares ..................... 6.03% N/A
Portfolio Turnover Rate .......................................... 90.07% 121.62%
</TABLE>
GLOBAL SECTOR PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
5/1/96* TO
8/31/96
----------
<S> <C>
Net Asset Value, Beginning of Period ............................. $ 10.00
Income From Investment Operations
Net Investment Income ....................................... .03
Net Gains (Losses) on Securities (both realized and unrealized) (.05)
--------
Total Income (Loss) From Investment Operations ................ (.02)
--------
Less Distributions
Dividends (from net investment income) ....................... .00
Distributions (from net realized gains) ........................ .00
--------
Total Distributions ........................................... $ .00
--------
Net Asset Value, End of Period ................................... $ 9.98
========
Total Return*** .................................................. (.16%)
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) .......................... $ 1,872
Ratio of Expenses to Average Net Assets .......................... 2.55%
Ratio of Net Investment Income to Average Net Assets ............ 1.55%
Ratio of Commission paid to number of shares ..................... 6.28%
Portfolio Turnover Rate .......................................... 3.25%
</TABLE>
* THE TOTAL RETURN SHOWN FOR 1995 IS FOR THE EIGHT MONTH PERIOD ENDED
DECEMBER 31, 1995, AND IS NOT ANNUALIZED. THE TOTAL RETURN OF THE
PORTFOLIO REFLECTS THE ADVISORY FEE AND ALL OTHER PORTFOLIO EXPENSES AND
INCLUDES REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS; IT DOES NOT
REFLECT THE CHARGES AGAINST THE CORRESPONDING SUB-ACCOUNTS OR THE
CHARGES AND DEDUCTIONS UNDER THE APPLICABLE POLICY OR ANNUITY CONTRACT;
INCLUDING THESE CHARGES WOULD REDUCE TOTAL RETURN FIGURES FOR ALL
PERIODS SHOWN.
** RATIO IS ANNUALIZED AND NET OF ADVISORY FEE WAIVER FOR THE PERIOD ENDED
DECEMBER 31, 1995, FOR WHICH PERIOD THE ANNUALIZED RATIO OF EXPENSES TO
<PAGE>
AVERAGE NET ASSETS WOULD HAVE BEEN 4.15% ABSENT THE ADVISORY FEE WAIVER
BY WESTERN RESERVE LIFE.
*** THE INCEPTION OF THIS PORTFOLIO WAS MAY 1, 1996. THE TOTAL RETURN IS NOT
ANNUALIZED.
7
<PAGE>
VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
5/1/96* TO
8/31/96
----------
<S> <C>
Net Asset Value, Beginning of Period ............................. $ 10.00
Income From Investment Operations
Net Investment Income ....................................... .03
Net Gains (Losses) on Securities (both realized and unrealized) .04
--------
Total Income (Loss) From Investment Operations ................ .07
--------
Less Distributions
Dividends (from net investment income) ....................... .00
Distributions (from net realized gains) ........................ .00
--------
Total Distributions ........................................... $ .00
--------
Net Asset Value, End of Period ................................... $10.07
========
Total Return* .................................................... .77%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) ........................ $ 3,286
Ratio of Expenses to Average Net Assets .......................... 1.56%
Ratio of Net Investment Income to Average Net Assets ............ 1.32%
Ratio of Commission paid to number of shares ..................... 8.00%
Portfolio Turnover Rate .......................................... 0.00%
</TABLE>
* THE INCEPTION OF THIS PORTFOLIO WAS MAY 1, 1996. THE TOTAL RETURN IS NOT
ANNUALIZED.
PORTFOLIOS AT A GLANCE
The Fund consists of twenty-two portfolios. This Prospectus provides
information on sixteen portfolios of the Fund. WRL Investment Management,
Inc. ("WRL Management") serves as the Fund's investment adviser ("Investment
Adviser"), and contracts on behalf of each Portfolio with an investment
sub-adviser ("Sub-Adviser") to provide investment advisory assistance and
portfolio management advice for each Portfolio. See "Management of the Fund",
p. 36. Each Portfolio has its own distinct investment objective and policies
which are summarized below:
\diamond\AGGRESSIVE GROWTH PORTFOLIO
OBJECTIVE: Seeks long-term capital appreciation.
INVESTMENT POLICY: The Aggressive Growth Portfolio invests primarily in a
diversified, actively managed portfolio of equity securities, such as common
stock or preferred stocks, or securities convertible into or exchangeable for
equity securities, including warrants and rights.
INVESTOR PROFILE: For the investor who aggressively seeks capital growth, and
who can tolerate substantial volatility in the value of an investment.
SUB-ADVISER: Fred Alger Management, Inc.
\diamond\EMERGING GROWTH PORTFOLIO
OBJECTIVE: Seeks capital appreciation by investing primarily in common stocks
of small and medium-sized companies.
INVESTMENT POLICY: The Emerging Growth Portfolio invests primarily in common
stocks of small and medium-sized companies. Under normal conditions, at least
65% of the Portfolio's total assets will be invested in common stocks of
small and medium-sized companies, both domestic and foreign, in the early
stages of their life cycle, believed to have the potential to become major
enterprises.
INVESTOR PROFILE: For the investor seeking greater opportunities for growth
of capital and willing to accept certain special risks. See "Portfolio
Securities and Risk Factors" on p. 28.)
SUB-ADVISER: Van Kampen American Capital Asset Management, Inc.
INTERNATIONAL EQUITY PORTFOLIO
\diamond\INTERNATIONAL EQUITY PORTFOLIO
OBJECTIVE: Seeks long-term growth of capital.
INVESTMENT POLICY: The International Equity Portfolio invests primarily in
the common stock of foreign issuers traded on overseas exchanges and in
foreign over-the-counter ("OTC") markets.
8
<PAGE>
INVESTOR PROFILE: For the investor who seeks long-term growth of capital
through investments in foreign securities. The investor should also be able
to tolerate the significant risk factors associated with foreign investing.
CO-SUB-ADVISERS: Scottish Equitable Investment Management Limited and GE
Investment Management Incorporated.
\diamond\GLOBAL PORTFOLIO
OBJECTIVE: Seeks long-term growth of capital in a manner consistent with
preservation of capital.
INVESTMENT POLICY: The Global Portfolio invests primarily in common stocks of
foreign and domestic issuers.
INVESTOR PROFILE: For the investor who wants capital growth without being
limited to investments in U.S. securities. The investor should also be able
to tolerate the significant risk factors associated with foreign investing.
SUB-ADVISER: Janus Capital Corporation
\diamond\GROWTH PORTFOLIO
OBJECTIVE: Seeks growth of capital.
INVESTMENT POLICY: The Growth Portfolio invests primarily in common stocks
listed on a national securities exchange or traded on NASDAQ, which the
Portfolio's Sub-Adviser believes have a good potential for capital growth.
INVESTOR PROFILE: For the investor who wants capital growth in a broadly
diversified stock portfolio, and who can tolerate significant fluctuations in
value.
SUB-ADVISER: Janus Capital Corporation
\diamond\C.A.S.E. GROWTH PORTFOLIO
OBJECTIVE: Seeks capital growth through investments in common stocks of small
to medium-sized companies.
INVESTMENT POLICY: The C.A.S.E. Growth Portfolio will primarily invest in
smaller, less well-established companies, with limited product lines and
financial resources. The Portfolio, however, seeks to invest in such
companies with above-market growth characteristics in several investment
classifications including sales, earnings, returns and institutional support.
INVESTOR PROFILE: For the investor who seeks growth in excess of the Standard
& Poor's Index of 500 Common Stocks (the "S&P 500") on a quarterly basis, but
wants a diversified portfolio that seeks to have investments in companies
that have below-market risk characteristics. The investor should be
comfortable with the price fluctuations of a stock portfolio.
SUB-ADVISER: C.A.S.E. Management, Inc.
\diamond\U.S. EQUITY PORTFOLIO
OBJECTIVE: Seeks long-term growth of capital.
INVESTMENT POLICY: The U.S. Equity Portfolio invests primarily in equity
securities of U.S. companies. Under normal conditions, the Portfolio will
invest at least 65% of its assets in equity securities, consisting of common
stocks and preferred stocks, and securities convertible into common stocks,
consisting of convertible bonds, convertible debentures, convertible notes,
convertible preferred stocks and warrants or rights issued by U.S. companies.
INVESTOR PROFILE: For the investor seeking growth from a broadly diversified
portfolio consisting of both "value" and "growth" equities, which the
Portfolio's Sub-Adviser believes will have characteristics similar to the S&P
500 and the potential to outperform the S&P 500 on a total return basis. The
investor should be comfortable with the price fluctuations of a stock
portfolio.
SUB-ADVISER: GE Investment Management Incorporated
\diamond\VALUE EQUITY PORTFOLIO
OBJECTIVE: Seeks to achieve maximum, consistent total return with minimum
risk to principal.
INVESTMENT POLICY: The Value Equity Portfolio invests primarily in common
stocks with above-average statistical value which, in the Sub-Adviser's
opinion, are in fundamentally attractive industries and are undervalued at
the time of purchase.
INVESTOR PROFILE: For the investor who seeks both capital preservation and
long-term capital appreciation.
SUB-ADVISER: NWQ Investment Management Company, Inc.
\diamond\GLOBAL SECTOR PORTFOLIO
OBJECTIVE: Seeks growth of capital.
INVESTMENT POLICY: The Global Sector Portfolio follows an asset allocation
strategy that shifts among a wide range of asset categories and within them,
market sectors. The Portfolio will invest primarily in the following asset
categories: equity securities of domestic and foreign issuers, including
common stocks, preferred stocks, convertible securities and warrants; debt
securities of domestic and foreign issuers, including mortgage-related
9
<PAGE>
and other asset-backed securities and securities rated below investment grade;
real estate investment trusts ("REITs"); equity securities of companies involved
in the exploration, mining, processing, or dealing or investing in gold; gold
bullion; and domestic money market instruments.
INVESTOR PROFILE: For the investor who seeks long-term capital appreciation
and protection of buying power who, at the same time, can tolerate an
increased exposure to risk. The Portfolio is geared towards investors willing
to concentrate in industries and countries that offer an opportunity for
greater capital appreciation and are willing to take the additional risks
associated with sector investing and asset rotation.
CO-SUB-ADVISERS: Meridian Investment Management Corporation and INVESCO
Global Asset Management Limited
\diamond\TACTICAL ASSET ALLOCATION PORTFOLIO
OBJECTIVE: Seeks preservation of capital and competitive investment returns.
INVESTMENT POLICY: The Tactical Asset Allocation Portfolio invests primarily
in stocks, U.S. Treasury bonds, notes and bills, and money market funds.
INVESTOR PROFILE: For the investor who wants a combination of capital growth
and income, and who is comfortable with the risks associated with an actively
traded portfolio which shifts assets between equity and debt.
SUB-ADVISER: Dean Investment Associates
\diamond\EQUITY-INCOME PORTFOLIO
OBJECTIVE: Seeks to provide current income, long-term growth of income and
capital appreciation.
INVESTMENT POLICY: The Equity-Income Portfolio invests primarily in a blend
of equity and fixed-income securities, including common stocks, income
producing securities convertible into common stock, and fixed-income
securities.
INVESTOR PROFILE: For the investor who wants current income with the prospect
of income growth, plus the prospect of capital growth. The investor should be
comfortable with the price fluctuations of a stock portfolio.
SUB-ADVISER: Luther King Capital Management Corporation
UTILITY PORTFOLIO
\diamond\UTILITY PORTFOLIO
OBJECTIVE: Seeks to achieve high current income and moderate capital
appreciation.
INVESTMENT POLICY: The Utility Portfolio invests primarily in a diversified
portfolio of equity and debt securities of utility companies that produce,
transmit, or distribute gas and electric energy as well as those companies
that provide communications facilities.
INVESTOR PROFILE: For the investor who seeks high current income and moderate
capital appreciation and is willing to accept certain special risks
associated with investments in utility companies.
SUB-ADVISER: Federated Investment Counseling
\diamond\BALANCED PORTFOLIO
OBJECTIVE: Seeks preservation of capital, reduced volatility, and superior
long-term risk-adjusted returns.
INVESTMENT POLICY: The Balanced Portfolio invests primarily in common stock,
convertible securities and fixed-income securities.
INVESTOR PROFILE: For the investor who wants capital growth and income from
the same investment, but who also wants an investment which has the prospect
of sustaining its interim principal value through maintaining a balance
between equity and debt. The Portfolio is not designed for investors who
desire a consistent level of income.
SUB-ADVISER: AEGON USA Investment Management, Inc.
\diamond\BOND PORTFOLIO
OBJECTIVE: Seeks the highest possible current income within the confines of
the primary goal of insuring the protection of capital by investing in debt
securities issued by the U.S. Government and its agencies and in medium to
high-quality corporate debt securities.
INVESTMENT POLICY: The Bond Portfolio invests at least 65% of assets in debt
securities issued by the U.S. Government and its agencies and in medium to
high-quality corporate debt securities.
INVESTOR PROFILE: For the investor seeking current income consistent with
preservation of capital, and who can tolerate the fluctuation in the
principal associated with changes in interest rates.
SUB-ADVISER: Janus Capital Corporation
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\diamond\SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
OBJECTIVE: Seeks as high a level of current income as is consistent with
preservation of capital.
INVESTMENT POLICY: The Short-to-Intermediate Government Portfolio seeks to
achieve its objective by investing primarily in U.S. Government securities.
At least 65% of the Portfolio's total assets will be invested in U.S.
Government securities, including repurchase agreements with respect to U.S.
Government securities.
INVESTOR PROFILE: For the investor seeking current income consistent with
preservation of capital, and who can tolerate the fluctuation in the
principal associated with changes in interest rates.
SUB-ADVISER: AEGON USA Investment Management, Inc.
\diamond\MONEY MARKET PORTFOLIO
OBJECTIVE: Seeks to obtain maximum current income consistent with
preservation of principal and maintenance of liquidity.
INVESTMENT POLICY: The Money Market Portfolio maintains a dollar-weighted
average portfolio maturity of not more than 90 days by investing in U.S.
dollar-denominated securities which have effective maturities of not more
than 13 months and present minimal credit risks.
INVESTOR PROFILE: For the investor seeking current income, preservation of
capital and maintenance of liquidity.
SUB-ADVISER: J.P. Morgan Investment Management Inc.
PERFORMANCE INFORMATION
The Fund may include quotations of a Portfolio's total return or yield in
connection with the total return for the appropriate Separate Account, in
advertisements, sales literature or reports to Policyholders or to
prospective investors. Total return and yield quotations for a Portfolio
reflect only the performance of a hypothetical investment in the Portfolio
during the particular time period shown as calculated based on the historical
performance of the Portfolio during that period. Such quotations do not in
any way indicate or project future performance. Quotations of total return
and yield will not reflect charges or deductions against the Separate
Accounts or charges and deductions against the Policies or the Annuity
Contracts. Where relevant, the prospectuses for the Policies and the Annuity
Contracts contain performance information which show total return and yield
for the Separate Accounts, Policies or Annuity Contracts.
\diamond\TOTAL RETURN
Total return refers to the average annual percentage change in value of an
investment in a Portfolio held for a stated period of time as of a stated
ending date. When a Portfolio has been in operation for the stated period,
the total return for such period will be provided if performance information
is quoted. Total return quotations are expressed as average annual compound
rates of return for each of the periods quoted. They also reflect the
deduction of a proportionate share of a Portfolio's investment advisory fees
and expenses, and assume that all dividends and capital gains distributions
during the period are reinvested in the Portfolio when made.
\diamond\YIELD
Yield quotations for the Bond Portfolio and the Short-to-Intermediate
Government Portfolio refer to the income generated by a hypothetical
investment in a Portfolio over a specified thirty-day period expressed as a
percentage rate of return for that period. The yield is calculated by
dividing the net investment income per share for the period by the price per
share on the last day of that period.
The Money Market Portfolio yield quotation refers to the income generated by
a hypothetical investment in the Money Market Portfolio over a specified
seven-day period if that level of income were generated for 52 consecutive
weeks and expressed as an annual percentage rate of return. The quotation of
compound effective yield for the Money Market Portfolio refers to the same
calculation adjusted to reflect the compounding effect of earnings on
reinvested dividends.
\diamond\PERFORMANCE SHOWN IN ADVERTISING
The Portfolios may disclose in advertisements, sales literature and reports
to Policyholders or to prospective investors, total returns for a Portfolio
for periods in addition to those required to be presented. They may also
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disclose other nonstandardized data, such as cumulative total returns, actual
year-by-year returns, or any combination thereof.
\diamond\PERFORMANCE RANKINGS AND COMPARISONS TO STANDARD INDEXES
Performance of the Portfolios may also be compared to: (1) indexes, such as
the S&P 500, the Dow Jones Industrial Average or other widely recognized
indexes; (2) other mutual funds whose performance is reported by all or any
of Lipper Analytical Services, Inc., ("Lipper"), Variable Annuity Research &
Data Service ("VARDS") and Morningstar, Inc. ("Morningstar"), or as reported
by other services, companies, individuals or other industry or financial
publications of general interest, such as FORBES, MONEY, THE WALL STREET
JOURNAL, BUSINESS WEEK, BARRON'S, KIPLINGER'S PERSONAL FINANCE AND FORTUNE,
which rank and/or rate mutual funds by overall performance or other criteria;
and (3) the Consumer Price Index. Lipper, VARDS and Morningstar are widely
quoted independent research firms which rank mutual funds according to
overall performance, investment objective, and assets. Unmanaged indexes,
such as the S&P 500, may assume the reinvestment of dividends but usually do
not reflect any "deduction" for the expenses associated with operating and
managing a fund. In connection with a ranking, a Portfolio will also provide
information in sales literature, advertisements, and reports with respect to
the ranking, including the particular category of fund to which it relates,
the number of funds in the category, the period and criteria on which the
ranking is based, and the effect of any fee waivers and/or expense
reimbursements.
(See the SAI for more information about the Portfolios' performance.)
THE PORTFOLIOS IN DETAIL
This section takes a closer look at each Portfolio's policies and
techniques, and the securities in which the Portfolios invest. PLEASE
CAREFULLY REVIEW THE "OTHER INVESTMENT POLICIES AND RESTRICTIONS" AND
"PORTFOLIO SECURITIES AND RISK FACTORS" SECTIONS OF THIS PROSPECTUS FOR A
DESCRIPTION OF EACH OF THE PORTFOLIO INVESTMENTS IDENTIFIED BELOW AND THE
RISKS ASSOCIATED WITH THOSE INVESTMENTS. You should carefully consider your
goals, time horizon and risk tolerance before choosing a Portfolio.
Each Portfolio's investment objective and, unless otherwise noted,
investment policies and techniques, may be changed by the Board of Directors
of the Fund (the "Fund's Board") without Shareholder or Policyholder
approval. A change in the investment objective or policies of a Portfolio may
result in that Portfolio having an investment objective or policies different
from that which a Policyholder deemed appropriate at the time of investment.
You will be notified of any such change so that you may determine whether
that Portfolio remains an appropriate investment for your Policy or Annuity
Contract. More information about each Portfolio's investment techniques and
restrictions is set forth in the Fund's Statement of Additional Information,
which is available without charge upon request.
PORTFOLIOS POLICIES AND TECHNIQUES
\diamond\AGGRESSIVE GROWTH PORTFOLIO
The Aggressive Growth Portfolio seeks to achieve its investment objective by
investing in a diversified, actively managed portfolio of equity securities,
such as common or preferred stocks, or securities convertible into or
exchangeable for equity securities, including warrants and rights. The
Portfolio may engage in leveraging and options and futures transactions,
which are deemed to be speculative and which may increase fluctuations in the
Portfolio's net asset value.
Except during temporary defensive periods, the Portfolio invests at least 85%
of its net assets in equity securities of companies of any size. The
Portfolio will generally invest in companies whose securities are traded on
domestic stock exchanges or in the OTC market. These companies may still be
in the developmental stage, may be older companies that appear to be entering
a new stage of growth progress (owing to factors such as management changes
or development of new technology, products or markets), or may be companies
providing products or services with a high unit volume growth rate.
To afford the Portfolio the flexibility to take advantage of new
opportunities for investment in accordance with its investment objective, the
Portfolio may hold up to 15%
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of its net assets in money market instruments and repurchase agreements and
in excess of that amount (up to 100% of its assets) during temporary
defensive periods. This amount may be higher than that maintained by other
funds with similar investment objectives. The Portfolio will only invest in
convertible debt securities rated in one of the three highest rating
categories by any nationally recognized statistical rating organizations
("NRSRO"). (See the SAI for further information on such ratings.)
The Portfolio may also borrow money for the purchase of additional securities
(leverage). The Portfolio may borrow only from banks and may not borrow in
excess of one-third of the market value of its assets, less liabilities other
than such borrowing. Funds that leverage through borrowing, which is a
speculative technique, offer an opportunity for greater capital appreciation,
but at the same time increase exposure to capital risk.
The Portfolio may purchase put and call options and sell (write) covered call
and put options on securities and securities indexes to increase gain and to
hedge against the risk of unfavorable price movements, and it may enter into
futures contracts on securities indexes and purchase and sell call and put
options on these futures contracts.
The Portfolio may also invest in short sales; restricted and illiquid (up to
15% of net assets) securities (including those issued under Rule 144A); U.S.
Government securities; foreign bank obligations; variable rate master demand
notes; and repurchase agreements.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\EMERGING GROWTH PORTFOLIO
The Emerging Growth Portfolio seeks to achieve its investment objective by
investing primarily in common stocks of small and medium-sized companies.
Under normal conditions, at least 65% of the Portfolio's total assets will be
invested in common stocks of small and medium-sized companies, both domestic
and foreign, in the early stages of their life cycle, that the Sub-Adviser
believes have the potential to become major enterprises. Investments in such
companies may offer greater opportunities for growth of capital than larger,
more established companies, but also involve certain special risks. Emerging
growth companies often have limited product lines, markets, or financial
resources, and they may be dependent upon one or a few key people for
management. The securities of such companies may be subject to more abrupt or
erratic market movements than securities of larger, more established
companies or the market averages in general.
The Portfolio does not limit its investments to any single group or type of
security. The Portfolio does not intend to invest more than 5% of its net
assets in unseasoned companies or special situations involving new
management, special products and techniques, unusual developments, mergers or
liquidations. Investments in unseasoned companies and special situations
often involve much greater risks than are inherent in ordinary investments,
because securities of such companies may be more than likely to experience
unexpected fluctuations in price.
The Portfolio's primary approach is to seek what the Sub-Adviser believes to
be unusually attractive growth investments on an individual company basis.
The Portfolio may invest in securities that have above average volatility of
price movement. The Portfolio attempts to reduce overall exposure to risk
from declines in securities prices by spreading its investments over many
different companies in a variety of industries.
While the Portfolio invests primarily in common stocks, it may invest to a
limited extent in other securities such as preferred stocks, convertible
securities, warrants (up to 5% of assets), illiquid securities (up to 15% of
its net assets), repurchase agreements, restricted securities (up to 5% of
assets) and up to 20% of its total assets in securities of foreign issuers,
including American Depositary Receipts ("ADRs").
The Portfolio expects to utilize options on securities, futures contracts and
options thereon in several different ways, depending upon the status of the
Portfolio's investment portfolio and the Sub-Adviser's expectations
concerning the securities markets.
In times of stable or rising stock prices, the Portfolio generally seeks to
obtain maximum exposure to the stock market, I.E., to be "fully invested."
Even when the Portfolio is fully invested, the Sub-Adviser believes that
prudent management may require that at least a small portfolio of assets be
available as cash to honor redemption requests and for other short term
needs. The Portfolio may also have cash on hand that has not yet been
invested. The portion of the Portfolio's assets that is invested in cash
equivalents does not fluctuate with stock market prices, so that, in times of
rising market prices, the Portfolio may underperform the market in proportion
to the amount of cash equivalents in its portfolio. By purchasing stock index
futures contracts, stock index call options, or call options on stock index
futures contracts, however, the Portfolio can "equitize" the cash portion of
its assets and obtain equivalent performance to investing 100% of its assets
in equity securities.
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Although the Portfolio's assets will be invested primarily in equity
securities at most times, the Portfolio's assets may be invested up to 100%
in U.S. Government securities, high-grade commercial paper, cash,
high-quality money market instruments, corporate bonds and debentures,
preferred stocks or certificates of deposit of commercial banks, when, in the
opinion of the Sub-Adviser, a temporary defensive position is warranted, or
so that the Portfolio may receive a return on its idle cash.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio seeks to achieve its investment objective
by investing primarily in the common stock of foreign issuers traded on
overseas exchanges and in foreign OTC markets. While the Portfolio will
primarily invest in common stock, the Portfolio may also invest in preferred
stocks convertible securities, warrants or rights, or fixed-income
instruments when the Co-Sub-Advisers deem appropriate.
Division of daily cash inflows attributable to shares purchased by the Separate
Accounts and periodic rebalancing of portfolio assets managed by each
Sub-Adviser will be made with the objective of keeping equal the total assets
managed by each Co-Sub-Adviser. It is anticipated that each Co-Sub-Adviser may
purchase securities for the Portfolio with its allocation of daily cash inflows
which are different from the securities purchased by the other Co-Sub-Adviser
with its respective allocation. In return, each Co-Sub-Adviser will receive
compensation, paid monthly, equal to 50% of the investment management fees
received by the Investment Adviser with respect to the amount of Portfolio
assets managed by each Co-Sub-Adviser during such period, and, until at least
December 31, 1997, less 50% of the amount of any excess expenses paid by the
Investment Adviser on behalf of the Portfolio pursuant to an expense limitation
(see "Management of the Fund - Investment Adviser," p. 37).
The Portfolio will seek to be invested in a minimum of 50 stocks of issuers
from approximately 15-25 countries, based on (i) the country in which an
issuer is organized; (ii) the country from which an issuer derives at least
50% of its revenues or profits; or (iii) the principal trading market for the
issuer's securities. Under normal circumstances, the Portfolio will not be
invested in issuers of fewer than twelve countries other than the U.S. at any
time. (For this purpose, ADRs, European Depositary Receipts ("EDRs"), and
Global Depositary Receipts ("GDRs") will be considered to be issued by the
issuer of the securities underlying the receipt.) Typically, the Portfolio
will be invested broadly, not only in the larger stock markets of the United
Kingdom, Continental Europe, Japan and the Far East, but also, to a lesser
extent, in the smaller stock markets of Asia, Europe and Latin America.
At any time, overseas economies may not be moving in the same direction and
will be subject to substantially different fiscal and monetary policies.
These provide situations the Portfolio will aim to exploit. The Portfolio
will aim to add value through both active country allocation and stock
selection in international equity markets.
In selecting investments on behalf of the Portfolio, GEIM seeks companies
that are expected to grow faster than relevant markets and whose securities
are available at a price that does not fully reflect the potential growth of
those companies. GEIM typically focuses on companies that possess one or more
of a variety of characteristics, including strong earnings growth relative to
price-to-earnings and price-to-cash earnings ratios, low price-to-book value,
strong cash flow, presence in an industry experiencing strong growth and high
quality management.
Under normal circumstances, the Portfolio will seek to invest as described
above, and may for cash management purposes and to meet operating expenses,
invest a portion of its total assets in cash and/or money market instruments
as described under "Portfolio Securities and Risk Factors" below, pending
investment in accordance with its investment objective and policies. During
periods when a Co-Sub-Adviser believes there are unstable market, economic,
political or currency conditions abroad, the portfolio may assume a temporary
defensive posture and (i) restrict the securities markets in which its assets
will be invested and/or invest all or a significant portion of its assets in
securities of the types described above issued by companies incorporated in
and/or having their principal activities in the United States, or (ii)
without limitation, hold cash and/or invest in such money market instruments.
To the extent that it holds cash or invests in money market instruments, the
Portfolio may not achieve its investment objective of long-term growth of
capital.
The Portfolio may purchase and sell financial futures contracts, stock index
futures contracts, and foreign currency futures contracts and related
options, forward foreign currency contracts, and interest rate swaps, caps
and floors for hedging purposes only and not for speculation, subject to
certain limitations.
The Portfolio may invest in convertible securities; stock index futures
contracts, including indexes on specific securities, as a hedge against
changes in the market
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value of common stocks; interest rate future contracts as a hedge against
changes in interest rates; and illiquid securities (up to 15% of net assets).
\diamond\GLOBAL SECTOR PORTFOLIO
The Global Sector Portfolio seeks to achieve its investment objective by
following an asset allocation strategy that shifts among a wide range of
asset categories and within them, market sectors. The Portfolio will invest
in the following asset categories: equity securities of domestic and foreign
issuers, including common stocks, preferred stocks, convertible securities
and warrants; debt securities of domestic and foreign issuers, including
mortgage-related and other asset-backed securities and securities rated below
investment grade; exchange-traded or OTC REITs; equity securities of
companies involved in the exploration, mining, processing, or dealing or
investing in gold ("gold stocks"); gold bullion; and domestic money market
instruments. Meridian Investment Management Corporation ("Meridian") (one of
the Co-Sub-Advisers) determines the allocation of the Portfolio's assets
among the asset categories described above, based on proprietary quantitative
research.
Under normal circumstances, the Portfolio will invest at least 65% of its
total assets in securities of issuers domiciled in at least three countries,
one of which may be the U.S., although the Co-Sub-Advisers expect the
Portfolio's investments to be allocated among a larger number of countries.
The percentage of the Portfolio's assets invested in securities of U.S.
issuers normally will be higher than that invested in securities of issuers
domiciled in any other single country. However, it is possible that at times
the Portfolio may have 65% or more (but not more than 80%) of its total
assets invested in foreign securities.
The Portfolio is not required to maintain a portion of its assets in each of
the permitted asset categories. The Portfolio, however, under normal
circumstances, will maintain a minimum of 20% of its total assets in equity
securities and 10% in debt securities. The Portfolio may, however, invest up
to 100% of its total assets in equity securities and up to 70% in debt
securities. For temporary defensive purposes, during times of unusual market
conditions, the Portfolio may invest 100% of its assets in short-term
securities. (See the SAI for a detailed description of these instruments.)
The Portfolio will not invest more than 20% of its total assets in gold
stocks. The Portfolio will not invest more than 25% of its total assets in
the securities of any single country, other than the U.S.
Market sectors within the asset categories include the industry, country or
bond markets available for investment. After asset allocations and relative
portfolio weightings of such allocations have been designated by Meridian,
INVESCO Global Asset Management Limited ("INVESCO") (the Portfolio's other
Co-Sub-Adviser) will select the specific securities within each asset
allocation category and the market sector in which the Portfolio will invest.
The Portfolio's investment in stocks, bonds and cash securities may vary from
time to time, depending upon Meridian's assessment of business, economic and
market conditions. If Meridian's assessment determines these conditions to be
abnormal, the Portfolio may depart from its basic investment objective and
assume a temporary defensive position, with up to 100% of its assets invested
in U.S. Government and agency securities, investment grade corporate bonds or
cash securities such as domestic certificates of deposit and bankers'
acceptances, repurchase agreements and commercial paper. (See the SAI for a
description of these securities.)
The Portfolio reserves the right to hold equity, debt and cash securities, in
whatever proportion is deemed desirable, at any time for defensive purposes.
While the Portfolio is in a defensive position, the opportunity to achieve
capital growth will be limited; however, the ability to maintain a defensive
position enables the Portfolio to seek to avoid capital losses during market
downturns. Under normal market conditions, the Portfolio does not expect to
have a substantial portion of its assets invested in cash securities.
In selecting equity securities (common stocks and, to a lesser degree,
preferred stocks and securities convertible into common stocks, such as
rights, warrants and convertible debt securities) in which the Portfolio
invests, INVESCO attempts to identify companies that have demonstrated or, in
INVESCO's opinion, are likely to demonstrate in the future, strong earnings
growth relative to other companies in the same industry or country. The
dividend payment records of companies are also considered. Equity securities
may be issued by either established, well-capitalized companies or
newly-formed, small-cap companies, and may trade on regional or national
stock exchanges or in the OTC market.
Most of the debt securities (corporate bonds, commercial paper, debt
securities issued by the U.S. Government, its agencies and instrumentalities,
or foreign governments, asset-backed securities and zero coupon bonds) in
which the Portfolio may invest must be rated in the four highest grades as
determined by Moody's Investors Service, Inc. ("Moody's") or Standard &
Poor's Corporation ("S&P"). However, the Portfolio may also invest up to 15%
of its total assets in debt securities rated below these four
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levels (commonly referred to as "junk bonds"). In no event will the Portfolio
ever invest in a debt security rated below Caa by Moody's or CCC by S&P. (See
Appendix A for a description of debt securities ratings.)
In order to hedge its portfolio, the Portfolio may purchase and write options
on securities (including index options and options on foreign securities),
and may invest in futures contracts for the purchase or sale of debt
securities and instruments based on financial indices (collectively, "futures
contracts"), options on futures contracts and interest rate swaps and
swap-related products. As a hedge against fluctuations in foreign exchange
rates, pending the settlement of transactions in foreign securities or during
the time the Portfolio holds foreign securities, the Portfolio may enter into
forward foreign currency contracts.
Investments made by the Portfolio in short-term securities may include
repurchase agreements. The Portfolio may enter into repurchase agreements
with respect to debt instruments eligible for investment by the Portfolio.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\GLOBAL PORTFOLIO
The Global Portfolio seeks to achieve its investment objective by investing
in companies on a worldwide basis, regardless of country of organization or
place of principal business activity, as well as domestic and foreign
governments, government agencies and other governmental entities. Realization
of income is not a significant investment consideration and any income
realized on the Portfolio's investments will, therefore, be incidental to the
Portfolio's objective.
The Portfolio's assets will normally be invested in securities of issuers
from at least five different countries, including the United States. The
Portfolio may, on a temporary basis, invest all of its assets in less than
five, or even a single country. When recommending allocations of the
Portfolio's investments among regions and countries, the Portfolio's
Sub-Adviser considers various factors such as prospects for relative economic
growth among countries, regions or geographic areas; expected levels of
inflation; government policies influencing business conditions; and the
outlook for currency relationships.
Although it is the policy of the Portfolio to purchase and hold securities
for long-term capital growth in a manner consistent with preservation of
capital, changes in the Portfolio will generally be made when the Sub-Adviser
believes they are advisable, typically either as a result of a security
having reached a price objective or by reason of developments not foreseen at
the time of the security's purchase.
Because the sale of a security ordinarily will be made without reference to
the length of time the security has been held, a significant number of
short-term transactions may result. The rate of portfolio turnover will not
be a limiting factor when changes are deemed to be appropriate. However,
certain tax rules may restrict the Portfolio's ability to sell securities in
some circumstances when a security has been held for an insufficient length
of time. Increased portfolio turnover necessarily results in correspondingly
higher brokerage costs for the Portfolio. These are ultimately borne by the
Policyholders.
The Sub-Adviser seeks to reduce the risks associated with these
considerations through diversification and active professional management.
The Portfolio seeks to invest substantially all of its assets in common
stocks when the Sub-Adviser believes that the relevant market environment
favors profitable investing in equity securities. Common stock investments
are selected from industries and companies that the Sub-Adviser believes are
experiencing favorable demand for their products and services, and which
operate in a favorable competitive environment and regulatory climate.
Although the assets of the Portfolio are ordinarily invested in common stocks
at most times, the Portfolio may increase its cash position (up to 100% of
assets) when the Sub-Adviser is unable to locate investment opportunities
with desirable risk/reward characteristics. The Portfolio may invest in
Government securities, corporate bonds and debentures, bank obligations,
high-grade commercial paper, preferred stocks, certificates of deposits or
other securities of U.S. issuers. These investments will be made when the
Sub-Adviser perceives an opportunity for capital growth from such securities,
or to enable the Portfolio to receive a competitive return on its uninvested
cash.
The Portfolio's investments in debt securities will be made in securities of
U.S. and foreign companies, the U.S. Government, foreign governments, and
U.S. and foreign governmental agencies and instrumentalities and other
government entities. The Portfolio may invest up to 15% of its net assets in
illiquid securities.
The Portfolio may also invest in futures contracts, related options
repurchase and reverse repurchase agreements, forward foreign currency
contracts and other derivative instruments, up to 5% in high-yield bonds, and
when issued securities (up to 20% of its assets).
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
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\diamond\GROWTH PORTFOLIO
The Growth Portfolio seeks to achieve its investment objective by investing
substantially all of its assets in common stocks when the Sub-Adviser
believes that the relevant market environment favors profitable investing in
those securities.
Common stock investments are selected in industries and companies which the
Sub-Adviser believes are experiencing favorable demand for their products and
services, and which operate in a favorable competitive environment and
regulatory climate. The Sub-Adviser's analysis and selection process focuses
on stocks issued by companies with earnings growth potential. In particular,
the Portfolio intends to buy stocks with earnings growth potential that may
not be recognized by the market. Securities are selected solely for their
growth potential; investment income is not a consideration.
Although the Portfolio's assets will be invested primarily in common stocks
at most times, the Portfolio may increase its cash position when the
Sub-Adviser is unable to locate investment opportunities with desirable
risk/reward characteristics, in such case, the Portfolio may invest in
Government securities, high-grade commercial paper, corporate bonds and
debentures, warrants, preferred stocks or certificates of deposit of
commercial banks or other debt securities.
The Portfolio may also invest in repurchase and reverse repurchase
agreements, illiquid securities (up to 15% of its net assets), futures
contracts, related options forward foreign currency contracts, and other
derivatives, and when-issued securities (up to 20% of its assets). The
Portfolio may also invest up to 25% of its net assets in foreign securities
(which may be purchased through ADRs, EDRs and GDRs) and up to 5% in
high-yield bonds.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\C.A.S.E. GROWTH PORTFOLIO
The C.A.S.E. Growth Portfolio seeks to achieve its investment objective
through investments in small to medium-sized companies. For these purposes,
the Sub-Adviser considers "small cap" stocks to be stocks issued by companies
with market capitalization of between $50 million and $500 million. The
Sub-Adviser considers "mid-capitalization" stocks to be stocks issued by
companies with market capitalization of between $350 million and $3 billion.
(Companies with market capitalization from $350 million to $500 million may
be classified by the Sub-Adviser as either small cap or medium cap, depending
upon the Sub-Adviser's evaluation of the liquidity of trading in the
company's stock.)
This Portfolio will generally invest in smaller, less well-established
companies, with limited product lines and financial resources. The Portfolio
seeks, however, to invest in such companies with above-market growth
characteristics in several investment classifications including sales,
earnings, returns and institutional support. Income derived is incidental to
the Portfolio's investment objective.
The Portfolio seeks to invest substantially all if its assets in common
stocks when the Sub-Adviser believes that the relevant market environment
favors profitable investing in those securities. Common stock investments are
selected from industries and companies that the Sub-Adviser believes are
experiencing favorable demand for their products and services, and which
operate in a favorable competitive environment and regulatory climate.
The Portfolio invests in common stocks traded on recognized securities
exchanges and in the OTC market. The Portfolio generally intends to invest in
medium-to small-sized companies which exhibit sustainable above-market
characteristics in sales, earnings, rates of return, insider and
institutional buying. The Sub-Adviser intends to be aggressive in its efforts
to increase Policyholders' capital by investing primarily in companies which
are likely to benefit from the comparatively strong conditional and
fundamental circumstances uncovered by the Sub-Adviser's analysis.
The Portfolio will invest in securities of companies that appear to be
under-valued from several vantage points and which, in the opinion of the
Sub-Adviser, demonstrate the characteristics for significant future growth.
As a result of these investment policies, the market price of many of the
securities purchased by the Portfolio may fluctuate widely; and any income
received by the Portfolio from these securities will be incidental. Investors
should be aware that whenever the securities markets become volatile,
secondary growth securities such as those in which the Portfolio will invest
have historically become even more so. The Sub-Adviser, nonetheless, believes
that small to middle capitalization securities in emerging markets often have
sales and earnings growth rates which exceed more developed companies. Such
growth rates may in turn be reflected in more rapid share price appreciation.
Although it is the policy of the Portfolio to purchase and hold securities
for long-term capital growth, changes in the Portfolio will generally be made
whenever the Sub-Adviser believes they are advisable. Because investment
changes ordinarily will be made without reference
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to the length of time a security has been held, a significant number of
short-term transactions may result. The rate of portfolio turnover will not
be a limiting factor when changes are deemed to be appropriate. However,
certain tax rules may restrict the Portfolio's ability to sell securities in
some circumstances when the security has been held for an insufficient length
of time.
Although the assets of the Portfolio are ordinarily invested in common stocks
at most times, the Portfolio may increase its cash position when the
Sub-Adviser is unable to locate investment opportunities with desirable
risk/reward characteristics.
The Portfolio's investments in debt securities will be made in securities of
U.S. and foreign companies, the U.S. Government, foreign governments, and
U.S. and foreign governmental agencies and instrumentalities and other
governmental entities.
Subject to certain limitations, the Portfolio may engage in hedging
strategies involving futures contracts and related options, forward currency
contracts, and interest rate swaps, caps and floors.
The Portfolio may engage in hedging strategies to attempt to reduce the
overall length of investment risk that normally would be expected to be
associated with the Portfolio's securities, and to attempt to protect the
Portfolio against market movements that might adversely affect the value of
the Portfolio's securities or the price of securities that the Portfolio is
considering purchasing. There can be no assurance, however, that the use of
these instruments by the Portfolio will assist it in achieving its investment
objective.
The Portfolio may invest in repurchase and reverse repurchase agreements,
illiquid securities (up to 15% of its net assets), when-issued securities and
"special situations."
The Portfolio may invest up to 25% of its net assets in the securities of
foreign issuers and obligors. Investments may be made in both domestic and
foreign companies. If appropriate and available, the Sub-Adviser may purchase
foreign securities through ADRs, EDRs, GDRs and other types of receipts of
shares evidencing ownership of the underlying foreign securities.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\U.S. EQUITY PORTFOLIO
The U.S. Equity Portfolio seeks to achieve its investment objective through
investment primarily in equity securities of U.S. companies. In pursuing its
objective, the Portfolio, under normal conditions, invests at least 65% of
its assets in equity securities, including common stocks and preferred
stocks, and securities convertible into common stocks, including convertible
bonds, convertible debentures, convertible notes, convertible preferred
stocks and warrants or rights issued by U.S. companies. In managing the
assets of the Portfolio, the Sub-Adviser uses a combination of
"value-oriented" and "growth-oriented" investing. Value-oriented investing
involves seeking securities that may have low price-to-earnings ratios, or
high yields, or that sell for less than intrinsic value as determined by the
Sub-Adviser, or that appear attractive on a dividend discount model. These
securities generally are sold from the Portfolio's portfolio when their
prices approach targeted levels. Growth-oriented investing generally involves
buying securities with above average earnings growth rates at reasonable
prices. The Portfolio holds these securities until the Sub-Adviser determines
that their growth prospects diminish or that they have become overvalued when
compared with alternative investments.
In investing on behalf of the Portfolio, the Sub-Adviser seeks to produce a
portfolio that it believes will have similar characteristics to the S&P 500,
by virtue of blending investments in both "value" and "growth" securities.
Since the Portfolio's strategy seeks to combine the basic elements of
companies comprising the S&P 500, but is designed to select investments
deemed to be the most attractive within each category, the Sub-Adviser
believes that the strategy should be capable of outperforming the U.S. equity
market as reflected by the S&P 500 on a total return basis.
The equity securities issued by U.S. companies in which the Portfolio invests
typically are traded on U.S. securities exchanges; those U.S. equity
securities held by the Portfolio that are not exchange-traded are
non-publicly traded or traded in the U.S. OTC market. Up to 15% of the
Portfolio's assets may be invested in foreign securities.
The Portfolio also may invest in certain equity-indexed securities and
securities of foreign issuers in the form of depositary receipts.
The Portfolio may, under normal market conditions, invest up to 35% of its
assets in notes, bonds and debentures issued by corporate or governmental
entities when the Sub-Adviser determines that investing in these kinds of
debt securities is consistent with the Portfolio's investment objective of
long-term growth of capital. The Sub-Adviser believes that such a
determination could be made, for example, upon the Portfolio's investing in
the debt securities of a company whose securities the Sub-Adviser anticipates
will increase in value as a result of a development particularly or uniquely
applicable to the
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company, such as a liquidation, reorganization, recapitalization or merger,
material litigation, technological breakthrough or new management or
management policies. In addition, the Sub-Adviser believes such a
determination could be made with respect to an investment by the Portfolio in
debt instruments issued by a governmental entity upon the Sub-Adviser's
concluding that the value of the instruments will increase as a result of
improvements or changes in public finances, monetary policies, external
accounts, financial markets, exchange rate policies or labor conditions of
the country in which the governmental entity is located.
During normal market conditions, a portion of the Portfolio's total assets
may be held in cash and/or invested in money market instruments of the types
described below under "Portfolio Securities and Risk Factors" for cash
management purposes, pending investment in accordance with the Portfolio's
investment objective and policies and to meet operating expenses. During
periods in which the Sub-Adviser believes that investment opportunities in
the U.S. equity markets are diminished (due to either fundamental changes in
those markets or an anticipated general decline in the value of U.S. equity
securities), the Portfolio may for temporary defensive purposes hold cash
and/or invest in the same types of money market instruments without
limitation. Included among the money market instruments in which the
Portfolio may invest are repurchase agreements. To the extent that it holds
cash or invests in money market instruments, the Portfolio may not achieve
its investment objective of long-term growth of capital.
The Portfolio's investments in debt securities are limited to those that are
rated investment grade, except that up to 5% of the Portfolio's assets may be
invested in securities rated lower than investment grade. A security is
considered investment grade if it is rated at the time of purchase within the
four highest grades assigned by S&P or by Moody's or has received an
equivalent rating from an NRSRO or, if unrated, is deemed by the Sub-Adviser
to be of comparable quality. (See Appendix A for a description of debt
securities ratings.)
The Portfolio, in addition to investing as described above, may hold the
following types of instruments: non-publicly traded securities, illiquid
securities, and securities that are not registered under the Securities Act
of 1933, as amended (the "1933 Act"), but that can be sold to "qualified
institutional buyers" in accordance with Rule 144A under the 1933 Act (each,
a "Rule 144A Security" and collectively, "Rule 144A Securities"). In
addition, the Portfolio may engage in the following types of investment
techniques and strategies: purchasing put and call options on securities,
writing put and call options on securities, purchasing put and call options
on securities indexes, entering into interest rate, financial and stock or
bond index futures contracts or related options that are traded on a U.S. or
foreign exchange or board of trade or in the over-the-counter market,
engaging in forward currency transactions, purchasing and writing put and
call options on foreign currencies, entering into securities transactions on
a when-issued or delayed-delivery basis and lending portfolio securities.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\VALUE EQUITY PORTFOLIO
The Value Equity Portfolio seeks to achieve its investment objective by
investing its assets in common stocks with above-average statistical value
which, the Sub-Adviser believes are in fundamentally attractive industries
and are undervalued at the time of purchase. The Sub-Adviser will seek to
identify stocks of above-average statistical value by using statistical
measures to screen for below-average price-to-earnings and price-to-book
ratios, above-average dividend yields and strong financial stability.
The Sub-Adviser will begin the process of evaluating potential common stock
and equity-related securities investments by screening a universe of 1,100
companies, primarily of medium to large capitalization. For these purposes,
the Sub-Adviser considers medium capitalization stocks to be stocks issued by
companies with market capitalization of between $500 million and $3 billion,
and large capitalization stocks to be those stocks issued by companies with
market capitalization in excess of $3 billion. Investments in companies with
market capitalization under $500 million will be limited to 10% of the
Portfolio's total assets.
The process used by the Sub-Adviser to identify promising under-valued
companies within this universe of companies may be different from those of
other value-oriented investment managers in the following ways: the use of
earnings averaged over both strong and weak periods to value cyclical
companies; a focus on quality of earnings; investment in relative value; and
concentration in industries/sectors having strong long-term fundamentals.
As a part of multi-disciplined approach to capturing value, the Sub-Adviser
first seeks to identify market sectors early in their cycle of fundamental
improvement, investor recognition and market exploitation. Industry
fundamentals used in this decision making process are business trend analysis
(to analyze industry and company fundamentals for the impact of changing
worldwide
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<PAGE>
product demand/supply), direction of inflation and interest rates, and
expansion/contraction of business cycles. The Sub-Adviser utilizes in-house
capabilities, in addition to independent resources, for economic, industry
and securities research.
Following this initial phase, approximately 200 companies that the
Sub-Adviser believes have above-average statistical value and are in a sector
identified as having positive fundamentals on a long-term basis, will be
actively followed. Company visits and interviews with management augment
fundamental research in seeking to identify the potential value in these
investments. The Portfolio will seek to be concentrated in those industries
with positive fundamentals and likewise will seek to minimize risk by
avoiding industries with deteriorating long-term fundamentals.
The Sub-Adviser anticipates that the majority of the investments in the
Portfolio will be in U.S.-based companies. However, from time to time,
securities of foreign based companies may be purchased, in accordance with
the selection process outlined above. The Portfolio presently intends to
limit its investment in foreign securities and ADRs to up to 25% of its total
assets.
In seeking to meet its investment objective, the Portfolio may invest in any
type of security whose investment characteristics are consistent with the
Portfolio's investment policies and techniques. Some of the other securities
the Portfolio may invest in are repurchase agreements (up to 25% of its total
assets); certificates of deposit and certain bankers' acceptance and other
securities; when-issued, delayed settlement or forward delivery securities;
short-term investments; illiquid securities (up to 15% of its net assets) and
Rule 144A securities; and non-investment grade convertible bonds and
preferred stock (up to 10% of its assets).
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\TACTICAL ASSET ALLOCATION PORTFOLIO
The Tactical Asset Allocation Portfolio seeks to achieve its investment
objective by investing primarily in stocks, U.S. Treasury bonds, notes and
bills, and money market funds. The Portfolio will seek to achieve income
yield in excess of the dividend income yield of the S&P 500. The Portfolio
seeks to invest its assets primarily in income producing common or preferred
stock, while the remainder of the Portfolio will ordinarily be invested in
debt obligations, typically some of which will be convertible into common
stock.
The principles by which the Sub-Adviser makes its stock selection are based
on value investing - combining safety of principal with above average returns.
A company is attractive if it is reasonably priced and the Sub-Adviser
believes it will perform better than the current expectations for
earning/cash flow over the next several years.
The Sub-Adviser's focus is on primarily high quality, liquid, large
capitalization stocks. The selection process starts with a "bottom-up"
screening of the market to identify stocks that are statistically
undervalued, based on financial characteristics such as Price to Cash Flow,
Price to Sales, Price to Earnings, Dividend Yield, and Return on Equity
relative to the stock's historical norms.
The Sub-Adviser believes that investors' expectations and the company's
operating performance ultimately determine which statistically "undervalued"
stocks make good investments. Finally, undervalued stocks, by definition, are
out of favor with most investors. Therefore, the analysis of the Sub-Adviser
includes a thorough fundamental and technical evaluation of stocks to
determine their likely prospects for positive investment performance. The
Sub-Adviser's goal is to choose stocks which the market has undervalued based
on "overreaction" to perceived risks.
A stock's fundamentals dominate the selection process. However, technical
analysis is used to improve the timeliness of the Sub-Adviser's trading
decisions.
The Sub-Adviser utilizes a series of linear statistical models that attempt
to forecast total stock market returns for both short (12 to 18 months) and
long (36 to 60 months) run time periods. These time series models assist the
Sub-Adviser in comparing the risks and rewards of holding stocks versus
treasury notes and money market funds, and assist the Sub-Adviser in
determining when to "tactically" adjust the asset allocation through a
gradual shifting of assets among stocks, U.S. Treasury bonds and notes, and
money market funds. A combination of fundamental, technical, subjective and
monetary variables are used in the forecasting models.
The Portfolio may invest up to 25% of its total assets in equity securities
of foreign issuers. It is anticipated that most of the Portfolio's
investments in securities of foreign issuers will be ADRs. The Portfolio may
also invest in American Depositary Shares ("ADSs").
The Portfolio may also invest in U.S. Government securities, corporate bonds
and debentures, high-grade commercial paper (rated Prime-1 by Moody's or A-1
by S&P), preferred stocks, certificates of deposit or other securities of
U.S. issuers when the Sub-Adviser perceives attractive opportunities from
such securities, or so that the Portfolio may receive a competitive return on
its
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<PAGE>
uninvested cash. The Portfolio may only invest in debt securities of U.S.
issuers. Corporate debt securities in which the Portfolio may invest will
have a rating within the four highest grades as determined by Moody's or S&P.
In the event that ratings decline after the Portfolio's investment in
securities, the Sub-Adviser will consider all such factors as it deems
relevant to the advisability of retaining such securities. (See Appendix A
for a description of debt securities ratings.)
The Portfolio may invest up to 10% of its total assets in money market funds,
within limits imposed by the 1940 Act upon investment by the Portfolio in
other investment companies. If the forecasting models predict a decline in
the stock market, the Sub-Adviser will reduce equity exposure which will
increase the Portfolio's cash position, including investment in money market
funds.
The Portfolio may also invest in zero coupon bonds, "strips" and convertible
securities.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\EQUITY-INCOME PORTFOLIO
The Equity-Income Portfolio seeks to achieve its investment objective by
investing primarily in a blend of equity and fixed-income securities,
including common stocks, income producing securities convertible into common
stock, and fixed-income securities. The Portfolio will primarily invest in
equity and debt securities of companies with established operating histories
and strong fundamental characteristics. The Portfolio seeks to achieve an
income yield in excess of the dividend income yield of the S&P 500 primarily
by utilizing both equity and fixed-income securities.
In selecting equity and fixed-income securities for the Portfolio, the
Sub-Adviser typically seeks companies which exhibit strong fundamental
characteristics and considers fundamental factors such as balance sheet
quality, cash flow generation, earnings and dividend growth record and
outlook, and profitability levels. However, the Sub-Adviser may select
securities based on factors other than those described above.
For example, some securities may be purchased at an apparent discount to
their appropriate value, anticipating that they will increase to that value
over time. The Sub-Adviser's objective in investing in such undervalued
companies is to purchase shares of these companies at a discount to net asset
value and have the investment accrue to that value over time. The Portfolio
does not presently intend to invest more than 20% of its total assets in
equity securities which do not pay a dividend. It is anticipated that a
majority of the equity securities in which the Portfolio invests will be
listed on a national securities exchange or traded on NASDAQ or in the U.S.
OTCs.
The Portfolio may increase its cash position when the Sub-Adviser determines
that investment opportunities with desirable risk/reward characteristics are
unavailable.
The Portfolio may invest up to 10% of its total assets in foreign securities
not publicly traded in the United States. In addition, the Portfolio may
invest in ADRs.
The Portfolio may also invest in U.S. and foreign government securities,
corporate bonds and debentures, high-grade commercial paper (rated Prime-1 by
Moody's or A-1 by S&P), preferred stocks, certificates of deposit or other
securities of U.S. issuers when the Sub-Adviser perceives attractive
opportunities from such securities, or so that the Portfolio may receive a
competitive return on its uninvested cash. The Portfolio may invest in debt
securities of U.S. and foreign issuers. The Portfolio may invest up to 15% of
its net assets in illiquid securities.
Corporate debt securities in which the Portfolio invests will generally have
a rating within the four highest grades as determined by Moody's or S&P. (See
Appendix A for a description of debt securities ratings.)
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\UTILITY PORTFOLIO
The Utility Portfolio seeks to achieve its investment objective by investing
at least 65% of its assets in a professionally managed and diversified
portfolio of equity and debt securities of utility companies that produce,
transmit, or distribute gas and electric energy as well as those companies
that provide communications facilities such as telephone and telegraph
companies.
The Portfolio's investment approach is based on the conviction that over the
long-term, the economy will continue to expand and develop and that this
economic growth will be reflected in the growth of the revenues and earnings
of such companies.
The common stocks of utility companies are selected by the Portfolio's
Sub-Adviser on the basis of traditional research techniques, including
assessment of earnings and dividend growth prospects and of the risk and
volatility of the company's industry. However, other factors, such as product
position, market share, or profitability will also be considered by the
Sub-Adviser. While the Portfolio invests primarily in common stocks of
utility companies, to a limited extent, it may invest in other securities of
utility companies such as preferred stocks, corporate bonds, notes and
warrants.
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Because of the Portfolio's investment concentration, there exist certain
risks associated with the utility industry of which investors should be
aware. These include difficulty in earning adequate returns on investment
despite frequent rate increases, restriction on operation and increased costs
and delays due to government regulations, building or construction delays,
environmental regulations, difficulty of the capital markets in absorbing
utility debt and equity securities, and difficulties in obtaining fuel at
reasonable prices.
The Portfolio presently intends to invest up to 15% of its total assets in
the securities of foreign issuers which are freely traded on U.S. securities
exchanges or in the OTC market in the form of ADRs. The Portfolio intends to
limit its investment in foreign securities to 15% of its total assets.
Foreign securities may be from developed and developing countries.
The Portfolio intends to invest in restricted and illiquid securities.
However, the Portfolio will limit investments in illiquid securities (up to
15% of its net assets), including certain restricted securities not
determined by the Fund's Board to be liquid, non-negotiable time deposits,
and repurchase agreements providing for settlement in more than seven days
after notice.
The Portfolio may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933.
The Portfolio may also invest temporarily in cash, cash items, and short-term
instruments, including notes and commercial paper, for liquidity and during
times of unusual market conditions for defensive purposes (up to 100% of its
assets).
The Portfolio may purchase securities on a when-issued or delayed delivery
basis. The Portfolio intends to limit its purchases of securities on a
when-issued or delayed delivery basis to no more than 10% of the value of its
total assets.
The Portfolio may purchase put options on its portfolio securities. These
options will be used as a hedge to attempt to protect securities which the
Portfolio holds against decreases in value. The Portfolio will only purchase
puts which are traded on a recognized exchange.
The Portfolio may also write call options on all or any portion of its
portfolio to generate income for the Portfolio. The Portfolio will write call
options on securities either held in its portfolio or for which it has the
right to obtain without payment of further consideration or for which it has
segregated cash in the amount of any additional consideration. The call
options which the Portfolio writes must be listed on a recognized options
exchange. Although the Portfolio reserves the right to write covered call
options on its entire portfolio, it will not write such options on more than
25% of its total assets unless a higher limit is authorized by the Fund's
Board.
The Portfolio may purchase and sell financial futures contracts to hedge all
or a portion of its portfolio of long-term debt securities against changes in
interest rates.
The Portfolio may also write call options and purchase put options on
financial futures contracts as a hedge to attempt to protect securities in
its portfolio against decreases in value. The Portfolio may not purchase or
sell futures or related options if, immediately thereafter, the sum of the
amount of margin deposits on the Portfolio's existing futures positions and
premiums paid for related options would exceed 5% of the market value of the
Portfolio's total assets.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\BALANCED PORTFOLIO
The Balanced Portfolio seeks to achieve its investment objective by investing
primarily in common stock, convertible securities and fixed-income
securities. The Portfolio may also invest in preferred stocks and interests
in REITs. A minimum of 25% of the Portfolio's assets will always be invested
in non-convertible fixed-income securities.
In seeking current income and growth opportunities, the Portfolio will
primarily select companies with established operating histories and potential
for dividend growth. The Portfolio will seek to achieve income yield in
excess of the dividend income yield of the S&P 500.
The Portfolio does not presently intend to invest more than 20% of its total
assets in equity securities which do not pay a dividend. It is anticipated
that almost all of the equity securities in which the Portfolio invests will
be listed on a national securities exchange or on NASDAQ or will be traded in
the U.S. OTC markets.
The Portfolio seeks to invest its assets primarily in income-producing common
or preferred stock when the Sub-Adviser believes that the relevant market
environment favors profitable investing in those securities.
In selecting equity securities and securities convertible into equity
securities for the Portfolio, the Sub-Adviser typically seeks companies which
exhibit strong fundamental characteristics such as balance sheet quality,
cash flow generation, earnings and dividend growth record and outlook, and
profitability levels. The Sub-Adviser presently intends to consider these and
other fundamental characteristics in determining attractive
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<PAGE>
investment opportunities. However, the Sub-Adviser may select securities
based on factors other than those described above.
The remainder of the Portfolio will ordinarily be invested in debt
obligations, typically some of which will be convertible into common stock.
However, the Portfolio may increase its cash position when the Sub-Adviser
determines that investment opportunities with desirable risk/ reward
characteristics are unavailable.
The Portfolio may invest up to 25% of its total assets in securities of
foreign issuers. It is anticipated that most of the Portfolio's investments
in securities of foreign issuers will be ADRs.
The Portfolio may invest in Government securities, corporate bonds and
debentures, high-grade commercial paper (rated Prime-1 by Moody's or A-1 by
S&P), preferred stocks, certificates of deposit or other securities of U.S.
issuers when the Sub-Adviser perceives attractive opportunities from such
securities, or to enable the Portfolio to receive a competitive return on its
uninvested cash. The Portfolio may invest in debt securities of U.S. and
foreign issuers.
Corporate debt securities in which the Portfolio invests will generally have
a rating within the four highest grades as determined by Moody's or S&P. The
Portfolio will not invest in rated securities that, at the time of
investment, are rated below "B" by Moody's or "B" by S&P ("b" in the case of
Moody's preferred stock ratings). If the securities are unrated, the
Portfolio will not invest if they are judged by the Sub-Adviser not to
possess investment qualities at least equivalent to a "B" or "b" rating. (See
Appendix A for a description of debt securities ratings.)
In the event that ratings decline after the Portfolio's investment in such
securities, the Sub-Adviser will consider all factors as it deems relevant to
the advisability of retaining such securities.
The Portfolio may also invest in zero coupon bonds, "strips", illiquid
securities (up to 15% of its net assets) and convertible securities.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\BOND PORTFOLIO
The Bond Portfolio seeks to achieve its investment objective by investing at
least 65%, and usually a higher percentage, of its assets in debt securities
issued by the U.S. Government and its agencies and instrumentalities and in
other medium to high-quality debt securities.
Generally, the Portfolio will invest in debt securities that have a rating
within the three highest grades as determined by Moody's or S&P. The
Portfolio may, however, invest in debt securities within the fourth highest
grade as determined by Moody's or S&P, if the Sub-Adviser determines such
investments meet the Portfolio's investment objective. (See Appendix A for a
description of debt securities ratings.)
An increase in interest rates tends to reduce the market value of fixed
income investments, and a decline in interest rates tends to increase their
value. The Portfolio's performance is, accordingly, quite sensitive to market
interest rate fluctuations. To take advantage of differences in securities
prices and yields, or fluctuations in interest rates, consistent with its
investment objective, the Portfolio may trade for short-term profits.
The Portfolio may invest in repurchase and reverse repurchase agreements,
illiquid securities (up to 15% of its net assets) when-issued securities (up
to 20% of its assets), futures contracts, related options and other
derivatives, zero coupon bonds up to 5% in high-yield bonds, "strips",
pay-in-kind and step coupon securities and, up to 25% of its net assets in
foreign securities. If appropriate and available, the Sub-Adviser may
purchase foreign securities through ADRs, EDRs and GDRs, and other types of
receipts or shares evidencing ownership of the underlying foreign securities.
The Portfolio does not intend to invest more than 10% of its assets in zero
coupon bonds or "strips".
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
The Short-to-Intermediate Government Portfolio seeks to achieve its
investment objective by investing primarily in U.S. Government securities and
certain other securities as described below. Under normal conditions, at
least 65% of the Portfolio's total assets will be invested in U.S. Government
securities, including repurchase agreements with respect to U.S. Government
securities. The Portfolio will not enter into a repurchase agreement or
reverse repurchase agreement which would cause more than 15% of its net
assets to be subject to repurchase or reverse repurchase agreements not
terminable within seven days, together with other illiquid investments. The
Portfolio itself, and its share price and yield, are not guaranteed by the
U.S. Government.
The Portfolio seeks to manage share price stability by investing in
obligations with short or intermediate maturities that are not as sensitive
to interest rate
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changes as obligations with longer maturities. In selecting securities for
the Portfolio, the Portfolio's Sub-Adviser attempts to maintain the
Portfolio's overall sensitivity to interest rates in a range similar to the
average for short-term to intermediate-term Government bonds with an
aggregate average dollar-weighted remaining maturity of one to seven years.
The Portfolio's dollar-weighted average maturity may be longer than seven
years from time to time, but will not exceed ten years under normal operating
conditions. The Portfolio may hold individual securities with maturities of
more than ten years as long as its average maturity remains within this
range.
The Portfolio may also invest in debt securities of all types, e.g., bonds,
debentures, notes, equipment lease and trust certificates, (debt securities
secured by direct or indirect interest in specified equipment or equipment
leases), mortgage-backed securities, asset-backed securities (rated at least
"A" by S&P or Moody's), taxable municipal bonds, bond warrants, obligations
issued or guaranteed by supranational issuers or collateralized mortgage
obligations ("CMOs") assembled for sale to investors by governmental agencies
("mortgage securities"). The Portfolio may also invest in commercial paper
(rated Prime-1 by Moody's or A-1 by S&P).
Corporate debt securities in which the Portfolio invests will generally have
a rating within the three highest grades as determined by Moody's or S&P. The
Portfolio may, however, invest in debt securities within the fourth highest
grade as determined by Moody's or S&P, if the Sub-Adviser determines the debt
securities' ratings are supported by an internal credit review that the
Sub-Adviser will conduct in each such instance. (See Appendix A for a
description of debt securities ratings.)
The Portfolio may invest a portion of its assets in very short-term
instruments with remaining maturities of one year or less, including U.S.
Treasury bills and repurchase agreements. When it is believed that market
conditions warrant a temporary defensive position, the Portfolio may invest
up to 100% of its assets in these instruments.
The Portfolio may invest up to 15% of its net assets in illiquid securities.
The Portfolio may also invest up to 10% of its total assets in foreign
securities.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\MONEY MARKET PORTFOLIO
The Money Market Portfolio seeks to maintain a constant net asset value of
$1.00 per share, although there can be no assurance that this will be
achieved.
The Portfolio seeks to achieve its investment objective by maintaining a
dollar-weighted average portfolio maturity of not more than 90 days through
investment in U.S. dollar-denominated securities which have effective
maturities of not more than 13 months and which, in accordance with
guidelines adopted by the Fund's Board, are determined to present minimal
credit risks. (See the SAI for a more detailed description of these
instruments.) Such instruments may include:
1. Obligations issued or guaranteed by the U.S. Government and backed by
the full faith and credit of the United States. These securities
include U.S. Treasury securities, obligations of the Government
National Mortgage Association, the Farmers Home Administration and the
Export-Import Bank. The Portfolio may also invest in obligations issued
or guaranteed by U.S. Government agencies or instrumentalities where
the Portfolio must look principally to the issuing or guaranteeing
agency for ultimate repayment. Some examples of agencies or
instrumentalities issuing these obligations are the Federal Farm Credit
System, the Federal Home Loan Banks and the Federal National Mortgage
Association.
2. Domestic and certain foreign bank obligations including time deposits,
certificates of deposit, bankers' acceptances and other bank
obligations. The Portfolio may invest in high quality U.S.
dollar-denominated obligations of (i) banks, savings and loan
associations and savings banks which have more than $2 billion in total
assets and are organized under U.S. Federal or state law, (ii) foreign
branches of these banks or of foreign banks of equivalent size (Euros),
and (iii) U.S. branches or subsidiaries of foreign banks of equivalent
size (Yankees). The Portfolio may also invest in obligations of
international banking institutions designated or supported by national
governments to promote economic reconstruction, development or trade
between nations (E.G., the European Investment Bank, the Inter-American
Development Bank, or the World Bank). These obligations may be
supported by appropriated but unpaid commitments of their member
countries, and there is no assurance these commitments will be
undertaken or met in the future.
3. Asset-backed securities.
4. Commercial paper, including variable amount master demand notes and
corporate bonds issued by U.S. corporations. The Portfolio may also
invest in bonds and commercial paper of
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foreign issuers if the obligation is U.S. dollar-denominated and is not
subject to foreign withholding tax.
5. Repurchase and reverse repurchase agreements.
The Portfolio will limit its investment to securities that present minimum
credit risks, as determined by guidelines adopted by the Fund's Board. In
addition, the Portfolio will limit its investment in the securities of any
one issuer to 5% of its total assets, measured at the time of purchase. (U.S.
Government securities and securities that benefit from certain types of
credit enhancement arrangements are not included in this limitation.) The
Portfolio may invest up to 25% of its total assets in securities of a single
issuer if the securities will not be held for more than three business days.
Also, the Portfolio will not purchase any security (other than a U.S.
Government security) unless (i) it (or a comparable security of the same
issuer) is rated with the highest rating assigned to short-term debt
securities by at least two NRSROs, such as Moody's and S&P, or (ii) it (or a
comparable security of the same issuer) is rated by only one NRSRO, and is
rated by that NRSRO with the highest such rating, or (iii) it is not rated
and is determined to be of comparable quality as determined by the Fund's
Board. The Fund's Board must approve or ratify the acquisition of any unrated
security or a security rated by only one NRSRO.
These standards must be satisfied at the time an investment is made. If the
quality of the investment later declines below the quality required for
purchase, the Portfolio shall dispose of the investment in accordance with
procedures adopted by the Fund's Board, except in certain circumstances where
there is a finding by the Fund's Board that disposing of the investment would
not be in the Portfolio's best interest. (For a description of the NRSRO
ratings, see the SAI.)
The Portfolio may also invest in securities of a when-issued or delayed
delivery basis and in certain privately-placed securities and repurchase and
reverse repurchase agreements. The Portfolio may invest up to 10% of its net
assets in illiquid securities.
The Portfolio may invest up to 10% of its total assets, calculated at the
time of purchase, in the securities of money market funds, which are
investment companies. The Portfolio may not invest (i) more than 5% of its
total assets in the securities of any one investment company or (ii) in more
than 3% of the voting securities of any other investment company. The
Portfolio will indirectly bear its proportionate share of any investment
advisory fees and expenses paid by the money market funds in which it
invests, in addition to the Portfolio's own investment advisory fee and
expenses paid.
The Portfolio operates under a rule of the SEC that permits it, subject to
certain conditions, to use the amortized cost method of valuing its shares.
(See the SAI for a description of these conditions.)
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
OTHER INVESTMENT POLICIES AND RESTRICTIONS
The Portfolios are subject to certain other investment policies and
restrictions which are described in the SAI for the Portfolios. Unless
otherwise noted, the investment policies, techniques, and percentage
restrictions described below are non-fundamental and may be changed by the
Fund's Board without Policyholder approval.
Unless otherwise stated, each of the following policies applies to all of the
Portfolios. In addition, unless otherwise stated below, the percentage
limitations included in these policies and elsewhere in this Prospectus apply
only at the time of purchase of the security.
\diamond\CASH POSITION
A Portfolio may, at times, choose to hold some portion of its net assets in
cash, or to invest that cash in a variety of debt securities. This may be
done as a defensive measure at times when desirable risk/reward
characteristics are not available in stocks or to earn income from otherwise
uninvested cash. When a Portfolio increases its cash or debt investment
position, its income may increase while its ability to participate in stock
market advances or declines decreases.
\diamond\DIVERSIFICATION AND CONCENTRATION
The 1940 Act classifies investment companies as either diversified or
non-diversified.
Diversification is the practice of spreading a portfolio's assets over a
number of investments, investment types, industries or countries to reduce
risk. A non-diversified portfolio has the ability to take larger positions in
fewer issuers. Because the appreciation or depreciation of a single security
may have a greater impact on the net asset value of a non-diversified
portfolio, its share price can be expected to fluctuate more than a
comparable portfolio.
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All of the Portfolios qualify as diversified funds under the 1940 Act. The
Portfolios are subject to the following diversification requirements:
\diamond\ As a fundamental policy, no Portfolio may own more than 10% of the
outstanding voting shares of any issuer other than U.S. Government
securities, bank money marketing instruments or bank repos.
\diamond\ As a fundamental policy, with respect to 75% of the total assets of a
Portfolio, the Portfolio will not purchase a security of any issuer if such
purchase would cause the Portfolio's holdings of that issuer to amount to
more than 5% of the Portfolio's total assets.
\diamond\ As a fundamental policy governing concentration, no Portfolio (except
the Utility Portfolio) will invest more than 25% of its assets in any one
particular industry, other than U.S. Government securities.
\diamond\PORTFOLIO TURNOVER
A portfolio turnover rate is, in general, the percentage calculated by taking
the lesser of purchases or sales of portfolio securities (excluding certain
short-term securities) for a year and dividing it by the monthly average of
the market value of such securities during the year. (See "Financial
Highlights" for each Portfolio on pages 1-8 for more information on
historical turnover rates.)
Changes in security holdings are made by a Portfolio's Sub-Adviser when it is
deemed necessary. Such changes may result from: liquidity needs; securities
having reached a price or yield objective; anticipated changes in interest
rates or the credit standing of an issuer; or developments not foreseen at
the time of the investment decision.
A Sub-Adviser may engage in a significant number of short-term transactions
if such investing serves a Portfolio's objective. The rate of portfolio
turnover will not be a limiting factor when such short-term investing is
considered appropriate.
Increased turnover results in higher brokerage costs or mark-up charges for a
Portfolio; these charges are ultimately borne by the Policyholders. For
further discussion of portfolio turnover, see the SAI.
\diamond\BORROWING
Each Portfolio may borrow money from banks for temporary or emergency
purposes. The amount borrowed shall not exceed 33-1/3% of total assets for
the Global Sector, the International Equity, the U.S. Equity and the
Aggressive Growth Portfolios; 10% of total assets for the Value Equity
Portfolio; and 25% of total assets for all other Portfolios. (The Utility
Portfolio does not presently intend to borrow.)
To secure borrowings, a Portfolio may not mortgage or pledge its securities
in amounts that exceed 15% of its net assets (10% for the Value Equity
Portfolio). (See the SAI for any exceptions to this limitation.)
The Portfolios with a common Sub-Adviser may also borrow (or lend) money to
other funds that permit such transactions and are also advised by that
Sub-Adviser, provided each Portfolio seeks and obtains permission from the
SEC. There is no assurance that such permission would be granted.
The Aggressive Growth Portfolio may borrow for investment purposes - this is
called "leveraging." The Portfolio may borrow only from banks, not from other
investment companies. There are risks associated with leveraging:
\diamond\ If a Portfolio's asset coverage drops below 300% of borrowings, the
Portfolio may be required to sell securities within three days to reduce its
debt and restore the 300% coverage, even though it may be disadvantageous to do
so.
\diamond\ Leveraging may exaggerate the effect on net asset value of any
increase or decease in the market value of a Portfolio's securities.
\diamond\ Money borrowed for leveraging will be subject to interest costs. In
certain cases, interest costs may exceed the return received on the securities
purchased.
\diamond\ A Portfolio may be required to maintain minimum average balances in
connection with borrowing or to pay a commitment or other fee to maintain a
line of credit. Either of these requirements would increase the cost of
borrowing over the stated interest rate.
Notwithstanding the limitations set forth above, in accordance with the
requirements of current California insurance regulations, each Portfolio will
restrict borrowings to no more than 10% of total assets, except that a
Portfolio may temporarily borrow amounts equal to as much as 25% of total
assets if such borrowing is necessary to meet redemptions. If California's
insurance regulations are changed at some future time to permit borrowings in
excess of 10%, but less than the borrowing limitation for a Portfolio, the
Portfolio may conduct borrowings in accordance with such revised limits.
State laws and regulations may impose additional limitations on borrowings.
See the SAI for further information on borrowing.
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<PAGE>
\diamond\LENDING
Each Portfolio may lend securities to broker-dealers and financial
institutions to realize additional income. As a fundamental policy, the
Utility and Global Sector Portfolios will not lend securities or other
assets, if as a result, more than 33-1/3% of total assets would be lent to
other parties; the International Equity Portfolio, the U.S. Equity Portfolio
and the Short-to-Intermediate Government Portfolio may lend up to 30% of
total assets; and all other Portfolios (except the Aggressive Growth
Portfolio) may lend up to 25% of total assets.
The Aggressive Growth Portfolio may not make loans to others, except through
buying qualified debt obligations, lending portfolio securities or entering
into repurchase agreements. The Aggressive Growth Portfolio will not lend
securities or other assets if, as a result, more than 20% of its total assets
would be lent to other parties.
If the borrower of a security defaults, the Portfolio may be delayed or
prevented from recovering collateral, or may be otherwise required to cover a
transaction in the security loaned.
If portfolio securities are loaned, collateral values must be continuously
maintained at no less than 100% by pricing both the securities loaned and the
collateral daily.
If a material event is to be voted upon affecting a Portfolio's investment in
securities which are on loan, the Portfolio will take such actions as may be
appropriate in order to vote its shares.
The Growth, Bond, Global, International Equity, Short-to-Intermediate
Government, Emerging Growth and Equity-Income Portfolios may also lend (or
borrow) money to other funds that are managed by their respective Sub-Adviser
provided each Portfolio seeks and obtains permission from the SEC.
For more information about Portfolio lending, see the SAI.
\diamond\SHORT SALES
Each Portfolio may sell securities "short against the box." A short sale is
the sale of a security that the Portfolio does not own. A short sale is
"against the box" if at all times when the short position is open, the
Portfolio owns an equal amount of the securities sold short or securities
convertible into, or exchangeable without further consideration for,
securities of the same issue as the securities sold short.
\diamond\OTHER INVESTMENT COMPANIES
A Portfolio may invest up to 10% of its total assets, calculated at the time
of purchase, in the securities of money market funds, which are investment
companies. The Portfolio may not invest (i) more than 5% of its total assets
in the securities of any one investment company or (ii) in more than 3% of
the voting securities of any other investment company. (Investments by the
International Equity and U.S. Equity Portfolios in the GEI Short-Term
Investment Trust, as described below under "Portfolio Securities and Risk
Factors - Money Market Instruments," is not considered an investment in
another investment company for purposes of these limitations.) A Portfolio
(except the Growth, Bond and Global Portfolios) will indirectly bear its
proportionate share of any investment advisory fees and expenses paid by the
funds in which it invests, in addition to the investment advisory fee and
expenses paid by the Portfolio. If the Growth, Bond and Global Portfolios
invest in a money market fund, the Investment Adviser will reduce the
advisory or administrative service fees paid to the investment manager of the
money market fund.
\diamond\SPECIAL SITUATIONS
Each Portfolio may invest in "special situations" from time to time. A
special situation arises when, in the opinion of its Sub-Adviser, the
securities of a particular issuer will be recognized and appreciate in value
due to a specific development with respect to that issuer. Developments
creating a special situation might include, among others, a new product or
process, a management change, a technological breakthrough, or other
extraordinary corporate event, or differences in market supply and demand for
the security.
Investment in special situations may carry an additional risk of loss in the
event that the anticipated development does not occur or does not attract the
expected attention. The impact of this strategy on a Portfolio will depend on
a Portfolio's size and the extent of the holdings of the special situation
issuer relative to its total assets.
PORTFOLIO SECURITIES AND RISK FACTORS
This section provides a more detailed description of some of the types of
securities and other instruments in which a Portfolio may invest. A Portfolio
may invest in these instruments to the extent permitted by its investment
objective, policies, and restrictions. Not all of these instruments are used
by each Portfolio. A Portfolio is not
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<PAGE>
limited by this discussion and may invest in other types of instruments not
precluded by the policies discussed above. (See "Portfolio Policies and
Techniques," above, and the SAI for more information regarding a Portfolio's
investment objective and its policies, that include limitations imposed on
certain investments.)
\diamond\EQUITY SECURITIES
Equity securities include common stocks, preferred stocks and securities
convertible into common stocks, such as rights, warrants and convertible debt
securities. Equity securities may also include certain equity-indexed
securities, the value of which is linked to a securities index (E.G., the S&P
500).
Common stock represents the basic ownership of a corporation. Common stocks
historically have provided the greatest long-term growth potential in a
company, but future results are not guaranteed. Owners of common stock share
directly in the success or failure of the business.
Preferred stock ranks senior to common stock and has certain fixed-income
features.
Preferred stockholders receive dividends before they are distributed to the
common stockholders.
\diamond\Risk Factors
The price of any equity security rises and falls. Common stocks generally
represent the riskiest investment in a company. It is possible that investors
may lose their entire investment.
In addition to the risk associated with individual equity securities, an
equity-indexed security carries overall market risk and the risk of
fluctuation inherent in the indexed security as distinguished from the
securities comprising the applicable index.
\diamond\SMALL CAPITALIZATION COMPANIES
A Portfolio may invest in equity securities issued by small-cap companies.
For these purposes, a Sub-Adviser may define small-cap companies differently.
Generally a small-cap company will have market capitalizations of $1 billion
or less. A Portfolio's investments in small capitalization stocks may include
companies that have limited operating histories, product lines, and financial
and managerial resources. These companies may be subject to intense
competition from larger companies, and their stocks may be subject to more
abrupt or erratic market movements than the stocks of larger, more
established companies. Due to these and other factors, small-cap companies
may suffer significant losses as well as realize substantial growth. See each
Portfolio's discussion of small-cap companies under the section "The
Portfolios In Detail."
\diamond\DEBT SECURITIES AND FIXED-INCOME INVESTING
Debt securities include such securities as corporate bonds and debentures,
commercial paper, debt securities issued by the U.S. Government, its agencies
and instrumentalities, or foreign governments, asset-backed securities, CMOs,
zero coupon bonds, "strips", pay-in-kind and step securities.
Fixed-income investing is the purchase of a debt security that maintains a
level of income that does not change. For instance, bonds paying interest at
a specified rate that does not change are fixed-income securities. When a
debt security is purchased, the Portfolio owns "debt" and becomes a creditor
to the company or government.
Fixed-income securities generally include short-and long-term government,
corporate and municipal obligations that pay a specified rate of interest or
coupons for a specified period of time, or preferred stock, which pays fixed
dividends. Coupon and dividend rates may be fixed for the life of the issue
or, in the case of adjustable and floating rate securities, for a shorter
period of time. A Portfolio may vary the average maturity of its portfolio of
debt securities based on the Sub-Adviser's analysis of interest rate trends
and factors.
Bonds rated Baa by Moody's or BBB by S&P are considered medium grade
obligations, I.E., they are neither highly protected nor poorly secured.
Interest payments and principal security for such bonds appear adequate for
the present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have speculative
characteristics. (See Appendix A for a description of debt securities
ratings.)
\diamond\Risk Factors
Investments in debt securities are generally subject to both credit risk and
market risk. Credit risk relates to the ability of the issuer to meet
interest or principal payments, or both, as they come due. Market risk
relates to the fact that the market values of the debt securities in which
the Portfolio invests generally will be affected by changes in the level of
interest rates. An increase in interest rates will tend to reduce the market
value of debt securities, whereas a decline in interest rates will tend to
increase their value.
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<PAGE>
Generally, shorter term securities are less sensitive to interest rate
changes, but longer term securities offer higher yields. The Portfolio's
share price and yield will also depend, in part, on the quality of its
investments in debt securities.
Such securities may be affected by changes in the creditworthiness of the
issuer of the security. The extent that such changes are reflected in the
Portfolio's share price will depend upon the extent of the Portfolio's
investment in such securities.
\diamond\CONVERTIBLE SECURITIES
Convertible securities may include corporate notes or preferred stock, but
ordinarily are a long-term debt obligation of the issuer such as a bond or
debenture convertible at a stated exchange rate into common stock of the
issuer.
Convertible securities generally rank senior to common stocks in an issuer's
capital structure and are consequently of higher quality and entail less risk
of decline in market value than the issuer's common stock. However, the
extent to which such risk is reduced depends greatly upon the degree to which
the convertible security sells above its value as a fixed-income security. In
evaluating investment in a convertible security, primary emphasis will be
given to the attractiveness of the underlying common stock.
\diamond\Risk Factors
As with all debt securities, the market value of convertible debt securities
tends to decline as interest rates increase and, conversely, to increase as
interest rates decline.
Convertible securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. However, when the market price
of the common stock underlying a convertible security exceeds the conversion
price, the price of the convertible security tends to reflect the value of
the underlying common stock. As the market price of the underlying common
stock declines, the convertible security tends to trade increasingly on a
yield basis, and thus may not depreciate to the same extent as the underlying
common stock.
\diamond\REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
A repurchase agreement involves the purchase of a security by a Portfolio and
a simultaneous agreement (generally from a bank or broker-dealer) to
repurchase that security back from the Portfolio at a specified price and
date upon demand. This technique offers a method of earning income on idle
cash. The repurchase agreement is effectively secured by the value of the
underlying security. Repurchase agreements not terminable within seven days
are considered illiquid securities.
A Portfolio invests in a reverse repurchase agreement when it sells a
portfolio security to another party, such as a bank or broker-dealer, in
return for cash, and agrees to buy the security back at a future date and
price. Reverse repurchase agreements may be used to provide cash to satisfy
unusually heavy redemption requests or for other temporary or emergency
purposes without the necessity of selling portfolio securities or to earn
additional income on portfolio securities such as U.S. Treasury bills and
notes. While a reverse repurchase agreement is outstanding, a Portfolio will
segregate with its custodian cash and other liquid assets to cover its
obligation under the agreement. Reverse repurchase agreements are considered
a form of borrowing by the Portfolio for purposes of the 1940 Act.
\diamond\Risk Factors
Repurchase agreements involve the risk that the seller will fail to
repurchase the security, as agreed. In that case, a Portfolio will bear the
risk of market value fluctuations until the security can be sold and may
encounter delays and incur costs in liquidating the security. In the event of
bankruptcy or insolvency of the seller, delays and costs are incurred.
Reverse repurchase agreements may expose a Portfolio to greater fluctuations
in the value of its assets.
diamond\MONEY MARKET INSTRUMENTS
Except as described below with respect to the International Equity and U.S.
Equity Portfolios, a Portfolio, other than the Money Market Portfolio, may
invest in the following types of money market instruments: U.S. Government
Securities; obligations issued or guaranteed by foreign governments or by any
of their political subdivisions, authorities, agencies or instrumentalities;
bank obligations (including certificates of deposit, time deposits and
bankers' acceptances of foreign or domestic banks, domestic savings and loan
associations and other banking institutions); commercial paper; and
repurchase agreements.
The International Equity and U.S. Equity Portfolios may also invest in the
GEI Short-Term Investment Fund (the "Investment Fund"), a private investment
fund created specifically to serve as a vehicle for the collective investment
of cash balances of these Portfolios and other accounts advised by GE
Investment Management Incorporated ("GEIM") or its affiliate, General
Electric Investment Corporation ("GEIC"). The Investment Fund is not
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<PAGE>
registered with the SEC as an investment company. The Investment Fund invests
exclusively in the money market instruments described in (i) through (vii)
below. The Investment Fund is advised by GEIM. No advisory fee is charged by
GEIM to the Investment Fund, nor will a Portfolio incur any sales charge,
redemption fee, distribution fee or service fee in connection with its
investments in the Investment Fund. The International Equity and U.S. Equity
Portfolios may each invest up to 25% of its assets in the Investment Fund.
The types of money market instruments in which the International Equity and
U.S. Equity Portfolios may invest directly or indirectly through their
investment in the Investment Fund are as follows: (i) securities issued or
guaranteed by the U.S. Government or one of its agencies or
instrumentalities; (ii) debt obligations of banks, savings and loan
institutions, insurance companies and mortgage bankers; (iii) commercial
paper and notes, including those with variable and floating rates of
interest; (iv) debt obligations of foreign branches of U.S. banks, U.S.
branches of foreign banks and foreign governments or any of their political
subdivisions, agencies or instrumentalities, including obligations of
supranational entities; (vi) debt securities issued by foreign issuers; and
(vii) repurchase agreements.
\diamond\U.S. GOVERNMENT SECURITIES
U.S. Government securities are obligations issued or guaranteed by the U.S.
Government or by its agencies or instrumentalities. Obligations of certain
agencies and instrumentalities of the U.S. Government, such as those of the
Government National Mortgage Association ("GNMA"), are supported by the "full
faith and credit" of the U.S. Government; others, such as those of the
Export-Import Bank of the U.S., are supported by the right of the issuer to
borrow from the U.S. Treasury; others, such as those of the Federal National
Mortgage Association ("FNMA"), are supported by the discretionary authority
of the U.S. Government to purchase the agency's obligations; and still
others, such as those of the Student Loan Marketing Association, are
supported only by the credit of the instrumentality. No assurance can be
given that the U.S. Government would provide financial support to U.S.
Government-sponsored instrumentalities if it is not obligated to do so by
law.
\diamond\Risk Factors
Investors should be aware that the value of the U.S. Government securities
held by a Portfolio will fluctuate with changes in interest rates, with a
decrease in interest rates generally resulting in an increase in the value of
the securities and an increase in interest rates having the opposite effect.
In addition, certain obligations, such as long-term obligations issued by the
GNMA and the FNMA, represent ownership interest in pools of mortgages that
may be subject to significant unscheduled prepayments as a result of a drop
in mortgage interest rates. Because these prepayments must be reinvested,
possibly in pools including mortgages bearing lower interest rates, these
obligations may have less potential for capital appreciation during periods
of declining interest rates than other investments of comparable maturity.
They have a comparable risk of decline during periods of rising interest
rates.
\diamond\BANK OBLIGATIONS
Subject to its investment policy, a Portfolio may invest in bank obligations
such as CDs or time deposits. Such investments involve the risks that an
investment in the banking industry may entail.
\diamond\Risk Factors
Banks are subject to extensive governmental regulations which may limit both
the amount and types of loans and other financial commitments which may be
made and interest rates and fees which may be charged.
The profitability of this industry is largely dependent upon the availability
and cost of capital funds for the purpose of financing lending operations
under prevailing money market conditions. Also, general economic conditions
play an important part in the operations of this industry.
Exposure to credit losses arising from possible financial difficulties of
borrowers might affect a bank's ability to meet its obligations.
\diamond\FOREIGN BANK OBLIGATIONS
A Portfolio may invest in foreign bank obligations and obligations of foreign
branches of domestic banks. These investments prevent certain risks.
\diamond\Risk Factors
Risks include the impact of future political and economic developments, the
possible imposition of withholding taxes on interest income, the possible
seizure or nationalization of foreign deposits, the possible establishment of
exchange controls and/or the addition of other foreign governmental
restrictions that might adversely affect the payment of principal and
interest on these obligations.
In addition, there may be less publicly available and reliable information
about a foreign bank than about domestic banks owing to different accounting,
auditing, reporting and recordkeeping standards.
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<PAGE>
\diamond\FOREIGN SECURITIES
Foreign securities include equity and debt securities of foreign issuers.
Each Portfolio may invest in foreign securities subject to its investment
limitations.
In accordance with the requirements of current California regulations, a
Portfolio will be invested in a minimum of five different foreign countries
at all times. However, this minimum is reduced to four when foreign country
investments comprise less than 80% of the Portfolio's net asset value; to
three when less than 60% of such value; to two when less than 40%; and to one
when less than 20%. No more than 20% of a Portfolio's net assets shall be
invested in securities of issuers located in any one foreign country, but may
have an additional 15% of its net assets invested in securities of issuers
located in any one of the following foreign countries: Australia, Canada,
France, Japan, the United Kingdom or Germany. If California's insurance
regulations are changed at some future time to permit a larger percentage of
a Portfolio's net assets to be invested in a single foreign country, the
Portfolio may invest more of its net assets in a single foreign country, in
accordance with the Portfolio's investment objective and investment
restrictions.
In addition to direct foreign investment, many of the Portfolios may invest
in foreign securities through ADRs or ADSs, which are dollar-denominated
receipts issued by domestic banks or securities firms. ADRs and ADSs are
publicly traded on U.S. exchanges, and may not involve the same risks as
securities denominated in foreign currency.
Some Portfolios may also indirectly invest in foreign securities through
EDRs, which are typically issued by European banks; in GDRs, which may be
issued by domestic or foreign banks; and in other types of receipts
evidencing ownership of foreign securities.
/diamond/Risk Factors
For U.S. investors, the returns on foreign securities are influenced not only
by the returns on the foreign investments themselves, but also by several
risks which include:
\diamond\CURRENCY RISK. Changes in the value of the currencies in which the
securities are denominated relative to the U.S. dollar may affect the value of
foreign securities and the value of their dividend or interest payments and,
therefore, a Portfolio's share price and returns.
Generally, in a period when the U.S. dollar commonly rises against foreign
currencies, the return on foreign securities for a U.S. investor are
diminished. By contrast, in a period when the U.S. dollar generally declines,
the returns on foreign securities generally are enhanced.
Exchange rates are affected by numerous factors, including relative interest
rates, balances of trade, levels of foreign investment and manipulation by
central banks. The foreign currency market is essentially unregulated and can
be subject to speculative trading. From time to time, many countries impose
exchange controls which limit or prohibit trading in certain currencies.
ADRs and ADSs do not involve the same direct currency and liquidity risks as
securities denominated in foreign currencies. However, the value of the
currency in which the foreign security represented by the ADR or ADS is
denominated may affect the value of the ADR or ADS.
To the extent that a Portfolio invests in foreign securities denominated in
foreign currencies, its share price reflects the price movements both of its
securities and of the currencies in which they are denominated. The share
price of a Portfolio that invests in both U.S. and foreign securities may
have a low correlation with movements in the U.S. markets. If most of the
securities in a Portfolio are denominated in foreign currencies or depend on
the value of foreign currencies, the relative strength of the U.S. dollar
against those foreign currencies may be an important factor in the
Portfolio's performance.
\diamond\CURRENCY TRADING COSTS. A Portfolio incurs costs in converting foreign
currencies into U.S. dollars, and vice versa.
\diamond\DIFFERENT ACCOUNTING AND REPORTING PRACTICES. Foreign companies are
generally subject to tax laws and to accounting, auditing and financial
reporting standards, practices and requirements different from those
that apply in the U.S.
\diamond\LESS INFORMATION AVAILABLE. There is generally less public information
available about foreign companies.
\diamond\MORE DIFFICULT BUSINESS NEGOTIATIONS. A Portfolio may find it difficult
to enforce obligations in foreign countries or to negotiate favorable
brokerage commission rates.
\diamond\REDUCED LIQUIDITY/INCREASED VOLATILITY. Some foreign securities are
less liquid and their prices more volatile, than securities of
comparable U.S. companies.
\diamond\SETTLEMENT DELAYS. Settling foreign securities may take longer than
settlements in the U.S.
31
<PAGE>
\diamond\HIGHER CUSTODY CHARGES. Custodianship of shares may cost more for
foreign securities than it does for U.S. securities.
\diamond\ASSET VULNERABILITY. In some foreign countries, there is a risk of
direct seizure or appropriation through taxation of assets of a
Portfolio. Certain countries may also impose limits on the removal of
securities or other assets of a Portfolio. Interest, dividends and
capital gains on foreign securities held by a Portfolio may be subject
to foreign withholding taxes.
diamond\POLITICAL INSTABILITY. In some countries, political instability, war or
diplomatic developments could affect investments.
These risks may be greater in developing countries or in countries with
limited or developing markets. In particular, developing countries have
relatively unstable governments, economies based on only a few
industries, and securities markets that trade only a small number of
securities. As a result, securities of issuers located in developing
countries may have limited marketability and may be subject to abrupt
or erratic price fluctuations.
At times, a Portfolio's foreign securities may be listed on exchanges
or traded in markets which are open on days (such as Saturday) when the
Portfolio does not compute a price or accept orders for purchase, sale
or exchange of shares. As a result, the net asset value of the
Portfolio may be significantly affected by trading on days when
Policyholders cannot make transactions.
ADRS and ADSs are subject to some of the same risks as direct investments in
foreign securities, including the currency risk discussed above. The regulatory
requirements with respect to ADRs and ADSs that are issued in sponsored and
unsponsored programs are generally similar but the issuers of unsponsored ADRs
and ADSs are not obligated to disclose material information in the U.S., and,
therefore, such information may not be reflected in the market value of the ADRs
and ADSs.
\diamond\ILLIQUID SECURITIES
Securities are considered illiquid because of the absence of a readily available
market or due to legal or contractual restrictions on resale. However, certain
restricted securities that are not registered for sale to the general public but
that can be sold to institutional investors ("Rule 144A Securities") may not be
considered illiquid, provided that a dealer or institutional trading market
exists. The institutional trading market is relatively new and liquidity of a
Portfolio's investments could be impaired if such trading does not further
develop or declines. The Sub-Advisers will determine the liquidity of Rule 144A
Securities under guidelines approved by the Fund's Board. (See the SAI for a
description of these guidelines.)
\diamond\Risk Factors
Investments in illiquid securities involve certain risks to the extent that a
Portfolio may be unable to dispose of such securities at the time desired or at
a reasonable price. In addition, in order to resell a restricted security, the
Portfolio might have to bear the expense and incur the delays associated with
effecting a registration required in order to qualify for resale.
\diamond\FUTURES, OPTIONS AND OTHER DERIVATIVES
Instruments commonly called "derivatives" include options on securities or
foreign currency futures contracts, options on futures contracts, forward
contracts, interest rate swaps, caps and floors, stock index futures and options
on stock index futures. These instruments are commonly called derivatives
because their price is derived from an underlying index, security or other
measure of value.
Each Portfolio that may use derivatives may do so only as a hedge - that is, for
example, to protect portfolio positions against market or currency swings, to
equitize a cash position, for duration management, or to reduce the risk
inherent in the management of the Portfolio involved.
A Portfolio may engage in futures contracts and options. The Portfolios intend
to use such techniques primarily for bona fide hedging purposes, including to
protect portfolio positions against market, interest rate or currency
fluctuations, to equitize a cash position, for duration management, or to reduce
the risk inherent in the management of the portfolio involved. If used for other
purposes as may be permitted under applicable rules pursuant to which the
Portfolio would remain exempt from the definition of a "commodity pool operator"
under the rules of the CFTC, the aggregate initial margin and premiums required
to establish any non-hedging positions will not exceed 5% of the fair market
value of the Portfolio's net assets.
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
32
<PAGE>
denominated securities. A Portfolio may also enter into forward contracts to
purchase or sell securities or other financial indices.
FUTURES CONTRACTS are contracts that obligate the buyer to receive and the
seller to deliver an instrument or money at a specified price on a specified
date. A Portfolio may buy and sell futures contracts on foreign currencies,
securities and financial indexes including interest rates or an index of U.S.
Government, foreign government, equity or fixed-income securities.
A Portfolio may also buy options on futures contracts. An option on a futures
contract gives the buyer the right, but not the obligation, to buy or sell a
futures contract at a specific price on or before a specified date.
Futures contracts and options on futures are standardized and traded on
designated exchanges.
INTEREST RATE SWAPS involve the exchange by two parties of their respective
commitments to pay or receive interest (E.G., an exchange of floating rate
payments for fixed rate payments).
INTEREST RATE FUTURES CONTRACTS involve the purchase or sale of contracts for
the future delivery of fixed-income securities at an established price. The
purchase of an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive payments of
interest on a contractually based principal amount from the party selling the
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a contractually based
principal amount from the party selling the interest rate floor.
OPTIONS are the right, but not the obligation, to buy or sell a specified amount
of securities or other assets on or before a fixed date at a predetermined
price. A Portfolio may purchase put and call options on securities, securities
indexes and foreign currencies, subject to its investment restrictions.
CALL OPTIONS give a buyer the right to purchase a portfolio security at a
designated price until a certain date. The option must be "covered" -for
example, the seller may own the securities required to fulfill the
contract.
PUT OPTIONS give the buyer the right to sell the security at a designated
price until a certain date. Put options are "covered", for example, by
segregating an amount of cash or securities equal to the exercise price.
STOCK INDEX FUTURES obligate the seller to deliver (and the purchaser to
take) an amount of cash equal to a specific dollar amount times the
difference between the value of a specified stock index at the close of the
last trading day of the contract and the price at which the agreement is
made. No physical delivery of the underlying stocks in the index is made.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS, as contrasted with the direct
investment in such a contract, gives the purchaser the right, in return for
the premium paid, to assume a position in a stock index futures contract at a
specified exercise price at any time prior to the expiration date of the
option.
\diamond\Risk Factors
There can be no assurance the use of derivatives will help a Portfolio
achieve its investment objective. Derivatives involve special risks and
transaction costs, and draw upon skills and experience which are different
from those needed to choose the other securities or instruments in which a
Portfolio invests. Special risks of these instruments include:
\diamond\INACCURATE MARKET PREDICTIONS. If interest rates, securities prices or
currency markets do not move in the direction expected by a Sub-Adviser
who used derivatives based on those measures, these instruments may
fail in their intended purpose and result in losses to the Portfolio.
\diamond\IMPERFECT CORRELATION. Derivatives' prices may be imperfectly
correlated with the prices of the securities, interest rates or
currencies being hedged. When this happens, the expected benefits may
be diminished.
\diamond\ILLIQUIDITY. A liquid secondary market may not be available for a
particular instrument at a particular time. A Portfolio may therefore
be unable to control losses by closing out a derivative position.
\diamond\TAX CONSIDERATIONS. A Portfolio may have to delay closing out certain
derivative positions to avoid adverse tax consequences.
The risk of loss from investing in derivative instruments is potentially
unlimited.
FORWARD FOREIGN CURRENCY CONTRACTS
A forward foreign currency contract ("forward contract") is used to purchase
or sell foreign currencies at a future date as a hedge against fluctuations
in foreign exchange rates pending the settlement of transactions in foreign
securities or during the time a Portfolio has exposure to foreign currencies.
A forward contract, which is also included in the types of instruments
commonly known as derivatives, is an agreement between contracting parties to
exchange an amount of currency at some future time at an agreed upon rate.
33
<PAGE>
\diamond\Risk Factors
Investors should be aware that hedging against a decline in the value of a
currency in the foregoing manner does not eliminate fluctuations in the
prices of portfolio securities or prevent losses if the prices of portfolio
securities decline.
Furthermore, such hedging transactions preclude the opportunity for gain if
the value of the hedging currency should rise. Forward contracts may, from
time to time, be considered illiquid, in which case they would be subject to
a Portfolio's limitation on investing in illiquid securities.
\diamond\WHEN-ISSUED, DELAYED SETTLEMENT AND FORWARD DELIVERY SECURITIES
Securities may be purchased and sold on a "when-issued," "delayed
settlement," or "forward (delayed) delivery" basis.
"When-issued" or "forward delivery" refers to securities whose terms are
available, and for which a market exists, but which are not available for
immediate delivery. When-issued or forward delivery transactions may be
expected to occur a month or more before delivery is due.
A Portfolio may engage in when-issued transactions to obtain what is
considered to be an advantageous price and yield at the time of the
transaction. When a Portfolio engages in when-issued or forward delivery
transactions, it will do so for the purpose of acquiring securities
consistent with its investment objective and policies and not for the purpose
of investment leverage.
"Delayed settlement" is a term used to describe settlement of a securities
transaction in the secondary market which will occur sometime in the future.
No payment or delivery is made by a Portfolio until it receives payment or
delivery from the other party to any of the above transactions.
The Portfolio will segregate with its custodian cash, U.S. Government
securities or other liquid assets at least equal to the value of purchase
commitments until payment is made. Such segregated securities will either
mature or, if necessary, be sold on or before the settlement date. Typically,
no income accrues on securities purchased on a delayed delivery basis prior
to the time delivery of the securities is made, although a Portfolio may earn
income in securities it has segregated to collateralize its delayed delivery
purchases.
New issues of stocks and bonds, private placements and U.S. Government
securities may be sold in this manner.
\diamond\Risk Factors
At the time of settlement, the market value of the security may be more or
less than the purchase price. The Portfolio bears the risk of such market
value fluctuations. These transactions also involve risk to a Portfolio if
the other party to the transaction defaults on its obligation to make payment
or delivery, and the Portfolio is delayed or prevented from completing the
transaction.
\diamond\MORTGAGE-AND OTHER ASSET-BACKED SECURITIES
Mortgage-backed securities represent interests in a pool of mortgages.
Principal and interest payments made on the mortgages in the underlying
mortgage pool are passed through to the Portfolio.
CMOs are "pass-through" securities collateralized by mortgages or
mortgage-backed securities. (Pass-through securities mean that principal and
interest payments on the underlying securities, less servicing fees, are
passed through to Policyholders on a pro rata basis.) CMOs are issued in
classes and series that have different maturities and often are retired in
sequence.
Asset-backed securities represent interests in pools of consumer loans
(generally unrelated to mortgage loans), and most often are structured as
pass-through securities.
Interest and principal payments ultimately depend on payment of the
underlying loans by individuals, although the securities may be supported by
letters of credit or other credit enhancements.
\diamond\Risk Factors
Prepayments will shorten these securities' weighted average life and may lower
their returns. The value of these securities may change because of changes in
the market's perception of the creditworthiness of the federal agency or private
institution that issued them, in the case of mortgage-backed securities, or in
the servicing agent for the pool, the originator of the pool or the financial
institution providing the credit support or enhancement in the case of
asset-backed securities. Interest rate risks are also involved with these
investments; see "Debt Securities and Fixed-Income Investing," page 28.
In addition, the mortgage securities market may be adversely affected by
changes in government regulation or tax policies.
\diamond\REAL ESTATE INVESTMENT TRUSTS ("REITs")
REITs are pooled investment vehicles which invest primarily in income producing
real estate, or real estate
34
<PAGE>
related loans or interests. REITs are generally classified as equity REITs,
mortgage REITs, or hybrid REITs.
Equity REITs invest the majority of their assets directly in real property
and derive income primarily from the collection of rents. Equity REITs can
also realize capital gains by selling properties that have appreciated in
value. Mortgage REITs invest the majority of their assets in real estate
mortgages and derive income from the collection of interest payments. Hybrid
REITs invest their assets in both real property and mortgages. REITs are not
taxed on income distributed to Policyholders provided they comply with
several requirements of the Internal Revenue Code of 1986, as amended (the
"Code").
\diamond\Risk Factors
REITs may subject a Portfolio to certain risks associated with the direct
ownership of real estate. These risks include, among others: possible
declines in the value of real estate; possible lack of availability of
mortgage funds; extended vacancies of properties; risks related to general
and local economic conditions; overbuilding; increases in competition,
property taxes and operating expenses; changes in zoning laws; costs
resulting from the clean-up of, and liability to third parties for damages
resulting from, environmental problems; casualty or condemnation losses;
uninsured damages from floods, earthquakes or other natural disasters;
limitations on and variations in rents; and changes in interest rates.
Investing in REITs involves certain unique risks, in addition to those risks
associated with investing in the real estate industry in general. Equity
REITs may be affected by changes in the value of the underlying property
owned by the REITs, while mortgage REITs may be affected by the quality of
any credit extended. REITs are dependent upon management skills, are not
diversified, and are subject to heavy cash flow dependency, default by
borrowers, self-liquidation and the possibilities of failing to qualify for
the exemption from tax for distributed income under the Code. REITs
(especially mortgage REITs) are also subject to interest rate risk. (See
"Debt Securities and Fixed-Income Investing," page 28.)
\diamond\ZERO COUPON, STRIPS, PAY-IN-KIND AND STEP COUPON SECURITIES
Zero coupon bonds do not make regular interest payments; rather, they are
sold at a discount from face value. Principal and accreted discount
(representing interest accrued but not paid) are paid at maturity. Step
coupon bonds sell at a discount and pay a low coupon rate for an initial
period and a higher coupon rate thereafter. Pay-in-kind securities may pay
interest in cash or a similar bond. Strips are debt securities that are
stripped of their interest after the securities are issued, but otherwise are
comparable to zero coupon bonds.
\diamond\Risk Factors
The market value of zero coupon bonds, step coupon bonds, pay-in-kind securities
and strips generally fluctuates in response to changes in interest rates to a
greater degree than interest-paying securities of comparable term and quality.
A Portfolio may realize greater gains or losses as a result of such
fluctuations. In order to pay cash distributions from these types of securities,
a Portfolio may sell certain portfolio securities and may incur a gain or loss
on such sales.
\diamond\HIGH-YIELD/HIGH-RISK SECURITIES
High-yield/high-risk securities (or "junk bonds") are debt securities rated
below investment grade by the primary rating agencies (such as S&P and Moody's).
(See Appendix A for a description of debt securities ratings.)
\diamond\Risk Factors
The value of lower quality securities generally is more dependent on the
ability of the issuer to meet interest and principal payments (i.e., credit
risk) than is the case for higher quality securities. Conversely, the value
of higher quality securities may be more sensitive to interest rate movements
than lower rated securities. Issuers of high-yield securities may not be as
strong financially as those issuing bonds with higher credit ratings.
Investments in such companies are considered to be more speculative than
higher quality investments.
Issuers of high-yield securities are more vulnerable to real or perceived
economic changes (for instance, an economic downturn or prolonged period of
rising interest rates), political changes or adverse developments specific to
the issuer. Adverse economic, political or other developments may impair the
issuer's ability to service principal and interest obligations, to meet
projected business goals and to obtain additional financing, particularly if
the issuer is highly leveraged.
In the event of a default, a Portfolio would experience a reduction of its
income and could expect a decline in the market value of the defaulted
securities.
The market for lower quality securities is generally less liquid than the
market for higher quality bonds. Adverse publicity and investor perceptions,
as well as new or proposed laws, may also have a greater negative impact on
the market for lower quality securities. Unrated debt,
35
<PAGE>
while not necessarily of lower quality than rated securities, may not have as
broad a market as higher quality securities.
\diamond\VARIABLE RATE MASTER DEMAND NOTES
Variable rate master demand notes are unsecured commercial paper instruments
that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate. Because variable rate master demand notes
are direct lending arrangements between a Portfolio and the issuer, they are
not normally traded.
Although no active secondary market may exist for these notes, a Portfolio
may demand payment of principal and accrued interest at any time or may
resell the note to a third party.
While the notes are not typically rated by credit rating agencies, issuers of
variable rate master demand notes must satisfy a Sub-Adviser that the ratings
are within the two highest ratings of commercial paper. (See the SAI for
further information on these ratings.)
In addition, when purchasing variable rate master demand notes, a Sub-Adviser
will consider the earning power, cash flows, and other liquidity ratios of
the issuers of the notes and will continuously monitor their financial status
and ability to meet payment on demand.
\diamond\Risk Factors
In the event an issuer of a variable rate master demand note defaulted on its
payment obligations, a Portfolio might be unable to dispose of the note
because of the absence of a secondary market and could, for this or other
reasons, suffer a loss to the extent of the default.
\diamond\WARRANTS AND RIGHTS
A warrant is a type of security that entitles the holder to buy a proportionate
amount of common stock at a specified price, usually higher than the market
price at the time of issuance, for a period of years or to perpetuity.
In contrast, rights, which also represent the right to buy common shares,
normally have a subscription price lower than the current market value of the
common stock and a life of two to four weeks.
\diamond\Risk Factors
Warrants and rights may be considered more speculative than certain other types
of investments because they do not entitle a holder to the dividends or voting
rights for the securities that may be purchased. They do not represent any
rights in the assets of the issuing company.
Also, the value of a warrant or right does not necessarily change with the value
of the underlying securities. A warrant or right ceases to have value if it is
not exercised prior to the expiration date.
\diamond\GOLD STOCK AND GOLD BULLION
Gold stocks are equity securities involved in the exploration, mining,
processing, or dealing or investing in gold. Investments in gold bullion involve
the purchase of bars or ingots of the precious metal.
\diamond\Risk Factors
Due to monetary and political policies on a national and international level,
the price of gold is subject to substantial fluctuations, which will have an
effect on the profitability of issuers of gold stocks and the market value of
their securities.
Changes in the political or economic climate for the two largest gold producers
- - South Africa and the Commonwealth of Independent States (the former Soviet
Union)- may have a direct impact on the price of gold worldwide.
A Portfolio's investments in gold bullion will earn no income return.
Appreciation in the market price of gold is the sole manner in which a Portfolio
would be able to realize gains on such investments. Furthermore, a Portfolio may
encounter storage and transaction costs in connection with their ownership of
gold bullion that may be higher than those associated with the purchase, holding
and disposition of more traditional types of investments.
MANAGEMENT OF THE FUND
\diamond\DIRECTORS
The Board of Directors is responsible for managing the business affairs of
the Fund. It oversees the operation of the Fund by its officers. It also
reviews the management of the Portfolios' assets by the Investment Adviser
and Sub-Advisers. Information about the Directors and executive officers of
the Fund is contained in the SAI.
36
<PAGE>
\diamond\INVESTMENT ADVISER
WRL Management, located at 201 Highland Avenue, Largo, Florida 33770-2597,
serves as the Fund's Investment Adviser. The Investment Adviser is a direct,
wholly-owned subsidiary of Western Reserve Life Assurance Co. of Ohio ("Western
Reserve"), a stock life insurance company which is wholly-owned by First AUSA
Life Insurance Company, which is wholly-owned by AEGON USA, Inc. ("AEGON").
AEGON is a financial services holding company whose primary emphasis is on life
and health insurance and annuity and investment products. AEGON is a
wholly-owned indirect subsidiary of AEGON nv, a Netherlands corporation, which
is a publicly traded international insurance group. The Investment Adviser has
served as the investment adviser to the Fund since January 1, 1997. Prior to
this date, Western Reserve served as investment adviser to each Portfolio.
Subject to the supervision of the Fund's Board, the Investment Adviser is
responsible for furnishing continuous advice and recommendations to the Fund
as to the acquisition, holding or disposition of any or all of the securities
or other assets which the Portfolios may own or contemplate acquiring from
time to time; to cause its officers to attend meetings and furnish oral or
written reports, as the Fund may reasonably require, in order to keep the
Board of Directors and appropriate officers of the Fund fully informed as to
the conditions of each investment portfolio of the Portfolios, the investment
recommendations of the Investment Adviser, and the investment considerations
which have given rise to those recommendations; to supervise the purchase and
sale of securities of the Portfolios as directed by the appropriate officers
of the Fund; and to maintain all books and records required to be maintained
by the Investment Adviser pursuant to the 1940 Act and the rules and
regulations promulgated thereunder with respect to transactions on behalf of
the Fund.
\diamond\ADVISORY FEES PAID BY THE PORTFOLIOS
Subject to the supervision and direction of the Fund's Board, the Investment
Adviser is responsible for managing the Portfolios in accordance with each
Portfolio's stated investment objective and policies. As compensation for its
services to the Portfolios, the Investment Adviser receives monthly
compensation at an annual rate of a percentage of the average daily net
assets of each Portfolio. The table below lists each Portfolio and the annual
rate of the monthly compensation the Investment Adviser received for the
fiscal year ended December 31, 1995.
<TABLE>
<CAPTION>
ADVISORY ADVISORY
PORTFOLIO FEE PORTFOLIO FEE
--------- -------- --------- --------
<S> <C> <C> <C>
Growth 0.80% Emerging Growth 0.80%
Bond 0.50% Equity-Income 0.80%
Global 0.80% Aggressive Growth 0.80%
Money Market 0.40% (prior to 5/1/96, Utility 0.75%
0.50%) Tactical Asset Allocation 0.80%
Short-to-Intermediate Government 0.60% C.A.S.E. Growth 0.80%
Balanced 0.80% Value Equity 0.80%*
International Equity 1.00%* Global Sector 1.10%
U.S. Equity 0.80%*
<FN>
- ------------
* No advisory fees were paid by these Portfolios in 1995 because they had not
commenced operations as of December 31, 1995.
</FN>
</TABLE>
\diamond\ADVISORY FEE REIMBURSEMENT
The Investment Adviser has voluntarily undertaken, until at least April 30,
1997, to pay expenses on behalf of the Portfolios to the extent normal
operating expenses (including investment advisory fees but excluding
interest, taxes, brokerage fees, commissions and extraordinary charges)
exceed a certain percentage of each Portfolio's average daily net assets. The
table below shows the expense limit and actual expenses for each Portfolio
and the reimbursement a Portfolio received, if any, for the fiscal year ended
December 31, 1995.
37
<PAGE>
<TABLE>
<CAPTION>
EXPENSE ACTUAL
PORTFOLIO LIMIT EXPENSES REIMBURSEMENT
--------- ----- -------- -------------
<S> <C> <C> <C>
Growth 1.00% 0.86% NONE
Bond 0.70% 0.61% NONE
Global 1.00% 0.99% NONE
Money Market 0.70% 0.46% NONE
Short-to-Intermediate Government 1.00% 0.78% NONE
Balanced 1.00% 0.97% NONE
Emerging Growth 1.00% 0.91% NONE
Equity-Income 1.00% 0.87% NONE
Aggressive Growth 1.00% 0.92%* NONE
Utility 1.00% 1.08% $14,417
Tactical Asset Allocation 1.00% 0.93% NONE
C.A.S.E. Growth 1.00% 0.93% NONE
Value Equity 1.00% ** NONE
International Equity 1.50% ** NONE
U.S. Equity 1.30% ** NONE
<FN>
- ----------
* The actual expenses of the Aggressive Growth Portfolio as a percentage of
average daily net assets were 1.07%. Of these expenses, 0.15% were
attributable to interest paid by this Portfolio resulting from borrowing
activities; as noted above, such interest is not subject to the voluntary
expense limitation. Therefore, the expenses of this Portfolio to which the
expense limitation was applicable were 0.92%; and no expenses were paid by
the Investment Adviser on behalf of this Portfolio.
** These Portfolios had not commenced operations as of December 31, 1995.
</FN>
</TABLE>
\diamond\DISTRIBUTION AND SERVICE PLANS
DISTRIBUTION PLAN AND DISTRIBUTION AGREEMENT
Effective January 1, 1997, the Fund has adopted a Plan of Distribution
pursuant to Rule 12b-1 under the 1940 Act ("Distribution Plan") and pursuant
to the Plan, has entered into a Distribution Agreement with InterSecurities,
Inc. ("ISI"), whose principal office is located at 201 Highland Avenue,
Largo, Florida 33770. ISI is an affiliate of the Investment Adviser, and
serves as principal underwriter for the Fund.
The expenses the Fund may pay pursuant to the Distribution Plan shall
include, but not necessarily limited to, the following: cost of printing and
mailing Fund prospectuses and statements of additional information, and any
supplements thereto to prospective investors; costs relating to development
and preparation of Fund advertisements, sales literature and brokers' and
other promotional materials describing and/or relating to the Fund; expenses
in connection with presentation of seminars and sales meetings describing the
Fund; development of consumer-oriented sales materials describing the Fund;
and expenses attributable to "distribution-related services" provided to the
Fund (E.G., salaries and benefits, office expenses, equipment expenses (I.E.,
computers, software, office equipment, etc.), training expenses, travel
costs, printing costs, supply expenses, programming time and data center
expenses, each as they relate to the promotion of the sale of Fund shares).
Under the Distribution Plan, the Fund, on behalf of the Portfolios, is
authorized to pay to various service providers, as direct payment for
expenses incurred in connection with the distribution of a Portfolio's
shares, amounts equal to actual expenses associated with distributing such
Portfolio's shares, up to a maximum rate of 0.15% on an annualized basis of
the average daily net assets. This fee is measured and accrued daily and paid
monthly.
ISI will submit to the Fund's Board for approval annual distribution expenses
with respect to each Portfolio. ISI allocates to each Portfolio distribution
expenses specifically attributable to the distribution of shares of such
Portfolio. Distribution expenses not specifically attributable to the
distribution of shares of a particular Portfolio are allocated among the
Portfolios, based upon the ratio of net asset value of each Portfolio to the net
asset value of all Portfolios, or such other factors as ISI deems fair and are
approved by the Fund's Board. ISI has determined that it will not seek payment
by the Fund of distribution expenses with respect to any Portfolio during the
fiscal year ending December 31, 1997. Prior to ISI seeking reimbursement,
Policyowners will be notified in advance.
\diamond\ADMINISTRATIVE AND TRANSFER
AGENCY SERVICES
Effective January 1, 1997, the Fund has entered into an Administrative
Services and Transfer Agency Agreement with WRL Investment Services, Inc.
("WRL Services"), located at 201 Highland Avenue, Largo, Florida 33770, an
38
<PAGE>
affiliate of WRL Management and Western Reserve, to furnish the Fund with
administrative services to assist the Fund in carrying out certain of its
functions and operations. Under this Agreement, WRL Services shall furnish to
each Portfolio, subject to the overall supervision of the Board, supervisory,
administrative, and transfer agency services, including recordkeeping and
reporting. WRL Services is reimbursed by the Fund monthly on a cost incurred
basis. Prior to January 1, 1997, Western Reserve performed these services in
connection with its serving as the Fund's investment adviser.
\diamond\SUB-ADVISERS
Each Sub-Adviser provides investment advisory assistance and portfolio
management advice to the Investment Adviser for its respective Portfolio(s).
Subject to review and supervision by the Investment Adviser and the Fund's
Board, each Sub-Adviser is responsible for the actual investment management
of its Portfolio(s) and for making decisions to buy, sell or hold any
particular security. Each Sub-Adviser also places orders to buy or sell
securities on behalf of that Portfolio. Each Sub-Adviser bears all of its
expenses in connection with the performance of its services, such as
compensating and furnishing office space for its officers and employees
connected with investment and economic research, trading and investment
management of its Portfolio(s). Each Sub-Adviser is a registered investment
adviser under the Investment Advisers Act of 1940, as amended.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
JANUS CAPITAL CORPORATION
Janus Capital Corporation ("Janus Capital"), located at 100 Fillmore Street,
Denver, CO 80206, serves as the Sub-Adviser to the Growth, Bond and Global
Portfolios. Thomas H. Bailey is the President of Janus Capital. Kansas City
Southern Industries, Inc. ("KCSI") owns approximately 83% of Janus Capital.
Janus Capital provides investment management and related services to other
mutual funds, and individuals, corporate, charitable and retirement accounts.
See "Management of the Fund - The Sub-Advisers" in the SAI for a more detailed
description of the previous experience of Janus Capital as an investment
adviser.
\diamond\PORTFOLIO MANAGERS:
SCOTT W. SCHOELZEL has served as the Portfolio Manager for the Growth
Portfolio since January 2, 1996. Mr. Schoelzel also serves as co-portfolio
manager of other mutual funds. Mr. Schoelzel is a Vice President of Janus
Capital, where he has been employed since 1994. From 1991 to 1993, Mr.
Schoelzel was a portfolio manager with Founders Asset Management, Denver,
Colorado. Prior to 1991, he was a general partner of Ivy Lane Investments,
Denver, Colorado (a real estate investment brokerage).
RONALD V. SPEAKER has served as Portfolio Manager for the Bond Portfolio
since 1988. Mr. Speaker also serves as portfolio manager of other mutual
funds. Mr. Speaker is also an Executive Vice President of Janus Investment
Fund and Janus Aspen Series and previously served as a securities analyst and
research associate of Janus Capital (from 1986).
HELEN Y. HAYES has served as Portfolio Manager of the Global Portfolio since
its inception. Ms. Hayes also serves as a portfolio manager of other mutual
funds. Ms. Hayes is also an Executive Vice President of Janus Investment Fund
and Janus Aspen Series. Ms. Hayes has been employed by Janus Capital since
1987.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\J.P. MORGAN INVESTMENT MANAGEMENT INC.
J. P. Morgan Investment Management Inc. ("J.P. Morgan Investment"), located
at 522 Fifth Avenue, New York, NY 10036, has served as the Sub-Adviser to the
Money Market Portfolio since May 1, 1996. J. P. Morgan Investment is a
wholly-owned subsidiary of J.P. Morgan & Co. Incorporated. J.P. Morgan
Investment provides investment management and related services for corporate,
public, and union employee benefit funds, foundations, endowments, insurance
companies and government agencies.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\AEGON USA INVESTMENT MANAGEMENT, INC.
AEGON USA Investment Management, Inc. ("AEGON Management"), located at 4333
Edgewood Road, N.E., Cedar Rapids, IA 52499, serves as the Sub-Adviser to the
Short-to-Intermediate Government and Balanced Portfolios. AEGON Management is
an indirect wholly-owned subsidiary of AEGON.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\PORTFOLIO MANAGERS:
CLIFFORD A. SHEETS AND JARRELL D. FREY serve as Portfolio Managers of the
Short-to-Intermediate Government Portfolio. Mr. Sheets has served as the
Portfolio Manager of the Short-to-Intermediate Government Portfolio since its
inception. Mr. Sheets has been a Senior Vice President of AEGON Management
since 1990. Prior to joining AEGON Management, Mr. Sheets was head of the
Fixed Income Management Department of the Trust and Asset Management Group of
Bank One, Indianapo-lis NA. Mr. Frey has served as Portfolio Manager for the
Short-to-Intermediate Government Portfolio since May,
39
<PAGE>
1995. Mr. Frey joined AEGON Management in 1994. Prior to joining AEGON
Management, Mr. Frey was employed for five years by Woodmen Accident and Life
Company in Lincoln, NE where he analyzed fixed income (both public and
private debt offerings) and equity securities.
MICHAEL VAN METER has served as the Senior Portfolio Manager of the Balanced
Portfolio since its inception. Mr. Van Meter also serves as Chairman of the
Equity Investment Policy Committee of AEGON Management. Mr. Van Meter was
President and Managing Partner of Perpetual Investment Advisors from 1983 to
1989, when AEGON acquired that firm.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
VAN KAMPEN AMERICAN CAPITAL ASSET
MANAGEMENT, INC.
Van Kampen American Capital Asset Management, Inc. ("Van Kampen"), located at
One Parkview Plaza, Oakbrook Terrace, IL 60181, serves as the Sub-Adviser to
the Emerging Growth Portfolio.
Van Kampen became an indirect wholly-owned subsidiary of Morgan Stanley Group
Inc. on October 31, 1996.
\diamond\PORTFOLIO MANAGER:
GARY M. LEWIS has served as Portfolio Manager for the Emerging Growth
Portfolio since its inception. Mr. Lewis has also served as portfolio manager
at American Capital Asset Management, Inc., a predecessor firm of Van Kampen
American Capital Asset Management, Inc. for over six years and portfolio
manager for the Van Kampen American Capital Emerging Growth Fund, Inc. since
April, 1989.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
LUTHER KING CAPITAL
MANAGEMENT CORPORATION
Luther King Capital Management Corporation ("Luther King Capital"), located
at 301 Commerce Street, Suite 1600, Fort Worth, TX 76102, serves as the
Sub-Adviser to the Equity-Income Portfolio. Ultimate control of Luther King
Capital is exercised by J. Luther King, Jr. Luther King Capital provides
investment management services to accounts of individual investors, mutual
funds and other institutional investors. See "Management of the Fund -The
Sub-Advisers" in the SAI for a more detailed description of the previous
experience of Luther King Capital as an investment adviser.
\diamond\PORTFOLIO MANAGERS:
LUTHER KING, JR. AND SCOT HOLLMANN have served as Portfolio Managers of the
Equity-Income Portfolio since its inception. Mr. King has been President of
Luther King Capital since 1979. Mr. Hollmann has served as Vice President of
Luther King Capital since 1983.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
FRED ALGER MANAGEMENT, INC.
Fred Alger Management, Inc. ("Alger Management"), located at 75 Maiden Lane,
New York, NY 10038, serves as the Sub-Adviser to the Aggressive Growth
Portfolio. Alger Management is a wholly-owned subsidiary of Fred Alger &
Company, Incorporated ("Alger, Inc."), which in turn is a wholly-owned
subsidiary of Alger Associates, Inc., a financial services holding company
controlled by Fred M. Alger and David D. Alger. As of September 30, 1996,
Alger Management had approximately $6.8 billion in assets under management
for investment companies and private accounts.
\diamond\PORTFOLIO MANAGERS:
DAVID D. ALGER, SEILAI KHOO AND RONALD TARTARO are primarily responsible for
the day-to-day management of the Aggressive Growth Portfolio. Mr. Alger has
been employed by Alger Management as Executive Vice President and Director of
Research since 1971 and as President since 1995. Ms. Khoo has been employed
by Alger Management as a senior research analyst since 1989 and as a Senior
Vice President since 1995. Mr. Tartaro has been employed by Alger Management
as a senior research analyst since 1990 and as a Senior Vice President since
1995. Mr. David Alger has served as Portfolio Manager of the Aggressive
Growth Portfolio since its inception. Ms. Khoo and Mr. Tartaro have each
served as Co-Portfolio Managers of the Aggressive Growth Portfolio since May
1, 1996. Mr. Alger, Ms. Khoo and Mr. Tartaro also serve as portfolio managers
for other mutual funds and investment accounts managed by Alger Management.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
FEDERATED INVESTMENT COUNSELING
Federated Investment Counseling ("Federated"), located at Federated Investors
Tower, Pittsburgh, PA 15222-3779, serves as the Sub-Adviser to the Utility
Portfolio. Federated is a Delaware business trust organized on April 11,
1989. It is a subsidiary of Federated Investors. Federated serves as
investment adviser to a number of investment companies and private accounts.
Total assets under management or administered by Federated and other
subsidiaries of Federated Investors is approximately $85 billion.
40
<PAGE>
\diamond\PORTFOLIO MANAGERS:
CHRISTOPHER H. WILES AND LINDA A. DUESSEL serve as Co-Portfolio Managers of
the Utility Portfolio. Mr. Wiles has been a Portfolio Manager of the
Portfolio since its inception. Mr. Wiles joined Federated in 1990 and has
been a Vice President of an affiliate of Federated since 1992. Mr. Wiles
served as Assistant Vice President of Federated from 1990 to 1992. Mr. Wiles
is a Chartered Financial Analyst and received his MBA in Finance from
Cleveland State University. Ms. Duessell has served as Co-Portfolio Manager
of the Utility Portfolio since July, 1996. Ms. Duessel is a Chartered
Financial Analyst and also serves as co-portfolio manager for other utility
funds managed by Federated. Ms. Duessel received her B.S., Finance, from the
Wharton School of the University of Pennsylvania and her M.S.I.A., from
Carnegie Mellon University. Ms. Duessel has been a Vice President of an
affiliate of Federated since 1995, and was an Assistant Vice president from
1991 -1995.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
DEAN INVESTMENT ASSOCIATES
Dean Investment Associates ("Dean"), a Division of C.H. Dean and Associates,
Inc., located at 2480 Kettering Tower, Dayton, OH 45423-2480, serves as the
Sub-Adviser to the Tactical Asset Allocation Portfolio. Dean is wholly-owned
by C.H. Dean and Associates, Inc. Founded in 1972, Dean manages portfolios
for individuals and institutional clients worldwide. Dean provides a full
range of investment advisory services and as of January 31, 1996 had $3.756
billion of assets under management.
\diamond\PORTFOLIO MANAGERS:
The Tactical Asset Allocation Portfolio is managed by a team of 10 senior
investment professionals (Central Investment Committee), with over 135 years
of total investment experience.
JOHN C. RIAZZI, CFA, has served as the Senior Portfolio Manager of the
Tactical Asset Allocation Portfolio and ARVIND SACHDEVA, CFA has served as
Senior Equity Strategist of this Portfolio since its inception. Mr. Riazzi
joined Dean in March of 1989. Before being promoted to Vice President and
Director of Consulting Services at Dean, Mr. Riazzi was responsible for
client servicing, portfolio execution and trading operations. Mr. Riazzi has
been a member of the Central Investment Committee and a Senior Institutional
Portfolio Manager for the past four years. He received a B.A. in Economics
from Kenyon College in 1985 and was awarded the Chartered Financial Analyst
designation in 1993. Mr. Sachdeva joined Dean in 1993. Prior to working at
Dean, he was the Senior Security Analyst and Equity Portfolio Manager for
Carillon Advisors, Inc., from January, 1985 to September, 1993. Carillon
Advisors, Inc. is an investment subsidiary of the Union Central Life
Insurance Co.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
C.A.S.E. MANAGEMENT, INC.
C.A.S.E. Management, Inc. ("C.A.S.E."), located at 2255 Glades Road, Suite
221-A, Boca Raton, FL 33431, serves as the Sub-Adviser to the C.A.S.E. Growth
Portfolio. C.A.S.E. is a wholly-owned subsidiary of C.A.S.E. Inc. C.A.S.E.
Inc. is indirectly controlled by William Edward Lange, president and chief
executive officer of C.A.S.E. C.A.S.E. provides investment management
services to financial institutions, high net worth individuals, and other
professional money managers.
/diamond/PORTFOLIO MANAGERS:
Informally, C.A.S.E.'s Board members confer on a continuous basis, gathering
economic sector, industry and stock specific information from C.A.S.E.'s
research and management resources. Each Board member is individually
responsible for the analytical coverage of one or two of the market's eight
economic sectors. C.A.S.E.'s "sector specialists" are encouraged to maintain
contact with counterpart sector specialists from leading outside research
organizations. The information gathered for consideration by the Board's
sector specialists also includes objective forms of research from various
governmental agencies, stock exchanges and financial capitols. Formally, the
Board meets monthly to formulate overall strategic investment positions. The
Board then formally reviews its current investment focus towards every stock,
industry, and economic sector owned in its overall stock population.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
NWQ INVESTMENT MANAGEMENT COMPANY, INC.
NWQ Investment Management Company, Inc. ("NWQ Investment"), located at 655
South Hope Street, 11th Floor, Los Angeles, CA 90017, serves as the
Sub-Adviser to the Value Equity Portfolio. NWQ Investment was founded in 1982
and is a wholly-owned subsidiary of United Asset Management Corporation. NWQ
Investment provides investment management services to institutions and high
net worth individuals. As of September 30, 1996, NWQ Investment had over $6.3
billion in assets under management.
/diamond/PORTFOLIO MANAGER:
An investment policy committee is responsible for the day-to-day management of
the Value Equity Portfolio's investments. David A. Polak, CFA, Edward C.
Friedel,
41
<PAGE>
CFA, James H. Galbreath, CFA, Phyllis G. Thomas, CFA, and Jon D. Bosse, CFA,
constitute the committee.
EDWARD C. FRIEDEL, CFA serves as Senior Portfolio Manager for the Value
Equity Portfolio. Mr. Friedel has been a managing director and investment
strategist/portfolio manager of NWQ Investment since 1983. From 1971 to 1983,
Mr. Friedel was a portfolio manager for Beneficial Standard Investment
Management. Mr. Friedel is a graduate of the University of California at
Berkeley (BS) and Stanford University (MBA).
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
MERIDIAN INVESTMENT
MANAGEMENT CORPORATION
Meridian Investment Management Corporation ("Meridian"), located at 12835
East Arapahoe Road, Tower II, 7th Floor, Englewood, CO 80112, serves as a
Co-Sub-Adviser to the Global Sector Portfolio. Meridian is a wholly-owned
subsidiary of Meridian Management & Research Corporation ("MM&R"). Michael J.
Hart and Dr. Craig T. Callahan each own 50% of MM&R. Meridian provides
investment management and related services to other mutual fund portfolios
and individual, corporate, charitable and retirement accounts. Meridian
manages seven mutual fund wrap-fee programs which, as of March 1, 1996, had
aggregate assets of approximately $500 million. Meridian provides investment
advisory assistance and portfolio management advice to the Investment Adviser
for the Global Sector Portfolio. Meridian also provides quantitative
investment research and portfolio management advice. Subject to review and
supervision by the Investment Adviser and the Fund's Board, Meridian is
responsible for making decisions and recommendations as to asset allocation
and industry and country selections for the Global Sector Portfolio.
INVESCO GLOBAL ASSET MANAGEMENT LIMITED
INVESCO Global Asset Management Limited ("INVESCO"), located at Rosebank, 12
Bermudiana Road, Hamilton, Bermuda HM11, serves as a Co-Sub-Adviser to the
Global Sector Portfolio. INVESCO is an indirect wholly-owned subsidiary of
INVESCO PLC, a global firm that managed approximately $84 billion as of
December 31, 1995. INVESCO PLC is headquartered in London, with money
managers located in Europe, North America and the Far East.
INVESCO provides investment advisory assistance and portfolio management
advice to the Investment Adviser for the Global Sector Portfolio. Subject to
review and supervision by the Investment Adviser and the Fund's Board,
INVESCO is responsible for actual security selection for the Portfolio
(within the constraints of Meridian's asset, industry, and country
selections). INVESCO's services are provided by a team of portfolio managers.
Individual industry and country specialists are responsible for managing
security selection for their assigned shares of the asset, industry and
country allocations established by Meridian. In performing these services,
INVESCO is authorized to draw upon the resources of certain
INVESCO-affiliated companies and their employees, provided that INVESCO
supervises and remains fully responsible for all such services. Pursuant to
this authority, INVESCO has entered into agreements with INVESCO Asset
Management Limited ("IAML"), 11 Devonshire Square, London, EC2M 4YR England,
for assistance in managing the Portfolio's investments in foreign securities,
and with INVESCO Trust Company ("ITC"), 7800 East Union Avenue, Denver, CO
80237, for assistance in managing the Portfolio's investments in U.S.
securities. IAML is an indirect wholly-owned subsidiary of INVESCO PLC and a
registered investment adviser. IAML provided investment advisory services to
five U.S. mutual funds distributed by INVESCO affiliates, as well as a number
of offshore funds, as of September 30, 1996. ITC is an indirect wholly-owned
subsidiary of INVESCO PLC and a registered investment adviser. ITC provided
investment advisory or sub-advisory services to 41 investment portfolios as
of September 30, 1996.
\diamond\PORTFOLIO MANAGER:
Meridian's Investment Committee determines the guidelines for asset, country
and industry weightings based on Meridian's proprietary quantitative research
methods. The Committee is comprised of Dr. Craig T. Callahan, Michael J.
Hart, Patrick S. Boyle and Bryan M. Ritz. Dr. Craig T. Callahan is Chairman
of the Investment Committee and Chief Investment Officer of Meridian, and
directs Meridian's investment research and analysis. Dr. Callahan obtained
his D.B.A. from Kent State University. Michael Hart is President of Meridian
Investment Management and holds an M.B.A. from the University of Denver.
Patrick S Boyle, a Chartered Financial Analyst, acts as a Portfolio Manager
for several of Meridian's private accounts. Bryan R. Ritz, also a Chartered
Financial Analyst, serves as a Portfolio Manager for Meridian's private
accounts. Mr. Ritz holds a Bachelor of Science in Business Administration and
a M.B.A. from the University of Denver. In performing sub-advisory services
Meridian may draw upon additional members of its research team. These
employees are generally specialists within Meridian's research department.
However, the Investment Committee supervises the members of the research
department and remains fully responsible for all such services.
42
<PAGE>
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
SCOTTISH EQUITABLE INVESTMENT
MANAGEMENT LIMITED
Scottish Equitable Investment Management Limited ("Scottish Equitable"),
located at Edinburgh Park, Edinburgh EH12 9SE, Scotland, serves as a
Co-Sub-Adviser to the International Equity Portfolio. Scottish Equitable is a
wholly-owned subsidiary of Scottish Equitable plc. Scottish Equitable plc, is
successor to Scottish Equitable Life Assurance Society, which was founded in
Edinburgh in 1831. As of December 31, 1995, Scottish Equitable plc had
approximately $15.9 billion in assets under management. Like the Investment
Adviser, Scottish Equitable is also an indirect wholly-owned subsidiary of
AEGON nv. Scottish Equitable has not previously advised a U.S.-registered
mutual fund. Scottish Equitable currently provides investment advisory and
management services to certain of its affiliates, including Scottish
Equitable plc and to external organizations.
\diamond\PORTFOLIO MANAGER:
CAROL CLARK has served as a Portfolio Manager of the Portfolio since its
inception. Ms. Clark is the Manager of Scottish Equitable's Asset Allocation
group and has served both as a Portfolio Manager and Investment Analyst. Ms.
Clark joined Scottish Equitable in 1983 directly from Glasgow University
where she earned a MA (Honors) in Political Economy; and she also holds the
Securities Industry Diploma.
GE INVESTMENT MANAGEMENT INCORPORATED
GE Investment Management Incorporated ("GEIM") serves as a Co-Sub-Adviser to
the International Equity Portfolio and as the Sub-Adviser to the U.S. Equity
Portfolio. GEIM, located at 3003 Summer Street, Stamford, Connecticut 06905,
was formed under the laws of Delaware in 1988. GEIM is a wholly-owned
subsidiary of General Electric Company ("GE"). GEIM's principal officers and
directors serve in similar capacities with respect to General Electric
Investment Corporation ("GEIC", and, together with GEIM and their
predecessors, collectively referred to as "GE Investments"), which like GEIM
is a wholly-owned subsidiary of GE. GEIC serves as investment adviser to
various GE pension and benefit plans and certain employee mutual funds. GE
Investments has roughly 70 years of investment management experience, and has
managed mutual funds since 1935. As of June 30, 1996, GEIM and GEIC together
managed assets in excess of $55 billion.
\diamond\PORTFOLIO MANAGERS:
RALPH R. LAYMAN has served as a Portfolio Manager of the International Equity
Portfolio since its inception. Mr. Layman has more than 17 years of
investment experience and has held positions with GE Investments since 1991.
From 1989 to 1991, Mr. Layman served as Executive Vice President, Partner and
Portfolio Manager of Northern Capital Management, and prior thereto, served
as Vice President and Portfolio Manager of Templeton Investment Counsel. Mr.
Layman is currently a Director and Executive Vice President of GE
Investments.
EUGENE K. BOLTON is responsible for the overall management of the U.S. Equity
Portfolio and has served in that capacity since its inception. Mr. Bolton has
more than 12 years of investment experience and has held positions with GE
Investments since 1984. Mr. Bolton is currently a Director and Executive Vice
President of GE Investments.
DAVID B. CARLSON is one of the four Portfolio Managers for the U.S. Equity
Portfolio and has served in that capacity since its inception. Mr. Carlson is
also responsible for the management of the equity related investments of the
portfolio of the Strategic Fund. He has more than 13 years of investment
experience and has held positions with GE Investments since 1982. Mr. Carlson
is currently a Senior Vice president of GE Investments.
CHRISTOPHER D. BROWN is one of the four Portfolio Managers for the U.S.
Equity Portfolio and has served in that capacity since its inception. He has
ten years of investment experience, and has held positions with GE
Investments since 1985. Mr. Brown is currently a Vice President of GE
Investments.
PETER J. HATHAWAY is one of the four Portfolio Managers for the U.S. Equity
Portfolio and has served in that capacity since its inception. He has more
than 35 years of investment experience and has held positions with GE
Investments since 1985. Mr. Hathaway is currently a Senior Vice President of
GE Investments.
PAUL C. REINHARDT is one of the four Portfolio Managers for the U.S. Equity
Portfolio and has served in that capacity since its inception. He has more
than 14 years of investment experience and has held positions with GE
Investments since 1982. Mr. Reinhardt is currently a Senior Vice President of
GE Investments.
43
<PAGE>
\diamond\SUB-ADVISERS' COMPENSATION
Each Sub-Adviser receives monthly compensation from the Investment Adviser at
the annual rate of a specified percentage of the average daily net assets of
each Portfolio managed by that Sub-Adviser. The table below lists those
percentages by Portfolio.
<TABLE>
<CAPTION>
PERCENTAGE OF AVERAGE
PORTFOLIO DAILY NET ASSETS
--------- --------------------------------------------------------
<S> <C>
Growth 0.40%
Bond 0.25%
Global 0.40%
Money Market 0.15% (Prior to May 1, 1996, Janus Capital
Corporation, previous Sub-Adviser, received 0.25%)
Short-to-Intermediate Government 0.30%, less 50% of amount of excess expenses*
Balanced 0.40%, less 50% of amount of excess expenses*
Emerging Growth 0.40%, less 50% of amount of excess expenses*
Equity-Income 0.40%
Aggressive Growth 0.40%
Tactical Asset Allocation 0.40%, less 50% of amount of excess expenses*
C.A.S.E. Growth 0.40%
Utility 0.50% of the first $30 million of assets; 0.35% of
the next $20 million in assets, and 0.25% of assets
in excess of $50 million
Value Equity 0.40%, less 50% of amount of excess expenses*
Global Sector Meridian: 0.30% of first $100 million of assets, and
0.35% of assets in excess of $100 million;
INVESCO**: 0.40% of first $100 million of assets,
and 0.35% of assets in excess of $100 million
International Equity Scottish Equitable: 0.50% of assets managed by
Scottish Equitable, less 50% of amount of excess
expenses attributable to such assets/dagger/
GEIM: 0.50% of assets managed by GEIM, less
50% of amount of excess expenses attributable to
such assets*
U.S. Equity 0.40%, less 50% of amount of excess expenses/dagger/
<FN>
- ------------
* Excess expenses are those expenses paid by the Investment Adviser on
behalf of a Portfolio pursuant to any expense limitation.
** With respect to the Global Sector Portfolio, neither IAML nor ITC
receives any compensation from the Investment Adviser. IAML and ITC are
compensated for their services by INVESCO. INVESCO pays 50% of the
compensation it receives from the Investment Adviser to IAML for
investment advisory services, and 40% to ITC for investment advisory
services and administrative assistance. IAML and ITC each pay their own
expenses relating to personnel, office space and equipment.
/dagger/ Any amount borne by GEIM pursuant to any expense limitation
constitutes an agreement between the Investment Adviser and GEIM
only for the first twelve months following the Portfolio's
commencement of operations. Thereafter, any such arrangements will
be as mutually agreed upon by GEIM and the Investment Adviser.
</FN>
</TABLE>
PORTFOLIO TRANSACTIONS
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\PORTFOLIO TRANSACTIONS
Each Sub-Adviser is also responsible for selecting the broker-dealers who
execute the portfolio transactions for its respective Portfolio(s). In
placing portfolio business with all dealers, the Sub-Adviser seeks best
execution of each transaction and all brokerage placement must be consistent
with the Rules of Fair Practice of the National Association of Securities
Dealers, Inc. Within these parameters, each Sub-Adviser is authorized to
consider sales of the Policies or Annuity Contracts described in the
accompanying prospectus by a broker-dealer as a factor in the selection of
broker-dealers to execute portfolio transactions. Each Sub-Adviser may
occasionally place portfolio brokerage with InterSecurities, Inc., an
affiliated broker of the Investment Adviser. The Sub-Adviser is authorized to
pay higher commissions to brokerage firms that provide it with investment and
research
44
<PAGE>
information than to firms which do not provide such services, if the
Sub-Adviser determines that such commissions are reasonable in relation to
the overall services provided and the Sub-Adviser receives best execution.
The information received may be used by the Sub-Adviser in managing the
assets of other advisory and sub-advisory accounts, as well as in the
management of the assets of a Portfolio.
With respect to the Aggressive Growth Portfolio, it is anticipated that
Alger, Inc., an affiliate of Alger Management, will serve as the Portfolio's
broker in effecting substantially all of the Aggressive Growth Portfolio's
transactions on securities exchanges and will retain commissions in
accordance with certain regulations of the SEC.
With respect to the Short-to-Intermediate Government and Balanced Portfolios,
it is anticipated that AEGON Management may occasionally place portfolio
business with InterSecurities, Inc. and AEGON USA Securities, Inc.,
affiliated brokers of the Investment Adviser and AEGON Management.
The other Sub-Advisers may also from time to time place portfolio brokerage
with their affiliates in accordance with SEC regulations.
OTHER INFORMATION
\diamond\JOINT TRADING ACCOUNTS
Subject to approval by the Fund's Board, the Growth, Bond and Global
Portfolios may transfer uninvested cash balances on a daily basis into
certain joint trading accounts. Assets in the joint trading accounts are
invested in money market instruments. All other participants in the joint
trading accounts will be other clients, including registered mutual fund
clients, of Janus Capital or its affiliates. The Growth, Bond and Global
Portfolios will participate in the joint trading accounts only to the extent
that the investments of the joint trading accounts are consistent with each
Portfolio's investment policies and restrictions. Janus Capital anticipates
that the investment made by a Portfolio through the joint trading accounts
will be at least as advantageous to that Portfolio as if the Portfolio had
made such investment directly. (See "Management of the Fund -The
Sub-Advisers" in the SAI.)
\diamond\PERSONAL SECURITIES TRANSACTIONS
The Fund permits "Access Persons" as defined by Rule 17j-1 under the 1940 Act
to engage in personal securities transactions, subject to the terms of the
Code of Ethics and Insider Trading Policy ("Ethics Policy") that has been
adopted by the Fund's Board. Access Persons are required to follow the
guidelines established by this Ethics Policy in connection with all personal
securities transactions and are subject to certain prohibitions on personal
trading. The Fund's Sub-Advisers, pursuant to Rule 17j-1 and other applicable
laws, and pursuant to the terms of the Ethics Policy, must adopt and enforce
their own Code of Ethics and Insider Trading Policies appropriate to their
operations. Each Sub-Adviser is required to report to the Fund's Board on a
quarterly basis with respect to the administration and enforcement of such
Ethics Policy, including any violations thereof which may potentially affect
the Fund.
\diamond\PURCHASE AND REDEMPTION OF SHARES
Shares of the Portfolios are sold and redeemed at their net asset value next
determined after receipt of a purchase order or notice of redemption in
proper form. Shares are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain sales and other charges may
apply to the Policies and the Annuity Contracts. Such charges are described
in the respective prospectuses for the Policies and the Annuity Contracts.
\diamond\VALUATION OF SHARES
Each Portfolio's net asset value per share is ordinarily determined, once
daily, as of the close of the regular session of business on the New York
Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day
the Exchange is open.
Net asset value of a Portfolio share is computed by dividing the value of the
net assets of the Portfolio by the total number of shares outstanding in the
Portfolio.
Except for money market instruments maturing in 60 days or less, securities
held by Portfolios other than the Money Market Portfolio are valued at market
value. Securities for which market values are not readily available are
valued at fair value as determined in good faith by the Investment Adviser or
Sub-Adviser under the
45
<PAGE>
supervision of the Fund's Board. Money market instruments maturing in 60 days
or less are valued on the amortized cost basis. (See the SAI for details.)
The Fund's Board has determined that the most appropriate method for valuing
the securities of the Money Market Portfolio is the amortized cost method.
Under this method, the net asset value of Portfolio shares is expected to
remain at a constant $1.00 per share, although there can be no assurance that
the Portfolio will be able to maintain a stable net asset value. (See the SAI
for details concerning the amortized cost valuation method, including the
conditions under which it may be used.)
\diamond\THE FUND AND ITS SHARES
The Fund was incorporated under the laws of the State of Maryland on August
21, 1985 and is registered with the SEC as a diversified, open-end,
management investment company.
The Fund offers its shares only for purchase by the Separate Accounts of the
Life Companies to fund benefits under variable life insurance or variable
annuity contracts issued by the Life Companies. Because Fund shares are sold
to Separate Accounts established to receive and invest premiums received
under variable life insurance policies and purchase payments received under
the variable annuity contracts, it is conceivable that, in the future, it may
become disadvantageous for variable life insurance Separate Accounts and
variable annuity Separate Accounts of the Life Companies to invest in the
Fund simultaneously. Neither the Life Companies nor the Fund currently
foresees any such disadvantages or conflicts, either to variable life
insurance policyholders or to variable annuity contract owners. Any Life
Company may notify the Fund's Board of a potential or existing conflict. The
Fund's Board will then determine if a material conflict exists and what
action, if any, should be taken in response. Such action could include the
sale of Fund shares by one or more of the Separate Accounts, which could have
adverse consequences. Material conflicts could result from, for example, (1)
changes in state insurance laws, (2) changes in Federal income tax laws, or
(3) differences in voting instructions between those given by variable life
insurance policyholders and those given by variable annuity contract owners.
The Fund's Board might conclude that separate funds should be established for
variable life and variable annuity Separate Accounts. If this happens, the
affected Life Companies will bear the attendant expenses of establishing
separate funds. As a result, variable life insurance policyholders and
variable annuity contract owners would no longer have the economies of scale
typically resulting from a larger combined fund.
The Fund offers a separate class of Common Stock for each Portfolio. All
shares of a Portfolio have equal voting rights, but only shares of a
particular Portfolio are entitled to vote on matters concerning only that
Portfolio. Each of the issued and outstanding shares of a Portfolio is
entitled to one vote and to participate equally in dividends and
distributions declared by the Portfolio and, upon liquidation or dissolution,
to participate equally in the net assets of the Portfolio remaining after
satisfaction of outstanding liabilities. The shares of a Portfolio, when
issued, will be fully paid and nonassessable, have no preference, preemptive,
conversion, exchange or similar rights, and will be freely transferable.
Shares do not have cumulative voting rights. The holders of more than 50% of
the shares of the Fund voting for the election of directors can elect all of
the directors of the Fund if they so choose. In such event, holders of the
remaining shares would not be able to elect any directors.
Only the Separate Accounts of the Life Companies may hold shares of the Fund
and are entitled to exercise the rights directly as described above. To the
extent required by law, the Life Companies will vote the Fund's shares held
in the Separate Accounts, including Fund shares which are not attributable to
Policyholders, at meetings of the Fund, in accordance with instructions
received from persons having voting interests in the corresponding
sub-accounts of the Separate Accounts. Except as required by the 1940 Act,
the Fund does not hold regular or special Policyholder meetings. If the 1940
Act or any regulation thereunder should be amended, or if present
interpretation thereof should change, and as a result it is determined that
the Life Companies are permitted to vote the Fund's shares in their own
right, they may elect to do so. The rights of Policyholders are described in
more detail in the prospectuses or disclosure documents for the Policies and
the Annuity Contracts, respectively.
\diamond\REPORTS TO POLICYHOLDERS
The fiscal year of each Portfolio ends on December 31 of each year. The Fund
will send to the Portfolios' Policyholders, at least semi-annually, reports
showing the Portfolios' composition and other information. An annual report,
containing financial statements audited by the Fund's independent
accountants, will be sent to Policyholders each year.
46
<PAGE>
\diamond\CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, MA 02111, acts as
Custodian and Dividend Disbursing Agent of the Portfolios' assets.
\diamond\ADDITIONAL INFORMATION
The telephone number or the address of the Fund appearing on the first page
of this Prospectus should be used for requests for additional information.
DISTRIBUTION AND TAXES
\diamond\DIVIDENDS AND DISTRIBUTIONS
Each Portfolio intends to distribute substantially all of its net investment
income, if any. Dividends from investment income of a Portfolio normally are
declared daily and reinvested monthly in additional shares of the Portfolio
at net asset value. Distributions of net realized capital gains from security
transactions normally are declared and paid in additional shares of the
Portfolio at the end of the fiscal year.
\diamond\TAXES
Each Portfolio (except the International Equity and U.S. Equity Portfolios,
and they intend to qualify) has qualified and expects to continue to qualify
as a regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended ("Code"). As qualified under Subchapter M, a
Portfolio is not subject to Federal income tax on that part of its investment
company taxable income that it distributes to its Policyholders. Taxable
income consists generally of net investment income, net gains from certain
foreign currency transactions, and net short-term capital gain, if any and
any net capital gain (the excess of net long-term capital gain over net
short-term capital loss. It is each Portfolio's intention to distribute all
such income and gains.
Shares of each Portfolio are offered only to the Separate Accounts, which are
insurance company separate accounts that fund the Policies and the Annuity
Contracts. Under the Code, an insurance company pays no tax with respect to
income of a qualifying separate account when the income is properly allocable
to the value of eligible variable annuity or variable life insurance
contracts. For a discussion of the taxation of life insurance companies and
the Separate Accounts, as well as the tax treatment of the Policies and
Annuity Contracts and the holders thereof, see "Federal Tax Matters" included
in the respective prospectuses for the Policies and the Annuity Contracts.
Section 817(h) of the Code and the regulations thereunder impose
"diversification" requirements on each Portfolio. Each Portfolio intends to
comply with the diversification requirements. These requirements are in
addition to the diversification requirements imposed on each Portfolio by
Subchapter M and the 1940 Act. The 817(h) requirements place certain
limitations on the assets of each separate account that may be invested in
securities of a single issuer. These limitations apply to each Portfolio's
assets that may be invested in securities of a single issuer. Specifically,
the regulations provide that, except as permitted by "safe harbor", described
below, as of the end of each calendar quarter or within 30 days thereafter,
no more than 55% of the Portfolio's total assets may be represented by any
one investment, no more than 70% by any two investments, no more than 80% by
any three investments, and no more than 90% by any four investments.
Section 817(h) provides, as a safe harbor, that a separate account will be
treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities, and
securities of other regulated investment companies. For purposes of section
817(h), all securities of the same issuer, all interests in the same real
property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities, and
political subdivisions all will be considered securities issued by the same
issuer. Failure of a Portfolio to satisfy the section 817(h) requirements
would result in taxation of the Separate Accounts, the insurance companies,
the Policies and the Annuity Contracts, and tax consequences to the holders
thereof, other than as described in the respective prospectuses for the
Policies and the Annuity Contracts.
The foregoing is only a summary of some of the important Federal income tax
considerations generally affecting a Portfolio and its Policyholders; see the
SAI for a more detailed discussion. Prospective investors are urged to
consult their tax advisors.
47
<PAGE>
APPENDIX A
BRIEF EXPLANATION OF RATING CATEGORIES
BOND RATING EXPLANATION
----------- --------------------------
STANDARD & POOR'S CORPORATION AAA Highest rating; extremely
strong capacity to pay
principal and interest.
AA High quality; very strong
capacity to pay principal
and interest.
A Strong capacity to pay
principal and interest;
somewhat more susceptible
to the adverse effects of
changing circumstances and
economic conditions.
BBB Adequate capacity to pay
principal and interest;
normally exhibit adequate
protection parameters, but
adverse economic conditions
or changing circumstances
more likely to lead to a
weakened capacity to pay
principal and interest than
for higher rated bonds.
BB,B, Predominantly speculative
with respect to the
issuer's capacity to meet
CC,CC,C required interest and
principal payments. BB
-lowest degree of
speculation; C-the highest
degree of speculation.
Quality and protective
characteristics outweighed
by large uncertainties or
major risk exposure to
adverse conditions.
D In default.
PLUS (+) OR MINUS (-) - The ratings from "AA" to "BBB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
UNRATED - Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
MOODY'S INVESTOR SERVICES, INC. Aaa Highest quality, smallest
degree of investment risk.
Aa High quality; together with
Aaa bonds, they compose the
high-grade bond group.
A Upper-medium grade
obligations; many favorable
investment attributes.
Baa Medium-grade obligations;
neither highly protected
nor poorly secured.
Interest and principal
appear adequate for the
present but certain
protective elements may be
lacking or may be
unreliable over any great
length of time.
Ba More uncertain, with
speculative elements.
Protection of interest and
principal payments not well
safeguarded during good and
bad times.
B Lack characteristics of
desirable investment;
potentially low assurance
of timely interest and
principal payments or
maintenance of other
contract terms over time.
Caa Poor standing, may be in
default; elements of danger
with respect to principal
or interest payments.
Ca Speculative in a high
degree; could be in default
or have other marked
short-comings.
C Lowest-rated; extremely
poor prospects of ever
attaining investment
standing.
UNRATED - Where no rating has been assigned or where a rating has been suspended
or withdrawn, it may be for reasons unrelated to the quality of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
<PAGE>
WRL SERIES FUND, INC.
OFFICE OF THE FUND:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, Florida 33770-2597
(800) 851-9777
(813) 585-6565
INVESTMENT ADVISER: CUSTODIAN:
WRL INVESTMENT MANAGEMENT, INC. INVESTORS BANK & TRUST COMPANY
201 HIGHLAND AVENUE 89 SOUTH STREET
LARGO, FL 33770-2597 BOSTON, MA 02111
INDEPENDENT ACCOUNTANTS:
Price Waterhouse LLP
1055 Broadway
Kansas City, MO 64105
SUB-ADVISERS:
JANUS CAPITAL CORPORATION
100 Fillmore Street
Denver, CO 80206
LUTHER KING CAPITAL MANAGEMENT CORPORATION
301 Commerce Street
Fort Worth, TX 76102
FEDERATED INVESTMENT COUNSELING
Federated Investors Tower
Pittsburgh, PA 15222-3779
C.A.S.E. MANAGEMENT, INC.
2255 Glades Road
Suite 221-A
Boca Raton, FL 33431
J.P. MORGAN INVESTMENT MANAGEMENT INC.
522 Fifth Avenue
New York, NY 10036
MERIDIAN INVESTMENT MANAGEMENT CORPORATION
12835 East Arapahoe Road
Tower II, 7th Floor
Englewood, CO 80112
SCOTTISH EQUITABLE INVESTMENT MANAGEMENT LIMITED
Edinburgh Park
Edinburgh EH12 9SE, Scotland
AEGON USA INVESTMENT MANAGEMENT, INC.
4333 Edgewood Road, N.E.
Cedar Rapids, IA 52449
DEAN INVESTMENT ASSOCIATES
2480 Kettering Tower
Dayton, OH 45423-2480
FRED ALGER MANAGEMENT, INC.
75 Maiden Lane
New York, NY 10038
VAN KAMPEN AMERICAN CAPITAL ASSET
MANAGEMENT, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
INVESCO GLOBAL ASSET MANAGEMENT LIMITED
Rosebank, 12 Bermudiana Road
Hamilton, Bermuda HM11
NWQ INVESTMENT MANAGEMENT COMPANY, INC.
655 South Hope Street
11th Floor
Los Angeles, CA 90017
GE INVESTMENT MANAGEMENT INCORPORATED
3003 Summer Street
Stamford, CT 06905
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY STATE
OR JURISDICTION OF THE UNITED STATES OR ANY COUNTRY WHERE SUCH OFFER WOULD BE
UNLAWFUL. IT RELATES OR AN OFFER TO ANY PERSON IN ANY STATE OR JURISDICTION OF
THE UNITED STATES OR ANY COUNTRY WHERE SUCH OFFER WOULD BE UNLAWFUL.
