As filed with the Securities and Exchange Commission on February 12, 1998
Registration No. 33-507
1940 Act File No. 811-4419
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 33 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
Amendment No. 34 [X]
(Check appropriate box or boxes.)
WRL SERIES FUND, INC.
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
201 HIGHLAND AVENUE, LARGO, FLORIDA 33770-2597
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (813) 585-6565
THOMAS E. PIERPAN BOX 5068
---------------------------------------
CLEARWATER, FLORIDA 33758-5068
---------------------------------------
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after this
Registration Statement becomes effective.
It is proposed that this filing will become effective (check appropriate
box):
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485.
[ ] on ____, pursuant to paragraph (b) of Rule 485.
[ ] 60 days after filing pursuant to paragraph (a) of Rule 485.
[ ] on DATE, pursuant to paragraph (a) of Rule 485.
[X] 75 days after filing pursuant to paragraph (a) (2) of Rule 485.
[ ] on DATE, pursuant to paragraph (a) (2) of Rule 485.
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
WRL SERIES FUND, INC.
Cross Reference Sheet
FORM N-1A LOCATION IN
ITEM NUMBER PROSPECTUS
- ----------- -----------
PART A.
Item 1. Cover Page...................................... Cover Page
Item 2. Synopsis........................................ Not Applicable
Item 3. Condensed Financial Information................. Financial Highlights
Item 4. General Description of Registrant............... Other Information -
The Fund and Its
Shares
Item 5. Management of the Fund.......................... Management of the
Fund
Item 5.A. Management's Discussion of Fund Performance..... Not Applicable
Item 6. Capital Stock and other Securities.............. Other Information -
The Fund and Its
Shares
Item 7. Purchase of Securities Being Offered............ Other Information -
Purchase and
Redemption of
Shares; Valuation
of Shares
Item 8. Redemption or Repurchase........................ Other Information -
Purchase and
Redemption of
Shares
Item 9. Pending Legal Proceedings....................... Not Applicable
PART B. LOCATION IN STATEMENT
- ------ OF ADDITIONAL
INFORMATION
---------------------
Item 10. Cover Page...................................... Cover Page
Item 11. Table of Contents............................... Table of Contents
Item 12. General Information and History................. Not Applicable
i
<PAGE>
WRL SERIES FUND, INC.
Cross Reference Sheet (Continued)
LOCATION IN
STATEMENT OF
FORM N-1A ADDITIONAL
ITEM NUMBER INFORMATION
- ----------- -----------
Item 13. Investment Objectives and Policies.............. Investment Objectives
and Policies
Item 14. Management of the Registrant.................... Management of the
Fund
Item 15. Control Persons and Principal
Holders of Securities........................... Purchase and
Redemption of Shares
Item 16. Investment Advisory and Other Services.......... Management of the
Fund
Item 17. Brokerage Allocation and
Other Practices................................. Portfolio
Transactions and
Brokerage
Item 18. Capital Stock and Other Securities.............. Capital Stock of
the Fund
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered........................ Purchase and
Redemption of Shares
Item 20. Tax Statu....................................... Taxes
Item 21. Underwriter..................................... Management of the
Fund - The
Investment Adviser -
Distribution
Agreement
Item 22. Calculations ofYield Quotations of
Performance Data................................ Calculation of
Performance Related
Information
Item 23. Financial Statements............................ Financial Statements
ii
<PAGE>
PROSPECTUS
WRL SERIES FUND, INC.
201 Highland Avenue
Largo, Florida 33770-2597
Telephone: (800) 851-9777
(813) 585-6565
WRL Series Fund, Inc. (the "Fund") is an open-end management investment company
consisting of eighteen separate series or investment portfolios. All Portfolios
of the Fund are diversified except for the Third Avenue Value Portfolio and the
Real Estate Securities Portfolio. The Third Avenue Value and Real Estate
Securities Portfolios are non-diversified. The Fund is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). This Prospectus
pertains to seventeen of the Portfolios of the Fund: Aggressive Growth
Portfolio, Emerging Growth Portfolio, International Equity Portfolio, Global
Portfolio, Growth Portfolio, Third Avenue Value Portfolio, C.A.S.E. Growth
Portfolio, U.S. Equity Portfolio, Value Equity Portfolio, Global Sector
Portfolio, Tactical Asset Allocation Portfolio, Strategic Total Return
Portfolio, Real Estate Securities Portfolio, Growth & Income Portfolio,
Balanced Portfolio, Bond Portfolio, and Money Market Portfolio (the
"Portfolios"). For a brief description of these Portfolios, see "Portfolios At
A Glance" on page 9.
Shares of the Fund's Portfolios are currently sold only to separate accounts
(the "Separate Accounts") of Western Reserve Life Assurance Co. of Ohio
("WRL"), PFL Life Insurance Company ("PFL"), and AUSA Life Insurance Company,
Inc. ("AUSA") (WRL, PFL, and AUSA together, the "Life Companies") to fund the
benefits under certain individual flexible premium variable life insurance
policies (the "Policies") and individual and group variable annuity contracts
(the "Annuity Contracts"). The Life Companies are affiliates. The Separate
Accounts, which may or may not be registered with the Securities and Exchange
Commission (the "SEC"), invest in shares of one or more of the Portfolios in
accordance with the allocation instructions received from holders of the
Policies and the Annuity Contracts (collectively, the "Policyowners"). Such
allocation rights are further described in the prospectuses or disclosure
documents for the Policies and the Annuity Contracts. A particular Portfolio of
the Fund may not be available under the Policy or Annuity Contract you have
chosen or may not be available in your state due to certain state insurance law
considerations. The prospectus or disclosure document for the particular Policy
or Annuity Contract you have chosen will indicate the Portfolios which are
generally available under the applicable Policy or Annuity Contract and should
be read in conjunction with this Prospectus.
This Prospectus sets forth concisely the information about the Portfolios that
prospective investors ought to know before investing. Investors should read
this Prospectus and retain it for future reference.
Additional information about the Fund and the Portfolios has been filed with
the SEC and is available upon request without charge by calling or writing the
Fund. The Statement of Additional Information (the "SAI") pertaining to the
Portfolios bears the same date as this Prospectus and is incorporated by
reference into this Prospectus in its entirety.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, A BANK OR OTHER FINANCIAL INSTITUTION, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT PROSPECTUS OR DISCLOSURE
DOCUMENT FOR THE APPLICABLE VARIABLE ANNUITY CONTRACT OR FLEXIBLE PREMIUM
VARIABLE LIFE INSURANCE POLICY. ALL PROSPECTUSES SHOULD BE READ AND RETAINED
FOR FUTURE REFERENCE.
AN INVESTMENT IN THE MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR GUARANTEED
BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE PORTFOLIO WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
Prospectus Dated May 1, 1998
<PAGE>
WRL SERIES FUND, INC.
201 Highland Avenue
Largo, Florida 33770-2597
Telephone (813) 585-6565
(800) 851-9777
<TABLE>
<S> <C>
FINANCIAL HIGHLIGHTS .................................... 1
PORTFOLIOS AT A GLANCE .................................... 9
PERFORMANCE INFORMATION ................................. 12
THE PORTFOLIOS IN DETAIL ................................. 15
MANAGEMENT OF THE FUND .................................... 42
OTHER INFORMATION ....................................... 51
DISTRIBUTIONS AND TAXES ................................. 53
APPENDIX A - Brief Explanation of Rating Categories ...... A-1
</TABLE>
i
<PAGE>
FINANCIAL HIGHLIGHTS
The information in the tables below, except as noted below, is taken from
each Portfolio's audited financial statements, which have been incorporated by
reference into the SAI. The tables provide information for one share of capital
stock outstanding during the respective Portfolio's fiscal periods ended on
December 31 of each year using average shares outstanding throughout each year.
The total return of each Portfolio reflects the advisory fee and all other
Portfolio expenses and includes reinvestment of dividends and capital gains; it
does not reflect the charges against the corresponding sub-accounts or the
charges and deductions under the applicable Policy or Annuity Contract;
including these charges would reduce total return figures for all periods
shown. The Fund Annual Report and Semi-Annual Report contains additional
performance information for each Portfolio. A copy of the Annual Report,
Semi-Annual Report and SAI may be obtained without charge upon request. (No
information is included for the Third Avenue Value Portfolio and the Real
Estate Securities Portfolio because they had not yet commenced operations as of
December 31, 1997.)
GROWTH PORTFOLIO*
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1997 1996 1995 1994
--------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning
of period ............... $ $ 31.66 $ 23.81 $ 26.25
Income from operations:
Net investment
income (loss) ......... .34 .26 .22
Net realized and
unrealized gain
(loss) on invest-
ments 5.35 10.97 (2.41)
---------- ---------- --------
Total Income (loss)
from operations . 5.69 11.23 (2.19)
---------- ---------- --------
Distributions:
Dividends from net
investment income ...... ( .35) (.24) (.22)
Dividends in excess of
net investment
income .................. ( .01) .00 .00
Distributions from net
realized gains on
investments ............ ( 1.99) (3.14) .00
Distributions in excess
of net realized gains
on investments ......... .00 .00 (.03)
---------- ---------- --------
Total distributions ... ( 2.35) (3.38) (.25)
---------- ---------- --------
Net asset value, end of
period .................. $ $ 35.00 $ 31.66 $ 23.81
======== ========== ========== ========
Total return (a) ......... % 17.96 % 47.12% (8.31%)
Ratios and supplemental
data:
Net assets at end
of period (in
thousands) ............ $ $1,527,409 $1,195,174 $814,383
Ratio of expenses
to average net
assets (b) ............ % .88 % .86% .84%
Ratio of net invest-
ment income (loss)
to average net
assets (b) ............ % .98 % .90% .88%
Ratio of commissions
paid to number of
shares ............... $ $ 0.0493 N/A N/A
Portfolio turnover
rate (a) ............... % 45.21 % 130.48% 107.33%
<CAPTION>
1993 1992 1991 1990 1989 1988
------------ ------------ ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period ............... $ 25.83 $ 26.26 $ 17.48 $ 17.85 $ 12.97 $ 11.14
Income from operations:
Net investment
income (loss) ......... .28 .36 .27 .30 .19 .31
Net realized and
unrealized gain
(loss) on invest-
ments .79 .52 10.75 (.33) 6.29 1.83
-------- -------- -------- -------- -------- --------
Total Income (loss)
from operations . 1.07 .88 11.02 (.03) 6.48 2.14
-------- -------- -------- -------- -------- --------
Distributions:
Dividends from net
investment income ...... (.28) (.36) (.27) (.30) (.19) (.31)
Dividends in excess of
net investment
income .................. .00 .00 .00 .00 .00 .00
Distributions from net
realized gains on
investments ............ (.37) (.95) (1.97) (.04) (1.41) .00
Distributions in excess
of net realized gains
on investments ......... .00 .00 .00 .00 .00 .00
-------- -------- -------- -------- -------- --------
Total distributions ... (.65) (1.31) (2.24) (.34) (1.60) (.31)
-------- -------- -------- -------- -------- --------
Net asset value, end of
period .................. $ 26.25 $ 25.83 $ 26.26 $ 17.48 $ 17.85 $ 12.97
======== ======== ======== ======== ======== ========
Total return (a) ......... 3.97% 2.35% 59.79% (.22%) 47.04% 18.62%
Ratios and supplemental
data:
Net assets at end
of period (in
thousands) ............ $934,810 $711,422 $393,511 $129,057 $ 74,680 $ 28,497
Ratio of expenses
to average net
assets (b) ............ .87% .86% .90% 1.00% 1.00% 1.00%
Ratio of net invest-
ment income (loss)
to average net
assets (b) ............ 1.07% 1.44% 1.21% 2.06% 1.18% 2.50%
Ratio of commissions
paid to number of
shares ............... N/A N/A N/A N/A N/A N/A
Portfolio turnover
rate (a) ............... 77.91% 77.70% 7.27% 157.01% 123.80% 76.27%
</TABLE>
* SEE NOTES TO FINANCIAL HIGHLIGHTS ON P. 9.
1
<PAGE>
BOND PORTFOLIO*
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1997 1996 1995 1994
--------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning
of period ........................ $ $ 11.35 $ 9.80 $ 11.24
Income from operations:
Net investment income
(loss) ........................ 0.64 .69 .63
Net realized and unreal-
ized gain (loss) on on
investments .................. (0.64) 1.55 (1.44)
-------- -------- ---------
Total income (loss) from
operations .................. .00 2.24 (.81)
-------- -------- ---------
Distributions:
Dividends from net invest-
ment income (.64) (.69) (.63)
Dividends in excess of net
investment income ............... .00 .00 .00
Distributions from net
realized gains on invest-
ments .00 .00 .00
Distributions in excess of net
realized gains on invest-
ments .00 .00 .00
-------- -------- ---------
Total distributions ............ (.64) (.69) (.63)
-------- -------- ---------
Net asset value, end
of period ........................ $ $ 10.71 $ 11.35 $ 9.80
======== ======== ======== =========
Total return (a) .................. % 0.14% 22.99% (6.94%)
Ratios and supplemental Data:
Net assets end of period
(in thousands) ............... $ $ 95,759 $ 96,972 $ 71,064
Ratio of expenses to
average net assets (b) . % .64% .61% .59%
Ratio of net investment
income (loss) to aver-
age net assets (b) % 5.96% 6.45% 5.94%
Ratio of commissions paid
to number of shares ............ N/A N/A N/A
Portfolio turnover rate (a) . % 187.72% 120.54% 131.73%
<CAPTION>
1993 1992 1991 1990 1989 1988
----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period ........................ $ 11.18 $ 11.18 $ 9.91 $ 10.07 $ 9.29 $ 9.22
Income from operations:
Net investment income
(loss) ........................ .72 .75 .86 .79 .75 .90
Net realized and unreal-
ized gain (loss) on on
investments .................. .95 .32 1.30 (.16) .78 .07
-------- -------- -------- -------- -------- -------
Total income (loss) from
operations .................. 1.67 1.07 2.16 .63 1.53 .97
-------- -------- -------- -------- -------- -------
Distributions:
Dividends from net invest-
ment income (.72) (.75) (.86) (.79) (.75) (.90)
Dividends in excess of net
investment income ............... .00 .00 .00 .00 .00 .00
Distributions from net
realized gains on invest-
ments (.89) (.32) (.03) .00 .00 .00
Distributions in excess of net
realized gains on invest-
ments .00 .00 .00 .00 .00 .00
-------- -------- -------- -------- -------- -------
Total distributions ............ (1.61) (1.07) (.89) (.79) (.75) (.90)
-------- -------- -------- -------- -------- -------
Net asset value, end
of period ........................ $ 11.24 $ 11.18 $ 11.18 $ 9.91 $ 10.07 $ 9.29
======== ======== ======== ======== ======== =======
Total return (a) .................. 13.38% 6.79% 18.85% 6.21% 14.65% 7.73%
Ratios and supplemental Data:
Net assets end of period
(in thousands) ............... $ 90,715 $ 56,820 $ 22,291 $ 10,143 $ 7,025 $ 3,372
Ratio of expenses to
average net assets (b) . .64% .70% .70% .69% .70% .70%
Ratio of net investment
income (loss) to aver-
age net assets (b) 5.94% 6.49% 8.02% 8.82% 8.60% 8.96%
Ratio of commissions paid
to number of shares ............ N/A N/A N/A N/A N/A N/A
Portfolio turnover rate (a) . 149.02% 80.73% 33.47% 18.09% 23.26% 21.54%
</TABLE>
GLOBAL PORTFOLIO*
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1996 1995
--------- ------------- ------------
<S> <C> <C> <C>
Net asset value, beginning of period .............................. $ $ 15.52 $ 13.12
Income from operations:
Net investment income (loss) .................................... 0.08 .10
Net realized and unrealized gain (loss) on investments ......... 4.20 2.91
--------- --------
Total income (loss) from operations ........................... 4.28 3.01
--------- --------
Distributions:
Dividends from net investment income ........................... ( 0.04) .00
Dividends in excess of net investment income ..................... ( .17) .00
Distributions from net realized gains on investments ............ ( 1.47) (.61)
Distributions in excess of net realized gains on investments . .00 (.00)
---------- --------
Total distributions .......................................... ( 1.68) (.61)
---------- --------
Net asset value, end of period .................................... $ $ 18.12 $ 15.52
======== ========== ========
Total return (a) ................................................ % 27.74 % 23.06%
Ratios and supplemental data:
Net assets at end of period (in thousands) ..................... $ $ 534,820 $289,506
Ratio of expenses to average net assets (b) ..................... % .99 % .99%
Ratio of net investment income (loss)
to average net assets (b) .................................... % .46 % .75%
Ratio of commissions paid to number of shares .................. $ $ 0.0154 N/A
Portfolio turnover rate (a) .................................... % 88.31 % 130.60%
<CAPTION>
1994 1993 1992 (c)
------------ ----------- -------------
<S> <C> <C> <C>
Net asset value, beginning of period .............................. $ 13.62 $ 10.16 $ 10.00
Income from operations:
Net investment income (loss) .................................... .10 .04 (.02)
Net realized and unrealized gain (loss) on investments ......... .10 3.72 .18
-------- -------- ---------
Total income (loss) from operations ........................... .20 3.76 .16
-------- -------- ---------
Distributions:
Dividends from net investment income ........................... (.10) (.04) .00
Dividends in excess of net investment income ..................... (.01) .00 .00
Distributions from net realized gains on investments ............ (.56) (.26) .00
Distributions in excess of net realized gains on investments . (.03) .00 .00
-------- -------- ---------
Total distributions .......................................... (.70) (.30) .00
-------- -------- ---------
Net asset value, end of period .................................... $ 13.12 $ 13.62 $ 10.16
======== ======== =========
Total return (a) ................................................ .25% 35.05% 1.62%
Ratios and supplemental data:
Net assets at end of period (in thousands) ..................... $261,778 $ 99,094 $ 508
Ratio of expenses to average net assets (b) ..................... 1.01% 1.09% 2.48%
Ratio of net investment income (loss)
to average net assets (b) .................................... .73% .30% (2.23%)
Ratio of commissions paid to number of shares .................. N/A N/A N/A
Portfolio turnover rate (a) .................................... 192.06% 79.93% .00%
</TABLE>
* SEE NOTES TO FINANCIAL HIGHLIGHTS ON P. 9.
2
<PAGE>
MONEY MARKET PORTFOLIO*
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Net asset value, beginning of period $
Income from operations:
Net investment income (loss) ......
Net realized and unrealized gain
(loss) on investments ............
Total income (loss) from
operations .....................
Distributions:
Dividends from net investment
income ...........................
Dividends from net realized gains
on investments .....................
Distributions from net realized
gains on investments ...............
Distributions in excess of
net realized gains on
investments ........................
Total distributions ............
Net asset value, end of period ...... $
=========
Total return (a) ..................... %
Ratios and supplemental data:
Net assets at end of period
(in thousands) ..................... $
Ratio of expenses to average
net assets (b) .................. %
Ratio of net investment
income (loss) to average net
assets (b) ........................ %
Ratio of commissions paid to
number of shares ..................
Portfolio turnover rate (a) ......
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990
------------ ----------- ----------- ----------- -------------- ----------- -----------
<S> <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
Income from operations:
Net investment income (loss) ...... .05 .05 .04 .02 .03 .05 .07
Net realized and unrealized gain
(loss) on investments ............ .00 .00 .00 .00 .00 .00 .00
-------- ------- ------- ------- --------- ------- -------
Total income (loss) from
operations ..................... .05 .05 .04 .02 .03 .05 .07
-------- ------- ------- ------- --------- ------- -------
Distributions:
Dividends from net investment
income ........................... (.05) (.05) (.04) (.02) (.03) (.05) (.07)
Dividends from net realized gains
on investments ..................... .00 .00 .00 .00 .00 .00 .00
Distributions from net realized
gains on investments ............... .00 .00 .00 .00 .00 .00 .00
-------- ------- ------- ------- --------- ------- -------
Distributions in excess of
net realized gains on
investments ........................ .00 .00 .00 .00 .00 .00 .00
Total distributions ............ (.05) (.05) (.04) (.02) .(03) (.05) (.07)
-------- ------- ------- ------- --------- ------- -------
Net asset value, end of period ...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======= ======= ======= ========= ======= =======
Total return (a) ..................... 5.03% 5.40% 3.44% 2.45% 3.03% 5.25% 7.09%
Ratios and supplemental data:
Net assets at end of period
(in thousands) ..................... $122,114 $80,544 $93,081 $45,782 $45,600 $33,695 $24,931
Ratio of expenses to average
net assets (b) .................. .52% .56% .60% .66% .70% .70% .66%
Ratio of net investment
income (loss) to average net
assets (b) ........................ 5.03% 5.30% 3.59% 2.41% 2.99% 5.07% 7.09%
Ratio of commissions paid to
number of shares .................. N/A N/A N/A N/A N/A N/A N/A
Portfolio turnover rate (a) ...... N/A N/A N/A N/A N/A N/A N/A
<CAPTION>
1989 1988
---------- ----------
<S> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00
Income from operations:
Net investment income (loss) ...... .07 .05
Net realized and unrealized gain
(loss) on investments ............ .00 .00
------- -------
Total income (loss) from
operations ..................... .07 .05
------- -------
Distributions:
Dividends from net investment
income ........................... (.07) (.05)
Dividends from net realized gains
on investments ..................... .00 .00
Distributions from net realized
gains on investments ............... .00 .00
------- -------
Distributions in excess of
net realized gains on
investments ........................ .00 .00
Total distributions ............ (.07) (.05)
------- -------
Net asset value, end of period ...... $ 1.00 $ 1.00
======= =======
Total return (a) ..................... 8.09% 5.77%
Ratios and supplemental data:
Net assets at end of period
(in thousands) ..................... $ 6,233 $ 5,114
Ratio of expenses to average
net assets (b) .................. .70% .70%
Ratio of net investment
income (loss) to average net
assets (b) ........................ 7.82% 6.26%
Ratio of commissions paid to
number of shares .................. N/A N/A
Portfolio turnover rate (a) ...... N/A N/A
</TABLE>
BALANCED PORTFOLIO*
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1997 1996 1995 1994 (e)
--------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ................................. $ $ 10.63 $ 9.24 $ 10.00
Income from operations:
Net investment income (loss) ....................................... .34 .44 .34
Net realized and unrealized gain (loss) on investments ............... .80 1.38 (.76)
-------- -------- --------
Total income (loss) from operations ................................. 1.14 1.82 (.42)
-------- -------- --------
Distributions:
Dividends from net investment income ................................. ( .28) (.43) (.34)
Dividends in excess of net investment income ........................ .00 .00 .00
Distributions from net realized gains on investments ............... ( .10) .00 .00
Distributions in excess of net realized gains on investments ......... .00 .00 .00
---------- -------- --------
Total distributions ................................................ ( .38) (.43) (.34)
---------- -------- --------
Net asset value, end of period ....................................... $ $ 11.39 $ 10.63 $ 9.24
======== ========== ======== ========
Total return (a) ...................................................... % 10.72 % 19.80% (5.73%)
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................... $ $ 49,331 $ 31,114 $ 19,422
Ratio of expenses to average net assets (b) ........................... % .97 % .97% 1.00%
Ratio of net investment income (loss) to average net assets (b) ...... % 3.14 % 4.38% 4.27%
Ratio of commissions paid to number of shares ........................ $ $ 0.0024 N/A N/A
Portfolio turnover rate (a) .......................................... % 76.90 % 98.55% 57.73%
</TABLE>
* SEE NOTES TO FINANCIAL HIGHLIGHTS ON P. 9.
3
<PAGE>
EMERGING GROWTH PORTFOLIO*
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1996
---------- --------------
<S> <C> <C>
Net asset value, beginning of period .............................. $ $ 16.25
Income from operations:
Net investment income (loss) .................................... ( .04)
Net realized and unrealized gain (loss) on investments ......... 3.10
----------
Total income (loss) from operations ........................... 3.06
----------
Distributions:
Dividends from net investment income ........................... .00
Dividends in excess of net investment income .................. .00
Distributions from net realized gains on investments ............ ( .85)
Distributions in excess of net realized gains on investments ... .00
----------
Total distributions .......................................... ( .85)
----------
Net asset value, end of period .................................... $ $ 18.46
========= ==========
Total return (a) ................................................ % 18.88 %
Ratios and supplemental data:
Net assets at end of period (in thousands) ..................... $ $ 431,454
Ratio of expenses to average net assets (b) ..................... % .94 %
Ratio of net investment income (loss) to average net assets (b) % ( .24 %)
Ratio of commissions paid to number of shares .................. $ $ 0.0565
Portfolio turnover rate (a) .................................... % 80.02 %
<CAPTION>
1995 1994 1993 (d)
------------ ------------- -------------
<S> <C> <C> <C>
Net asset value, beginning of period .............................. $ 11.55 $ 12.47 $ 10.00
Income from operations:
Net investment income (loss) .................................... .01 .01 (.04)
Net realized and unrealized gain (loss) on investments ......... 5.42 (.92) 2.51
-------- -------- --------
Total income (loss) from operations ........................... 5.43 (.91) 2.47
-------- -------- --------
Distributions:
Dividends from net investment income ........................... .00 (.01) .00
Dividends in excess of net investment income .................. .00 .00 .00
Distributions from net realized gains on investments ............ (.73) .00 .00
Distributions in excess of net realized gains on investments ... .00 .00 .00
-------- -------- --------
Total distributions .......................................... (.73) (.01) .00
-------- -------- --------
Net asset value, end of period .................................... $ 16.25 $ 11.55 $ 12.47
======== ======== ========
Total return (a) ................................................ 46.79% (7.36%) 24.71%
Ratios and supplemental data:
Net assets at end of period (in thousands) ..................... $288,519 $182,650 $102,472
Ratio of expenses to average net assets (b) ..................... .91% .92% 1.00%
Ratio of net investment income (loss) to average net assets (b) .03% .06% (.30%)
Ratio of commissions paid to number of shares .................. N/A N/A N/A
Portfolio turnover rate (a) .................................... 124.13% 72.62% 12.79%
</TABLE>
STRATEGIC TOTAL RETURN PORTFOLIO*
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1997 1996
---------- -------------
<S> <C> <C>
Net asset value, beginning of period .............................. $ $ 12.86
Income from operations:
Net investment income (loss) .................................... .37
Net realized and unrealized gain (loss) on investments ......... 1.56
---------
Total income (loss) from operations ........................... 1.93
---------
Distributions:
Dividends from net investment income ........................... ( .32)
Dividends in excess of net investment income .................. .00
Distributions from net realized gains on investments ............ ( .50)
Distributions in excess of net realized gains on investments ... .00
----------
Total distributions .......................................... ( .82)
----------
Net asset value, end of period .................................... $ $ 13.97
========= ==========
Total return (a) ................................................ % 15.00 %
Ratios and supplemental data:
Net assets at end of period (in thousands) ..................... $ $ 390,141
Ratio of expenses to average net assets (b) ..................... % .91 %
Ratio of net investment income (loss) to average net
assets (b) ................................................... % 2.72 %
Ratio of commissions paid to number of shares .................. $ $ 0.0582
Portfolio turnover rate (a) .................................... % 49.32 %
<CAPTION>
1995 1994 1993 (d)
------------ ------------- -----------
<S> <C> <C> <C>
Net asset value, beginning of period .............................. $ 10.90 $ 11.23 $ 10.00
Income from operations:
Net investment income (loss) .................................... .37 .31 .19
Net realized and unrealized gain (loss) on investments ......... 2.33 (.33) 1.33
-------- -------- --------
Total income (loss) from operations ........................... 2.70 (.02) 1.52
-------- -------- --------
Distributions:
Dividends from net investment income ........................... (.37) (.31) (.19)
Dividends in excess of net investment income .................. .00 .00 .00
Distributions from net realized gains on investments ............ (.37) .00 (.10)
Distributions in excess of net realized gains on investments ... .00 .00 .00
-------- -------- --------
Total distributions .......................................... (.74) (.31) (.29)
-------- -------- --------
Net asset value, end of period .................................... $ 12.86 $ 10.90 $ 11.23
======== ======== ========
Total return (a) ................................................ 24.66% (.53%) 13.49%
Ratios and supplemental data:
Net assets at end of period (in thousands) ..................... $256,806 $183,867 $ 90,560
Ratio of expenses to average net assets (b) ..................... .87% .89% 1.00%
Ratio of net investment income (loss) to average net
assets (b) ................................................... 3.07% 2.78% 1.70%
Ratio of commissions paid to number of shares .................. N/A N/A N/A
Portfolio turnover rate (a) .................................... 52.59% 53.50% 27.41%
</TABLE>
* SEE NOTES TO FINANCIAL HIGHLIGHTS ON P. 9.
4
<PAGE>
AGGRESSIVE GROWTH PORTFOLIO*
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1997 1996 1995 1994 (e)
---------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ................................. $ $ 13.25 $ 9.86 $ 10.00
Income from operations:
Net investment income (loss) ....................................... ( .01) (.06) .02
Net realized and unrealized gain (loss) on investments ............... 1.38 3.96 (.14)
--------- -------- --------
Total income (loss) from operations ................................. 1.37 3.90 (.12)
--------- -------- --------
Distributions:
Dividends from net investment income ................................. .00 .00 (.02)
Dividends in excess of net investment income ........................ ( .19) .00 .00
Distributions from net realized gains on investments ............... ( .25) (.51) .00
Distributions in excess of net realized gains on investments .........
Total distributions ................................................ ( .44) (.51) (.02)
--------- -------- --------
Net asset value, end of period ....................................... $ $ 14.18 $ 13.25 $ 9.86
========= ========= ======== ========
Total return (a) ...................................................... % 10.45 % 38.02% (1.26%)
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................... $ $ 220,552 $158,534 $ 38,826
Ratio of expenses to average net assets (b) ........................ % .98 % 1.07% 1.00%
Ratio of net investment income (loss) to average net assets (b) ...... % ( .10 %) (.48%) 0.20%
Ratio of commissions paid to number of shares ........................ $ $ 0.0708 N/A N/A
Portfolio turnover rate (a) .......................................... % 101.28 % 108.04% 89.73%
</TABLE>
TACTICAL ASSET ALLOCATION PORTFOLIO*
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1996 1995 (f)
---------- ------------ -----------
<S> <C> <C> <C>
Net asset value, beginning of period ................................. $ $ 11.49 $ 10.00
Income from operations:
Net investment income (loss) ....................................... .33 .41
Net realized and unrealized gain (loss) on investments ............... 1.33 1.93
--------- --------
Total income (loss) from operations ................................. 1.66 2.34
--------- --------
Distributions:
Dividends from net investment income ................................. ( .30) (.41)
Dividends in excess of net investment income ........................ .00 .00
Distributions from net realized gains on investments ............... ( .24) (.44)
Distributions in excess of net realized gains on investments ......... .00 .00
--------- --------
Total distributions ................................................ ( .54) (.85)
--------- --------
Net asset value, end of period ....................................... $ $ 12.61 $ 11.49
========== ========= ========
Total return (a) ...................................................... % 14.42 % 20.09%
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................... $ $ 206,172 $120,531
Ratio of expenses to average net assets (b) ........................ % .90 % .93%
Ratio of net investment income (loss) to average net assets (b) ...... % 2.78 % 3.76%
Ratio of commissions paid to number of shares ........................ $ $ 0.0050 N/A
Portfolio turnover rate (a) .......................................... % 98.97 % 38.68%
</TABLE>
* SEE NOTES TO FINANCIAL HIGHLIGHTS ON P. 9.
5
<PAGE>
GROWTH & INCOME PORTFOLIO*
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1997 1996 1995 1994 (e)
--------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ................................. $ $ 11.12 $ 9.30 $ 10.00
Income from operations:
Net investment income (loss) ....................................... .42 .46 .43
Net realized and unrealized gain (loss) on investments ............... .87 1.93 (.70)
-------- -------- --------
Total income (loss) from operations ................................. 1.29 2.39 (.27)
-------- -------- --------
Distributions:
Dividends from net investment income ................................. ( .33) (.46) (.43)
Dividends in excess of net investment income ........................ .00 .00 .00
Distributions from net realized gains on investments ............... ( .32) (.11) .00
Distributions in excess of net realized gains on investments ......... .00 .00 .00
---------- -------- --------
Total distributions ................................................ ( .65) (.57) (.43)
---------- -------- --------
Net asset value, end of period ....................................... $ $ 11.76 $ 11.12 $ 9.30
======== ========== ======== ========
Total return (a) ...................................................... % 11.64 % 25.25% (4.58%)
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................... $ $ 38,115 $ 24,607 $ 10,482
Ratio of expenses to average net assets (b) ........................ % 1.00 % 1.00% 1.00%
Ratio of net investment income (loss) to average net assets (b) ...... % 3.73 % 4.56% 5.36%
Ratio of commissions paid to number of shares ........................ $ $ 0.0433 N/A N/A
Portfolio turnover rate (a) .......................................... % 68.53 % 78.34% 36.13%
</TABLE>
C.A.S.E. GROWTH PORTFOLIO*
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1996 1995 (g)
--------- ------------- -----------
<S> <C> <C> <C>
Net asset value, beginning of period ................................. $ $ 11.66 $ 10.00
Income from operations:
Net investment income (loss) ....................................... .12 .12
Net realized and unrealized gain (loss) on investments ............... 1.92 2.49
-------- --------
Total income (loss) from operations ................................. 2.04 2.61
-------- --------
Distributions:
Dividends from net investment income ................................. ( .05) (.12)
Dividends in excess of net investment income ........................ .00
Distributions from net realized gains on investments ............... ( .23) (.83)
Distributions in excess of net realized gains on investments ......... .00
----------
Total distributions ................................................ ( .28) (.95)
---------- --------
Net asset value, end of period ....................................... $ $ 13.42 $ 11.66
========= ========== ========
Total return (a) ...................................................... % 17.50 % 20.65%
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................... $ $ 26,560 $ 2,578
Ratio of expenses to average net assets (b) ........................ % 1.00 % 1.00%
Ratio of net investment income (loss) to average net assets (b) ...... % .94 % 1.02%
Ratio of commissions paid to number of shares ........................ $ $ 0.0604 N/A
Portfolio turnover rate (a) .......................................... % 160.27 % 121.62%
</TABLE>
* SEE NOTES TO FINANCIAL HIGHLIGHTS ON P. 9.
6
<PAGE>
GLOBAL SECTOR PORTFOLIO*
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1996 (h)
--------- -------------
<S> <C> <C>
Net asset value, beginning of period ................................. $ $ 10.00
Income from operations:
Net investment income (loss) ....................................... .06
Net realized and unrealized gain (loss) on investments ............... .55
--------
Total income (loss) from operations ................................. .61
--------
Distributions:
Dividends from net investment income ................................. ( .02)
Dividends in excess of net investment income ........................ .00
Distributions from net realized gains on investments ............... ( .04)
Distributions in excess of net realized gains on investments ......... .00
----------
Total distributions ................................................ ( .06)
----------
Net asset value, end of period ....................................... $ $ 10.55
========= ==========
Total return (a) ...................................................... % 6.08 %
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................... $ $ 6,986
Ratio of expenses to average net assets (b) ........................ % 2.37 %
Ratio of net investment income (loss) to average net assets (b) ...... % .62 %
Ratio of commissions paid to number of shares ........................ $ $ 0.0313
Portfolio turnover rate (a) .......................................... % 27.58 %
</TABLE>
VALUE EQUITY PORTFOLIO*
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1996 (h)
---------- -------------
<S> <C> <C>
Net asset value, beginning of period ................................. $ $ 10.00
Income from operations:
Net investment income (loss) ....................................... .10
Net realized and unrealized gain (loss) on investments ............... 1.23
--------
Total income (loss) from operations ................................. 1.33
--------
Distributions:
Dividends from net investment income ................................. ( .04)
Dividends in excess of net investment income ........................ .00
Distributions from net realized gains on investments ............... ( .02)
Distributions in excess of net realized gains on investments ......... .00
----------
Total distributions ................................................ ( .06)
----------
Net asset value, end of period ....................................... $ $ 11.27
========== ==========
Total return (a) ...................................................... % 13.19 %
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................... $ $ 49,394
Ratio of expenses to average net assets (b) ........................ % 1.00 %
Ratio of net investment income (loss) to average net assets (b) ...... % .89 %
Ratio of commissions paid to number of shares ........................ $ $ 0.0696
Portfolio turnover rate (a) .......................................... % 7.93 %
</TABLE>
* SEE NOTES TO FINANCIAL HIGHLIGHTS ON P. 9.
7
<PAGE>
INTERNATIONAL EQUITY PORTFOLIO*
<TABLE>
<CAPTION>
Period from
1/2/97 to
12/31/97(i)
------------
<S> <C>
Net asset value, beginning of period ................................. $ 10.00
Income from operations:
Net investment income (loss) ....................................... 0.09
Net realized and unrealized gain (loss) on investments ............... 1.25
--------
Total income (loss) from operations ................................. 1.34
--------
Distributions:
Dividends from net investment income ................................. 0.00
Dividends in excess of net investment income ........................ 0.00
Distributions from net realized gains on investments ............... 0.00
Distributions in excess of net realized gains on investments ......... 0.00
--------
Total distributions ................................................ 0.00
--------
Net asset value, end of period ....................................... $ 11.34
========
Total return(a) ...................................................... 13.44 %
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................... $ 12,005
Ratio of expenses to average net assets(b) ........................... 1.50 %
Ratio of net investment income (loss) to average net assets(b) ...... 1.60 %
Ratio of commissions paid to number of shares ........................ $ 0.0276
Portfolio turnover rate(a) .......................................... 12.72 %
</TABLE>
U.S. EQUITY PORTFOLIO*
<TABLE>
<CAPTION>
Period from
1/2/97 to
12/31/97(i)
------------
<S> <C>
Net asset value, beginning of period ................................. $ 10.00
Income from operations:
Net investment income (loss) ....................................... $ 0.07
Net realized and unrealized gain (loss) on investments ............... $ 1.43
--------
Total income (loss) from operations ................................. 1.50
--------
Distributions:
Dividends from net investment income ................................. 0.00
Dividends in excess of net investment income ........................ 0.00
Distributions from net realized gains on investments ............... 0.00
Distributions in excess of net realized gains on investments ......... 0.00
--------
Total distributions ................................................ 0.00
--------
Net asset value, end of period ....................................... $ 11.50
========
Total return (a) ...................................................... 14.99 %
Ratios and supplemental data:
Net assets at end of period (in thousands) ........................... $ 19,209
Ratio of expenses to average net assets(b) ........................... 1.30 %
Ratio of net investment income (loss) to average net assets(b) ...... 1.24 %
Ratio of commissions paid to number of shares ........................ $ 0.0327
Portfolio turnover rate(a) .......................................... 25.58 %
</TABLE>
* SEE NOTES TO FINANCIAL HIGHLIGHTS ON P. 9.
8
<PAGE>
NOTES TO FINANCIAL HIGHLIGHTS
(a) For periods of less than one year the total return and portfolio turnover
rate are not annualized.
(b) For periods of less than one year the ratio of expenses to average net
assets and the ratio of net investment income (loss) to average net assets
are annualized. Without the advisory fee waiver by WRL (the Fund's
Investment Adviser prior to January 1, 1997) the ratio for each period
presented would be as follows:
<TABLE>
<CAPTION>
December 31
---------------------------------------------------
Portfolio
- --------------------------------- 1997 1996 1995 1994
<S> <C> <C> <C> <C>
Money Market .................. * * * *
Bond ........................... * * * *
Growth ........................ * * * *
Global ........................ * * * *
Strategic Total Return ......... * * * *
Emerging Growth ............... * * * *
Aggressive Growth ............... * * * 1,18%
Balanced ........................ * * * 1.34%
Growth & Income ............... * * 1.08% 1.90%
Tactical Asset Allocation ...... * * * *
C.A.S.E. Growth ............... * 1.64% 4.15% **
Global Sector .................. N/A N/A ** **
Value Equity .................. * 1.03% ** **
International Equity ............ % ** ** **
U.S. Equity ..................... % ** ** **
Third Avenue Value ............ ** ** ** **
<CAPTION>
Portfolio
- --------------------------------- 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C>
Money Market .................. * * * * .84% 1.16%
Bond ........................... * * .82 * .82% 1.07%
Growth ........................ * * * * 1.13% 1.49%
Global ........................ * * ** ** ** **
Strategic Total Return ......... 1.12% ** ** ** ** **
Emerging Growth ............... 1.16% ** ** ** ** **
Aggressive Growth ............... ** ** ** ** ** **
Balanced ........................ ** ** ** ** ** **
Growth & Income ............... ** ** ** ** ** **
Tactical Asset Allocation ...... ** ** ** ** ** **
C.A.S.E. Growth ............... ** ** ** ** ** **
Global Sector .................. ** ** ** ** ** **
Value Equity .................. ** ** ** ** ** **
International Equity ............ ** ** ** ** ** **
U.S. Equity ..................... ** ** ** ** ** **
Third Avenue Value ............ ** ** ** ** ** **
</TABLE>
* No waiver--Portfolio did not exceed expense limitations.
** Portfolio was not in existence during this period.
(c) The inception of this Portfolio was December 3, 1992.
(d) The inception of this Portfolio was March 1, 1993.
(e) The inception of this Portfolio was March 1, 1994.
(f) The inception of this Portfolio was January 3, 1995.
(g) The inception of this Portfolio was May 1, 1995.
(h) The inception of this Portfolio was May 1, 1996.
(i) The inception of this Portfolio was January 2, 1997.
PORTFOLIOS AT A GLANCE
The Fund consists of eighteen Portfolios. This Prospectus provides information
on seventeen 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. . 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.
9
<PAGE>
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. .)
SUB-ADVISER: Van Kampen American Capital Asset Management, Inc.
/diamond/ INTERNATIONAL EQUITY PORTFOLIO
OBJECTIVE: Seeks long-term growth of capital.
INVESTMENT POLICY: The International Equity Portfolio invests primarily in the
common stock of foreign issuers traded on overseas exchanges and in foreign
over-the-counter ("OTC") markets.
INVESTOR PROFILE: For the investor who seeks long-term growth of capital
through investments in foreign securities. The investor should also be able to
tolerate the significant risk factors associated with foreign investing.
CO-SUB-ADVISERS: Scottish Equitable Investment Management Limited and GE
Investment Management Incorporated
/diamond/ GLOBAL PORTFOLIO
OBJECTIVE: Seeks long-term growth of capital in a manner consistent with
preservation of capital.
INVESTMENT POLICY: The Global Portfolio invests primarily in common stocks of
foreign and domestic issuers.
INVESTOR PROFILE: For the investor who wants capital growth without being
limited to investments in U.S. securities. The investor should also be able to
tolerate the significant risk factors associated with foreign investing.
SUB-ADVISER: Janus Capital Corporation
/diamond/ GROWTH PORTFOLIO
OBJECTIVE: Seeks growth of capital.
INVESTMENT POLICY: The Growth Portfolio invests primarily in common stocks
listed on a national securities exchange or traded on NASDAQ, which the
Portfolio's Sub-Adviser believes have a good potential for capital growth.
INVESTOR PROFILE: For the investor who wants capital growth in a broadly
diversified stock portfolio, and who can tolerate significant fluctuations in
value.
SUB-ADVISER: Janus Capital Corporation
/diamond/ THIRD AVENUE VALUE PORTFOLIO
OBJECTIVE: Seeks long-term capital appreciation.
INVESTMENT POLICY: The Third Avenue Value Portfolio invests primarily in a
portfolio of equity securities of well-financed companies believed to be priced
below their private market values and debt securities providing strong
protective covenants and high, effective yields.
INVESTOR PROFILE: For the investor willing to hold shares through periods of
market fluctuations and the accompanying changes in share prices. This
Portfolio is not intended for investors seeking short-term price appreciation
or for "market timers."
SUB-ADVISER: EQSF Advisers, Inc.
/diamond/ C.A.S.E. GROWTH PORTFOLIO
OBJECTIVE: Seeks annual growth of capital through investment in companies whose
management, financial resources and fundamentals appear attractive on a scale
measured against each company's present value.
INVESTMENT POLICY: The C.A.S.E. Growth Portfolio will primarily invest in
companies whose securities are traded on a national exchange or in the domestic
OTC markets. Companies are selected based on their perceived qualitative and
quantitative fundamental strengths, on a market relative basis against other
companies in the same industry, sector and against the broad market.
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
10
<PAGE>
/diamond/ VALUE EQUITY PORTFOLIO
OBJECTIVE: Seeks to achieve maximum, consistent total return with minimum risk
to principal.
INVESTMENT POLICY: The Value Equity Portfolio invests primarily in common
stocks with above-average statistical value which, in the Sub-Adviser's
opinion, are in fundamentally attractive industries and are undervalued at the
time of purchase.
INVESTOR PROFILE: For the investor who seeks both capital preservation and
long-term capital appreciation.
SUB-ADVISER: NWQ Investment Management Company, Inc.
/diamond/ GLOBAL SECTOR PORTFOLIO
OBJECTIVE: Seeks growth of capital.
INVESTMENT POLICY: The Global Sector Portfolio follows an asset allocation
strategy that shifts among a wide range of asset categories and within them,
market sectors. The Portfolio will invest primarily in the following asset
categories: equity securities of domestic and foreign issuers, including common
stocks, preferred stocks, convertible securities and warrants; debt securities
of domestic and foreign issuers, including mortgage-related and other
asset-backed securities and securities rated below investment grade; real
estate investment trusts ("REITs"); equity securities of companies involved in
the exploration, mining, processing, or dealing or investing in gold; gold
bullion; and domestic money market instruments.
INVESTOR PROFILE: For the investor who seeks long-term capital appreciation and
protection of buying power who, at the same time, can tolerate an increased
exposure to risk. The Portfolio is geared towards investors willing to
concentrate in industries and countries that offer an opportunity for greater
capital appreciation and are willing to take the additional risks associated
with sector investing and asset rotation.
SUB-ADVISER: Meridian Investment Management Corporation
/diamond/ TACTICAL ASSET ALLOCATION PORTFOLIO
OBJECTIVE: Seeks preservation of capital and competitive investment returns.
INVESTMENT POLICY: The Tactical Asset Allocation Portfolio invests primarily in
stocks, U.S. Treasury bonds, notes and bills, and money market funds.
INVESTOR PROFILE: For the investor who wants a combination of capital growth
and income, and who is comfortable with the risks associated with an actively
traded portfolio which shifts assets between equity and debt.
SUB-ADVISER: Dean Investment Associates
/diamond/ STRATEGIC TOTAL RETURN PORTFOLIO
OBJECTIVE: Seeks to provide current income, long-term growth of income and
capital appreciation.
INVESTMENT POLICY: The Strategic Total Return Portfolio invests primarily in a
blend of equity and fixed-income securities, including common stocks, income
producing securities convertible into common stocks, and fixed-income
securities.
INVESTOR PROFILE: For the investor who wants current income with the prospect
of income growth, plus the prospect of capital growth. The investor should be
comfortable with the price fluctuations of a stock portfolio that invests in
both equity and fixed income securities.
SUB-ADVISER: Luther King Capital Management Corporation
/diamond/ REAL ESTATE SECURITIES PORTFOLIO
OBJECTIVE: Seeks long-term total return from investments primarily in equity
securities of real estate companies. Total return will consist of realized and
unrealized capital gains and losses plus income.
INVESTMENT POLICY: The Real Estate Securities Portfolio, under normal
conditions, invests at least 65% of its total assets primarily in the equity
securities of real estate companies. Equity securities include common stock,
preferred stock and securities convertible into common stock.
INVESTOR PROFILE: For the investor who seeks long-term total return consisting
of current income and, potentially, capital appreciation. The investor should
be comfortable with the risk of a portfolio invested primarily in securities of
real estate companies and their exposure to real estate markets.
SUB ADVISER: J.P. Morgan Investment Management Inc.
/diamond/ GROWTH & INCOME PORTFOLIO
OBJECTIVE: Seeks total return by investing in securities that have defensive
characteristics.
INVESTMENT POLICY: The Growth & Income Portfolio invests primarily in a
diversified portfolio of equity and debt securities with an emphasis on sector
investing.
INVESTOR PROFILE: For the investor who seeks high current income and moderate
capital appreciation and is willing to accept certain special risks associated
with sector investing.
SUB-ADVISER: Federated Investment Counseling
11
<PAGE>
/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.
INVESTMENT POLICY: The Bond Portfolio invests 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.
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 Policyowners 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 direct
Portfolio expenses, and assume that all dividends and capital gains
distributions during the period are reinvested in the Portfolio when made.
The rates of return shown below depict the actual investment experience of each
of the Portfolios for the periods shown. (The Third Avenue Value and the Real
Estate Securities Portfolios had not commenced operations as of December 31,
1997, so performance information is not yet available for these Portfolios.)
THE INFORMATION PROVIDED BELOW SHOWS THE HISTORICAL INVESTMENT EXPERIENCE OF
EACH OF THE PORTFOLIOS. IT DOES NOT REPRESENT PROJECTED FUTURE INVESTMENT
PERFORMANCE.
Also shown are comparable figures for the unmanaged S&P 500 and IBC's Taxable
Money Funds, widely used measures of market performance.
12
<PAGE>
Average Annual Compounded Rates of Return
For the Periods Ended On December 31, 1997
<TABLE>
<CAPTION>
Fund Portfolio Inception 10 Years
- --------------------------- ---------------------- ----------------------
<S> <C> <C>
Aggressive Growth % N/A
Emerging Growth % N/A
International Equity N/A
Global % N/A
Growth % %
C.A.S.E. Growth % N/A
U.S. Equity % N/A
Value Equity % N/A
Global Sector % N/A
Tactical Asset Allocation % N/A
Strategic Total Return % N/A
Growth & Income % N/A
Balanced % N/A
Bond % %
Money Market % %
Third Avenue Value N/A N/A
Real Estate Securities N/A N/A
Standard & Poor's Index
of 500 Common Stocks % %
IBC's Taxable Money Funds %
<CAPTION>
Inception
Fund Portfolio 5 Years 1 Year Date
- --------------------------- -------------------- -------------------- -----------------
<S> <C> <C> <C>
Aggressive Growth N/A % March 1, 1994
Emerging Growth N/A % March 1, 1993
International Equity N/A % January 1, 1997
Global N/A % December 3, 1992
Growth % % October 2, 1986
C.A.S.E. Growth N/A % May 1, 1995
U.S. Equity N/A % January 1, 1997
Value Equity N/A % May 1, 1996
Global Sector N/A % May 1, 1996
Tactical Asset Allocation N/A % January 3, 1995
Strategic Total Return N/A % March 1, 1993
Growth & Income N/A % March 1, 1994
Balanced N/A % March 1, 1994
Bond % % October 2, 1986
Money Market % % October 2, 1986
Third Avenue Value N/A N/A January 2, 1998
Real Estate Securities N/A N/A May 1, 1998
Standard & Poor's Index
of 500 Common Stocks % %
IBC's Taxable Money Funds % %
</TABLE>
/diamond/ YIELD
Yield quotations for the Bond Portfolio refer to the income generated by a
hypothetical investment in the Portfolio over a specified thirty-day period
expressed as a percentage rate of return for that period. The yield is
calculated by dividing the net investment income per share for the period by
the price per share on the last day of that period.
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
Policyowners or to prospective investors, total returns for a Portfolio for
periods in addition to those required to be presented. They may also disclose
other nonstandardized data, such as cumulative total returns, actual
year-by-year returns, or any combination thereof.
/diamond/ PERFORMANCE RANKINGS AND COMPARISONS TO STANDARD INDEXES
Performance of the Portfolios may also be compared to: (1) indexes, such as the
S&P 500, the Dow Jones Industrial Average or other widely recognized indexes;
(2) other mutual funds whose performance is reported by all or any of Lipper
Analytical Services, Inc., ("Lipper"), Variable Annuity Research & Data Service
("VARDS") and Morningstar, Inc. ("Morningstar"), or as reported by other
services, companies, individuals or other industry or financial publications of
general interest, such as Forbes, Money, The Wall Street Journal, Business
Week, Barron's, Kiplinger's Personal Finance and Fortune, which rank and/or
rate mutual funds by overall performance or other criteria; and (3) the
Consumer Price Index. Lipper, VARDS and Morningstar are widely quoted
independent research firms which rank mutual funds according to overall
performance, investment objective, and assets. Unmanaged indexes, such as the
S&P 500, may assume the reinvestment of dividends but usually do not reflect
any "deduction" for the expenses associated with operating and managing a
13
<PAGE>
fund. In connection with a ranking, a Portfolio will also provide information
in sales literature, advertisements, and reports with respect to the ranking,
including the particular category of fund to which it relates, the number of
funds in the category, the period and criteria on which the ranking is based,
and the effect of any fee waivers and/or expense reimbursements.
/diamond/ SUB-ADVISER PERFORMANCE
A Portfolio may disclose in advertisements, supplemental sales literature, and
reports to Policyowners or to prospective investors total returns of an
EXISTING SEC-REGISTERED fund that is managed by the Portfolio's Sub-Adviser and
that has investment objectives, policies, and strategies substantially similar
to those of such Portfolio (a "Similar Sub-Adviser Fund"). ALTHOUGH THE SIMILAR
SUB-ADVISER FUNDS HAVE SUBSTANTIALLY SIMILAR INVESTMENT OBJECTIVES, POLICIES,
AND STRATEGIES AS THE DESIGNATED PORTFOLIO, AND ARE MANAGED BY THE SAME
SUB-ADVISER AS THE DESIGNATED PORTFOLIO, YOU SHOULD NOT ASSUME THAT ANY
PORTFOLIO WILL HAVE THE SAME FUTURE PERFORMANCE AS SIMILAR SUB-ADVISER FUNDS
WHOSE TOTAL RETURNS ARE SHOWN. For example, any Portfolio's future performance
may be greater or less than the historical performance of the corresponding
Similar Sub-Adviser Fund due to, among other things, certain inherent
differences between a Portfolio and the Similar Sub-Adviser Fund.
The table below sets forth certain Portfolios of the Fund and, for each
Portfolio's respective Similar Sub-Adviser Fund, the fund's inception date,
asset size, and the average annual total returns for the one, five and ten year
periods (or life of the Similar Sub-Adviser Fund, if shorter) ended December
31, 1997. These figures are based on the actual investment performance of the
Similar Sub-Adviser Funds. Each Similar Sub-Adviser Fund has higher total
expenses than its corresponding Portfolio of the Fund. The average annual total
returns for the Similar Sub-Adviser Funds are shown with and without the
deductions of any applicable sales load. YOU SHOULD NOTE THAT THE PERFORMANCE
OF THE SIMILAR SUB-ADVISER FUNDS DOES NOT REFLECT THE HISTORICAL PERFORMANCE OF
ANY PORTFOLIOS.
<TABLE>
<CAPTION>
SIMILAR SUB-ADVISER FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURN
(WITH SALES LOADS)
SIMILAR 10 YEARS
SUB-ADVISER INCEPTION TOTAL OR SINCE
PORTFOLIO FUND DATE ASSETS 1 YEAR 5 YEARS INCEPTION
<S> <C> <C> <C> <C> <C> <C>
Global Portfolio Janus Worldwide 5/15/91 5,046,304,293 26.40% 17.45% 19.86%
Aggressive The Alger Fund
Growth Portfolio Capital Appreciation 11/1/93 156,027,971 9.79% N/A 28.50%
Emerging Van Kampen
Growth Portfolio American Capital Class A
Emerging Growth 10/2/70 1,652,300 11.13% 15.21% 16.54%
Third Avenue Third Avenue
Value Portfolio Value Fund 11/1/90 1.68 billion 23.87% 17.97% 22.53%
<FN>
- --------------
(1) The Janus Worldwide Fund does not have a sales load.
(2) Total return reflects a deferred sales load of 5.0% during the first year
and 2.0% during the fifth year.
(3) Total returns are for Class A shares of the Van Kampen American Capital
Emerging Growth Fund and reflect a deduction of a 5.75% front end sales
load. The fund also has Class B and Class C shares with different sales
loads. Calculating total return with those sales loads may have resulted
in lower total returns.
(4) 5 year total return for the Third Avenue Value Fund reflects a sales load
of 5.75% in effect during the fifth year.
</FN>
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
SIMILAR SUB-ADVISER FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURN
(WITHOUT SALES LOADS)
SIMILAR 10 YEARS
SUB-ADVISER INCEPTION TOTAL OR SINCE
PORTFOLIO FUND DATE ASSETS 1 YEAR 5 YEARS INCEPTION
<S> <C> <C> <C> <C> <C> <C>
Global Portfolio Janus Worldwide 5/15/91 5,046,304,293 26.40% 17.45% 19.86%
Aggressive The Alger Fund
Growth Portfolio Capital Appreciation 11/1/93 156,027,971 13.80% N/A 28.90%
Emerging Van Kampen
Growth Portfolio American Capital Class A
Emerging Growth 10/2/70 1,652,300 17.91% 16.58% 17.23%
Third Avenue Third Avenue
Value Portfolio Value Fund 11/1/90 1.68 billion 23.87% 19.36% 22.53%
</TABLE>
THE PERFORMANCE OF SIMILAR SUB-ADVISER FUNDS DOES NOT REFLECT ANY OF THE
CHARGES, FEES, AND EXPENSES IMPOSED UNDER THE POLICIES AND ANNUITY CONTRACTS.
SUCH PERFORMANCE WOULD IN EACH CASE BE LOWER IF IT REFLECTED THESE CHARGES,
FEES AND EXPENSES. SEE THE CONTRACT FORM OR DISCLOSURE DOCUMENT FOR THE POLICY
OR ANNUITY CONTRACT. (THE DISCLOSURE DOCUMENTS FOR THE POLICY OR ANNUITY
CONTRACT DESCRIBE SIMILAR SUB-ADVISER FUNDS AS "OTHER PORTFOLIOS.")
(See the SAI for more information about the Portfolios' performance.)
THE PORTFOLIOS IN DETAIL
This section takes a closer look at each Portfolio's policies and
techniques, and the securities in which the Portfolios invest. PLEASE CAREFULLY
REVIEW THE "OTHER INVESTMENT POLICIES AND RESTRICTIONS" AND "PORTFOLIO
SECURITIES AND RISK FACTORS" SECTIONS OF THIS PROSPECTUS FOR A DESCRIPTION OF
EACH OF THE PORTFOLIO 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 Policyowner 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 Policyowner deemed appropriate at the time of investment. You will be
notified of any such change so that you may determine whether that Portfolio
remains an appropriate investment for your Policy or Annuity Contract. More
information about each Portfolio's investment techniques and restrictions is
set forth in the Fund's SAI, which is available without charge upon request.
PORTFOLIO POLICIES AND TECHNIQUES
/diamond/ AGGRESSIVE GROWTH PORTFOLIO
The Aggressive Growth Portfolio seeks to achieve its investment objective by
investing in a diversified, actively managed portfolio of equity securities,
such as common or preferred stocks, or securities convertible into or
exchangeable for equity securities, including warrants and rights. The
Portfolio may engage in leveraging and options and futures transactions, which
are deemed to be speculative and which may increase fluctuations in the
Portfolio's net asset value.
Except during temporary defensive periods, the Portfolio invests at least 85%
of its net assets in equity securities of companies of any size. The Portfolio
will generally
15
<PAGE>
invest in companies whose securities are traded on domestic stock exchanges or
in the OTC market. These companies may still be in the developmental stage, may
be older companies that appear to be entering a new stage of growth progress
(owing to factors such as management changes or development of new technology,
products or markets), or may be companies providing products or services with a
high unit volume growth rate.
To afford the Portfolio the flexibility to take advantage of new opportunities
for investment in accordance with its investment objective, the Portfolio may
hold up to 15% of its net assets in money market instruments and repurchase
agreements and in excess of that amount (up to 100% of its assets) during
temporary defensive periods. This amount may be higher than that maintained by
other funds with similar investment objectives. The Portfolio will only invest
in convertible debt securities rated in one of the three highest rating
categories by any nationally recognized statistical rating organizations
("NRSRO"). (See Appendix A for further information on such ratings.)
The Portfolio may also borrow money for the purchase of additional securities
(leverage). The Portfolio may borrow only from banks and may not borrow in
excess of one-third of the market value of its assets, less liabilities other
than such borrowing. Funds that leverage through borrowing, which is a
speculative technique, offer an opportunity for greater capital appreciation,
but at the same time increase exposure to capital risk.
The Portfolio may purchase put and call options and sell (write) covered call
and put options on securities and securities indexes to increase gain and to
hedge against the risk of unfavorable price movements, and it may enter into
futures contracts on securities indexes and purchase and sell call and put
options on these futures contracts.
The Portfolio may also invest in short sales; restricted and illiquid (up to
15% of net assets) securities (including those issued under Rule 144A); U.S.
Government securities; foreign bank obligations; variable rate master demand
notes; and repurchase agreements.
/diamonds/
/diamond/ EMERGING GROWTH PORTFOLIO
The Emerging Growth Portfolio seeks to achieve its investment objective by
investing primarily in common stocks of small and medium-sized companies. Under
normal conditions, at least 65% of the Portfolio's total assets will be
invested in common stocks of small and medium-sized companies, both domestic
and foreign, in the early stages of their life cycle, that the Sub-Adviser
believes have the potential to become major enterprises. Investments in such
companies may offer greater opportunities for growth of capital than larger,
more established companies, but also involve certain special risks. Emerging
growth companies often have limited product lines, markets, or financial
resources, and they may be dependent upon one or a few key people for
management. The securities of such companies may be subject to more abrupt or
erratic market movements than securities of larger, more established companies
or the market averages in general.
The Portfolio does not limit its investments to any single group or type of
security. The Portfolio does not intend to invest more than 5% of its net
assets in unseasoned companies or special situations involving new management,
special products and techniques, unusual developments, mergers or liquidations.
Investments in unseasoned companies and special situations often involve much
greater risks than are inherent in ordinary investments, because securities of
such companies may be more than likely to experience unexpected fluctuations in
price.
The Portfolio's primary approach is to seek what the Sub-Adviser believes to be
unusually attractive growth investments on an individual company basis. The
Portfolio may invest in securities that have above average volatility of price
movement. The Portfolio attempts to reduce overall exposure to risk from
declines in securities prices by spreading its investments over many different
companies in a variety of industries.
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
16
<PAGE>
invested. The portion of the Portfolio's assets that is invested in cash
equivalents does not fluctuate with stock market prices, so that, in times of
rising market prices, the Portfolio may underperform the market in proportion
to the amount of cash equivalents in its portfolio. By purchasing stock index
futures contracts, stock index call options, or call options on stock index
futures contracts, however, the Portfolio can "equitize" the cash portion of
its assets and obtain equivalent performance to investing 100% of its assets in
equity securities.
Although the Portfolio's assets will be invested primarily in equity securities
at most times, the Portfolio's assets may be invested up to 100% in U.S.
Government securities, high-grade commercial paper, cash, high-quality money
market instruments, corporate bonds and debentures, preferred stocks or
certificates of deposit of commercial banks, when, in the opinion of the
Sub-Adviser, a temporary defensive position is warranted, or so that the
Portfolio may receive a return on its idle cash.
/diamonds/
/diamond/ INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio seeks to achieve its investment objective by
investing primarily in the common stock of foreign issuers traded on overseas
exchanges and in foreign OTC markets. While the Portfolio will primarily invest
in common stock, the Portfolio may also invest in preferred stocks, convertible
securities, warrants or rights, or fixed-income instruments when the
Co-Sub-Advisers deem appropriate.
Division of daily cash inflows attributable to shares purchased by the Separate
Accounts and periodic rebalancing of portfolio assets managed by each
Co-Sub-Adviser will be made with the objective of keeping equal the total
assets managed by each Co-Sub-Adviser. It is anticipated that each
Co-Sub-Adviser may purchase securities for the Portfolio with its allocation of
daily cash inflows which are different from the securities purchased by the
other Co-Sub-Adviser with its respective allocation. In return, each
Co-Sub-Adviser will receive compensation, paid monthly, equal to 50% of the
investment management fees received by the Investment Adviser with respect to
the amount of Portfolio assets managed by each Co-Sub-Adviser during such
period, and, until at least April 30, 1998, less 50% of the amount of any
excess expenses paid by the Investment Adviser on behalf of the Portfolio
pursuant to an expense limitation (see "Management of the Fund - Investment
Adviser," p. ).
The Portfolio will seek to be invested in a minimum of 50 stocks of issuers
from approximately 15-25 countries, based on (i) the country in which an issuer
is organized; (ii) the country from which an issuer derives at least 50% of its
revenues or profits; or (iii) the principal trading market for the issuer's
securities. Under normal circumstances, the Portfolio will not be invested in
issuers of fewer than twelve countries other than the U.S. at any time. (For
this purpose, ADRs, European Depositary Receipts ("EDRs"), and Global
Depositary Receipts ("GDRs") will be considered to be issued by the issuer of
the securities underlying the receipt.) Typically, the Portfolio will be
invested broadly, not only in the larger stock markets of the United Kingdom,
Continental Europe, Japan and the Far East, but also, to a lesser extent, in
the smaller stock markets of Asia, Europe and Latin America.
At any time, overseas economies may not be moving in the same direction and
will be subject to substantially different fiscal and monetary policies. These
provide situations the Portfolio will aim to exploit. The Portfolio will aim to
add value through both active country allocation and stock selection in
international equity markets.
In selecting investments on behalf of the Portfolio, GE Investment Management
Incorporated ("GEIM") seeks companies that are expected to grow faster than
relevant markets and whose securities are available at a price that does not
fully reflect the potential growth of those companies. GEIM typically focuses
on companies that possess one or more of a variety of characteristics,
including strong earnings growth relative to price-to-earnings and
price-to-cash earnings ratios, low price-to-book value, strong cash flow,
presence in an industry experiencing strong growth and high quality management.
In selecting investments on behalf of the Portfolio, Scottish Equitable
Investment Management Limited ("Scottish Equitable"), seeks initially to
identify countries where economic growth conditions are favorable (through
analysis of gross domestic product growth rates, inflation, interest rates and
other economic factors), and where stock market valuations generally do not
fully reflect growth potential. Scottish Equitable then seeks to identify
within each of the individual markets, companies whose earnings are undervalued
(that is, where future earnings potential is not reflected in the present share
price). Scottish Equitable will utilize measures of value appropriate to local
market conditions, which may include low price earnings ratios, low price to
book value, low price to cash flow ratios, as well as considering such factors
as industry position and management quality.
Under normal circumstances, the Portfolio will seek to invest as described
above, and may for cash management purposes and to meet operating expenses,
invest
17
<PAGE>
a portion of its total assets in cash and/or money market instruments as
described under "Portfolio Securities and Risk Factors" p. , pending
investment in accordance with its investment objective and policies. During
periods when a Co-Sub-Adviser believes there are unstable market, economic,
political or currency conditions abroad, the Portfolio may assume a temporary
defensive posture and (i) restrict the securities markets in which its assets
will be invested and/or invest all or a significant portion of its assets in
securities of the types described above issued by companies incorporated in
and/or having their principal activities in the United States, or (ii) without
limitation, hold cash and/or invest in such money market instruments. To the
extent that it holds cash or invests in money market instruments, the Portfolio
may not achieve its investment objective of long-term growth of capital.
The Portfolio may purchase and sell financial futures contracts, stock index
futures contracts, and foreign currency futures contracts and related options,
forward foreign currency contracts, and interest rate swaps, caps and floors
for hedging purposes only and not for speculation, subject to certain
limitations.
The Portfolio may invest in convertible securities; stock index futures
contracts, including indexes on specific securities, as a hedge against changes
in the market value of common stocks; interest rate future contracts as a hedge
against changes in interest rates; and illiquid securities (up to 15% of net
assets).
/diamonds/
/diamond/ GLOBAL PORTFOLIO
The Global Portfolio seeks to achieve its investment objective by investing in
companies on a worldwide basis, regardless of country of organization or place
of principal business activity, as well as domestic and foreign governments,
government agencies and other governmental entities. Realization of income is
not a significant investment consideration and any income realized on the
Portfolio's investments will, therefore, be incidental to the Portfolio's
objective.
The Portfolio's assets will normally be invested in securities of issuers from
at least five different countries, including the United States. The Portfolio
may, on a temporary basis, invest all of its assets in less than five, or even
a single country. When recommending allocations of the Portfolio's investments
among regions and countries, the Portfolio's Sub-Adviser considers various
factors such as prospects for relative economic growth among countries, regions
or geographic areas; expected levels of inflation; government policies
influencing business conditions; and the outlook for currency relationships.
Although it is the policy of the Portfolio to purchase and hold securities for
long-term capital growth in a manner consistent with preservation of capital,
changes in the Portfolio will generally be made when the Sub-Adviser believes
they are advisable, typically either as a result of a security having reached a
price objective or by reason of developments not foreseen at the time of the
security's purchase.
Because the sale of a security ordinarily will be made without reference to the
length of time the security has been held, a significant number of short-term
transactions may result. The rate of portfolio turnover will not be a limiting
factor when changes are deemed to be appropriate. However, certain tax rules
may restrict the Portfolio's ability to sell securities in some circumstances
when a security has been held for an insufficient length of time. Increased
portfolio turnover necessarily results in correspondingly higher brokerage
costs for the Portfolio. These are ultimately borne by the Policyowners.
The Sub-Adviser seeks to reduce the risks associated with these considerations
through diversification and active professional management.
The Portfolio seeks to invest substantially all of its assets in common stocks
when the Sub-Adviser believes that the relevant market environment favors
profitable investing in equity securities. Common stock investments are
selected from industries and companies that the Sub-Adviser believes are
experiencing favorable demand for their products and services, and which
operate in a favorable competitive environment and regulatory climate.
Although the assets of the Portfolio are ordinarily invested in common stocks
at most times, the Portfolio may increase its cash position (up to 100% of
assets) when the Sub-Adviser is unable to locate investment opportunities with
desirable risk/reward characteristics. The Portfolio may invest in Government
securities, corporate bonds and debentures, bank obligations, high-grade
commercial paper, preferred stocks, certificates of deposits or other
securities of U.S. issuers. These investments will be made when the Sub-Adviser
perceives an opportunity for capital growth from such securities, or to enable
the Portfolio to receive a competitive return on its uninvested cash.
The Portfolio's investments in debt securities will be made in securities of
U.S. and foreign companies, the U.S. Government, foreign governments, and U.S.
and foreign governmental agencies and instrumentalities and other government
entities. The Portfolio may invest up to 15% of its net assets in illiquid
securities.
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The Portfolio may also invest in futures contracts, related options, repurchase
and reverse repurchase agreements, forward foreign currency contracts and other
derivative instruments, up to 5% in high-yield bonds, and when issued
securities (up to 20% of its assets).
/diamonds/
/diamond/ GROWTH PORTFOLIO
The Growth Portfolio seeks to achieve its investment objective by investing
substantially all of its assets in common stocks when the Sub-Adviser believes
that the relevant market environment favors profitable investing in those
securities.
Common stock investments are selected in industries and companies which the
Sub-Adviser believes are experiencing favorable demand for their products and
services, and which operate in a favorable competitive environment and
regulatory climate. The Sub-Adviser's analysis and selection process focuses on
stocks issued by companies with earnings growth potential. In particular, the
Portfolio intends to buy stocks with earnings growth potential that may not be
recognized by the market. Securities are selected solely for their growth
potential; investment income is not a consideration.
Although the Portfolio's assets will be invested primarily in common stocks at
most times, the Portfolio may increase its cash position when the Sub-Adviser
is unable to locate investment opportunities with desirable risk/reward
characteristics. In such case, the Portfolio may invest in Government
securities, high-grade commercial paper, corporate bonds and debentures,
warrants, preferred stocks or certificates of deposit of commercial banks or
other debt securities.
The Portfolio may also invest in repurchase and reverse repurchase agreements,
illiquid securities (up to 15% of its net assets), futures contracts, related
options, forward foreign currency contracts, and other derivatives, and
when-issued securities (up to 20% of its assets). The Portfolio may also invest
up to 25% of its net assets in foreign securities (which may be purchased
through ADRs, EDRs and GDRs, as well as directly) and up to 5% in high-yield
bonds.
/diamonds/
/diamond/ THIRD AVENUE VALUE PORTFOLIO
The Third Avenue Value Portfolio seeks to achieve its objective by following a
value investing philosophy to acquire common stocks of well-financed companies
at a substantial discount to the Sub-Adviser's estimate of the issuing
company's private market value (i.e., take-over value). The Portfolio also
seeks to acquire senior securities, such as preferred stocks and debt
instruments, that have strong covenant protections and above-average current
yields, yields to events, or yields to maturity.
The Sub-Adviser adheres to a strict value discipline when selecting securities
for the Portfolio. Contrary to conventional wisdom, which says that greater
risks are necessary to reap greater rewards, the Sub-Adviser seeks to invest in
a portfolio of securities where the prices at the time of acquisition are low
enough so that the Sub-Adviser can conclude that both the risk is lowered and
appreciation potential is enhanced.
The Sub-Adviser believes that value is created more by past corporate
prosperity than by bear markets. For this reason, the Sub-Adviser conducts
intensive bottom-up research to identify investment opportunities, and ignores
the general stock market and other macro factors.
The Sub-Adviser believes that knowledge gained through intensive research lends
more toward reducing investment risk than does diversification. Thus, the
Portfolio will probably be less diversified than other mutual funds of
comparable size. See "Other Investment Policies and
Restrictions--Diversification and Concentration, p. ."
The Sub-Adviser follows a strategy of "buy and hold." This approach to
achieving growth over the long term means that the Portfolio should experience
low turnover, minimizing transaction costs and tax consequences.
In selecting equity securities, the Sub-Adviser seeks issuing companies that
exhibit (1) a strong financial position, as measured not only by balance sheet
data but also by off-balance sheet assets, liabilities and contigencies (as
disclosed in footnotes to financial statements and as determined through
research of public information); (2) responsible management and control groups,
gauged by management competence as operators and investors as well as by an
apparent absence of intent to profit at the expense of shareholders; (3)
availability of comprehensive and meaningful financial and related information
(a key disclosure being audited financial statements and information which the
Sub-Adviser believes are reliable benchmarks to aid in understanding the
business, its values and its dynamics); and (4) availability of the security at
a market price which the Sub-Adviser believes is at a substantial discount to
the Sub-Adviser's estimate of what the issuer is worth as a private company or
as a take-over, merger or acquisition candidate.
The Portfolio intends its investment in debt securities to be, for the most
part, in securities which the Sub-Adviser
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believes will provide above-average current yields, yields to events, or yields
to maturity. In selecting debt instruments, the Sub-Adviser requires the
following characteristics: (1) strong covenant protection, and (2) yield to
maturity at least 500 basis points above that of a comparable credit.
In acquiring debt securities, the Sub-Adviser generally will look for covenants
which protect holders of the debt issue from possible adverse future events
such as, for example, the addition of new debt senior to the issue under
consideration. Also, the Sub-Adviser will seek to analyze the potential impacts
of possible extraordinary events such as corporate restructurings,
refinancings, or acquisitions. The Sub-Adviser will also use its best judgment
as to the most favorable range of maturities. In general, the Portfolio will
acquire debt issues which have a senior position in an issuer's capitalization
and will avoid "mezzanine" issues such as non-convertible subordinated
debentures.
The Portfolio may invest in loans and other direct debt instruments owed by a
borrower to another party. They represent amounts owed to lenders, lending
syndicates (loans and loan participations) or to other parties. Direct debt
instruments may involve a risk of loss in case of default or insolvency of the
borrower and may offer less legal protection to the Portfolio in the event of
fraud or misrepresentation. In addition, loan participations involve a risk of
insolvency of the lending bank or other financial intermediary. The markets in
loans are not regulated by Federal securities laws or the SEC.
The Sub-Adviser may seek investments in the securities of companies in
industries that are temporarily depressed. The Sub-Adviser also seeks
investments in equity securities of companies where debt service (current
annual required payment of interest and principal to creditors) consumes a
small part of such companies' cash flow.
The Portfolio intends to invest occasionally in the common stock of selected
new issuers. Investments in relatively new issuers, i.e., those having
continuous operating histories of less than three years, may carry special
risks and may be more speculative because such companies are relatively
unseasoned.
The Portfolio may also invest in trade claims. Trade claims are interests in
amounts owed to suppliers of goods or services and are purchased from creditors
of companies in financial difficulty. An investment in trade claims is
speculative and carries a high degree of risk. (See "Portfolio Securities and
Risk Factors--Trade Claims," page 42.)
The Portfolio will not purchase or hold in excess of 35% of its net assets in
high yield debt securities, including those rated below Baa by Moody's
Investors Service, Inc. ("Moody's") and below BBB by Standard & Poor's
Corporation ("S&P") and unrated debt securities. (See "Portfolio Securities and
Risk Factors--Debt Securities and Fixed-Income Investing," page .)
The Portfolio may also invest in foreign securities. The Portfolio's foreign
securities investments will have characteristics similar to those of domestic
securities selected for the Portfolio. The Portfolio intends to limit its
investments in foreign securities to companies issuing U.S. dollar-denominated
ADRs or who otherwise comply with SEC disclosure requirements. By limiting its
investments in this manner, the Portfolio seeks to avoid investing in
securities where there is no compliance with SEC requirements to provide public
financial information, or when such information is unreliable as a basis for
analysis.
Foreign securities markets generally are not as developed or efficient as those
in the United States. Securities of some foreign issuers are less liquid and
more volatile than securities of comparable U.S. issuers. The Portfolio will be
subject to additional risks which include: possible adverse political and
economic developments, seizure or nationalization of foreign deposits and
adoption of governmental restrictions that may adversely affect the payment of
principal and interest on the foreign securities or currency blockage that
would restrict such payments from being brought back to the United States.
Because foreign securities often are purchased with and payable in foreign
currencies, the value of these assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in currency rates and exchange
control regulations.
The Portfolio may, from time to time, engage in foreign currency transactions
in order to hedge the value of its respective portfolio holdings denominated in
foreign currencies against fluctuations in foreign currency prices versus the
U.S. dollar. These transactions include forward currency contracts, exchange
listed and OTC options on currencies, currency swaps and other swaps
incorporating currency hedges.
The notional amount of a currency hedged by the Portfolio will be closely
related to the aggregate market value (at the time of making such purchase) of
the securities held and reasonably expected to be held in its portfolio
denominated or quoted in or currently convertible into that particular currency
or a closely related currency. If the Portfolio enters into a hedging
transaction in which the Portfolio is obligated to make further payments, its
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custodian will segregate cash or readily marketable securities having a value
at all times at least equal to the Portfolio's total commitments.
The Portfolio may also invest in mortgage-backed securities and derivative
mortgage-backed securities, including "principal only", but not "interest
only", components; asset-backed securities; floating rate, inverse floating
rate and index obligations; repurchase agreements; restricted and illiquid
securities (up to 15% of the Portfolio's net assets); and other investment
companies.
When, in the judgment of the Sub-Adviser, a temporary defensive posture is
appropriate, the Portfolio may hold all or a portion of its assets in
short-term U.S. Government obligations, cash or cash equivalents. The adoption
of a temporary defensive posture does not constitute a change in the
Portfolio's investment objective.
/diamonds/
/diamond/ C.A.S.E. GROWTH PORTFOLIO
The C.A.S.E. Growth Portfolio seeks to achieve its investment objective through
investments in common, preferred and convertible stocks of firms that the Sub-
Adviser believes exhibit below market risk characteristics supported by below
market multiples on a leading, lagging and ten-year basis, and are perceived to
have above average fundamentals including return on equity, price to earnings
ratio and other balance sheet components to obtain long-term capital growth.
The Sub-Adviser applies its proprietary forms of research to such companies
which it believes exhibit superior products, above average growth rates along
with sound management and financials. Each company selected in the Portfolio is
monitored against more than two dozen disciplines, on a market and comparative
basis, including insider's activity, market style leadership, earnings
surprise, analyst's change in earnings protection, return on equity, five-year
earnings per share growth, price earnings ratio, price-to-book, price to cash
flow, institutional activity and holdings, stock price changes, price to 200
day moving average, price to historical rising inflation, price to declining
U.S. dollar and earnings projected change. The Sub-Adviser believes that above
average performance is as much a condition of eliminating bad situations as it
is discovering good ones. Securities are sold when companies appear overvalued
or lose the fundamentals necessary for future confidence as determined by the
Sub-Adviser of the Portfolio.
Although it is the policy of the Portfolio to purchase and hold securities for
long-term capital growth, changes in the Portfolio will generally be made
whenever the Sub-Adviser believes they are advisable. Because investment
changes ordinarily will be made without reference to the length of time a
security has been held, a significant number of short-term transactions may
result. The rate of portfolio turnover will not be a limiting factor when
changes are deemed to be appropriate. However, certain tax rules may restrict
the Portfolio's ability to sell securities in some circumstances when the
security has been held for an insufficient length of time.
Although the assets of the Portfolio are ordinarily invested in common stocks
at most times, the Portfolio may increase its cash position when the
Sub-Adviser is unable to locate investment opportunities with desirable
risk/reward characteristics. The Portfolio may invest in government securities,
corporate bonds and debentures, high-grade commercial paper, preferred stocks,
certificates of deposit or other securities of U.S. issuers when the
Sub-Adviser perceives an opportunity for capital growth from such securities,
or so that the Portfolio may receive a competitive return on its uninvested
cash.
The Portfolio's investments in debt securities will be made in securities of
U.S. and foreign companies, the U.S. Government, foreign governments, and U.S.
and foreign governmental agencies and instrumentalities and other governmental
entities. The Portfolio does not presently intend to invest more than 5% of its
assets in debt securities rated less than investment grade.
Subject to certain limitations, the Portfolio may engage in hedging strategies
involving futures contracts and related options, forward currency contracts,
and interest rate swaps, caps and floors.
The Portfolio may engage in hedging strategies to attempt to reduce the overall
length of investment risk that normally would be expected to be associated with
the Portfolio's securities, and to attempt to protect the Portfolio against
market movements that might adversely affect the value of the Portfolio's
securities or the price of securities that the Portfolio is considering
purchasing. There can be no assurance, however, that the use of these
instruments by the Portfolio will assist it in achieving its investment
objective.
The Portfolio may invest in repurchase and reverse repurchase agreements,
illiquid securities (up to 15% of its net assets), when-issued securities and
"special situations." (The Portfolio does not intend to invest more than 20% of
its assets in when-issued securities.)
The Portfolio may invest up to 25% of its net assets in the securities of
foreign issuers and obligors. Investments may be made in both domestic and
foreign companies. If appropriate and available, the Sub-Adviser may purchase
foreign securities through ADRs, EDRs,
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GDRs and other types of receipts of shares evidencing ownership of the
underlying foreign securities.
/diamonds/
/diamond/ U.S. EQUITY PORTFOLIO
The U.S. Equity Portfolio seeks to achieve its investment objective through
investment primarily in equity securities of U.S. companies. In pursuing its
objective, the Portfolio, under normal conditions, invests at least 65% of its
assets in equity securities, including common stocks and preferred stocks, and
securities convertible into common stocks, including convertible bonds,
convertible debentures, convertible notes, convertible preferred stocks and
warrants or rights issued by U.S. companies. In managing the assets of the
Portfolio, the Sub-Adviser uses a combination of "value-oriented" and
"growth-oriented" investing. Value-oriented investing involves seeking
securities that may have low price-to-earnings ratios, or high yields, or that
sell for less than intrinsic value as determined by the Sub-Adviser, or that
appear attractive on a dividend discount model. These securities generally are
sold from the Portfolio's portfolio when their prices approach targeted levels.
Growth-oriented investing generally involves buying securities with above
average earnings growth rates at reasonable prices. The Portfolio holds these
securities until the Sub-Adviser determines that their growth prospects
diminish or that they have become overvalued when compared with alternative
investments.
In investing on behalf of the Portfolio, the Sub-Adviser seeks to produce a
portfolio that it believes will have similar characteristics to the S&P 500, by
virtue of blending investments in both "value" and "growth" securities. Since
the Portfolio's strategy seeks to combine the basic elements of companies
comprising the S&P 500, but is designed to select investments deemed to be the
most attractive within each category, the Sub-Adviser believes that the
strategy should be capable of outperforming the U.S. equity market as reflected
by the S&P 500 on a total return basis.
The equity securities issued by U.S. companies in which the Portfolio invests
typically are traded on U.S. securities exchanges; those U.S. equity securities
held by the Portfolio that are not exchange-traded are non-publicly traded or
traded in the U.S. OTC market. Up to 15% of the Portfolio's assets may be
invested in foreign securities.
The Portfolio also may invest in certain equity-indexed securities and
securities of foreign issuers in the form of depositary receipts.
The Portfolio may, under normal market conditions, invest up to 35% of its
assets in notes, bonds and debentures issued by corporate or governmental
entities when the Sub-Adviser determines that investing in these kinds of debt
securities is consistent with the Portfolio's investment objective of long-term
growth of capital. The Sub-Adviser believes that such a determination could be
made, for example, upon the Portfolio's investing in the debt securities of a
company whose securities the Sub-Adviser anticipates will increase in value as
a result of a development particularly or uniquely applicable to the company,
such as a liquidation, reorganization, recapitalization or merger, material
litigation, technological breakthrough or new management or management
policies. In addition, the Sub-Adviser believes such a determination could be
made with respect to an investment by the Portfolio in debt instruments issued
by a governmental entity upon the Sub-Adviser's concluding that the value of
the instruments will increase as a result of improvements or changes in public
finances, monetary policies, external accounts, financial markets, exchange
rate policies or labor conditions of the country in which the governmental
entity is located.
During normal market conditions, a portion of the Portfolio's total assets may
be held in cash and/or invested in money market instruments of the types
described on p. 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.)
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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.
/diamonds/
/diamond/ VALUE EQUITY PORTFOLIO
The Value Equity Portfolio seeks to achieve its investment objective by
investing its assets in common stocks with above-average statistical value
which the Sub-Adviser believes are in fundamentally attractive industries and
are undervalued at the time of purchase. The Sub-Adviser will seek to identify
stocks of above-average statistical value by using statistical measures to
screen for below-average price-to earnings and price-to-book value ratios,
above-average dividend yields and strong financial stability.
The Sub-Adviser will begin the process of evaluating potential common stock and
equity-related securities investments by screening a universe of 1,100
companies, primarily of medium to large capitalization. For these purposes, the
Sub-Adviser considers medium capitalization stocks to be stocks issued by
companies with market capitalization of between $500 million and $3 billion,
and large capitalization stocks to be those stocks issued by companies with
market capitalization in excess of $3 billion. Investments in companies with
market capitalization under $500 million will be limited to 10% of the
Portfolio's total assets.
The process used by the Sub-Adviser to identify promising, under-valued
companies within this universe of companies may be different from those of
other value-oriented investment managers in the following ways: the use of
earnings averaged over both strong and weak periods to value cyclical
companies; a focus on quality of earnings; investment in relative value; and
concentration in industries/sectors having strong long-term fundamentals.
As a part of multi-disciplined approach to capturing value, the Sub-Adviser
first seeks to identify market sectors early in their cycle of fundamental
improvement, investor recognition and market exploitation. Industry
fundamentals used in this decision making process are business trend analysis
(to analyze industry and company fundamentals for the impact of changing
worldwide product demand/supply), direction of inflation and interest rates,
and expansion/contraction of business cycles. The Sub-Adviser utilizes in-house
capabilities, in addition to independent resources, for economic, industry and
securities research.
Following this initial phase, approximately 200 companies that the Sub-Adviser
believes have above-average statistical value and are in a sector identified as
having positive fundamentals on a long-term basis will be actively followed.
Company visits and interviews with management augment fundamental research in
seeking to identify the potential value in these investments. The Portfolio
will seek to be concentrated in those industries with positive fundamentals and
likewise will seek to minimize risk by avoiding industries with deteriorating
long-term fundamentals.
The Sub-Adviser anticipates that the majority of the investments in the
Portfolio will be in U.S.-based companies. However, from time to time,
securities of foreign based companies may be purchased, in accordance with the
selection process outlined above. The Portfolio presently intends to limit its
investment in foreign securities and ADRs to up to 25% of its total assets.
In seeking to meet its investment objective, the Portfolio may invest in any
type of security whose investment characteristics are consistent with the
Portfolio's investment policies and techniques. Some of the other securities
the Portfolio may invest in are repurchase agreements (up to 25% of its total
assets); certificates of deposit and certain bankers' acceptance and other
securities; when-issued, delayed settlement or forward delivery securities;
short-term investments; illiquid securities (up to 15% of its net assets) and
Rule 144A securities; and non-investment grade convertible bonds and preferred
stock (up to 10% of its assets).
/diamonds/
/diamond/ GLOBAL SECTOR PORTFOLIO
The Global Sector Portfolio seeks to achieve its investment objective by
following an asset allocation strategy
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that shifts among a wide range of asset categories and within them, market
sectors. The Portfolio will invest in the following asset categories: equity
securities of domestic and foreign issuers, including common stocks, preferred
stocks, convertible securities and warrants; debt securities of domestic and
foreign issuers, including mortgage-related and other asset-backed securities
and securities rated below investment grade; exchange-traded or OTC REITs;
equity securities of companies involved in the exploration, mining, processing,
or dealing or investing in gold ("gold stocks"); gold bullion; and domestic
money market instruments. The Sub-Adviser determines the allocation of the
Portfolio's assets among the asset categories described above, based on
proprietary quantitative research.
The Portfolio is not required to maintain a portion of its assets in each of
the permitted asset categories. The Portfolio, however, under normal
circumstances, will maintain a minimum of 20% of its total assets in equity
securities and 10% in debt securities. The Portfolio may, however, invest up to
100% of its total assets in equity securities and up to 70% in debt securities.
For temporary defensive purposes, during times of unusual market conditions,
the Portfolio may invest 100% of its assets in short-term securities. (See the
SAI for a detailed description of these instruments.)
The Portfolio will not invest more than 20% of its total assets in gold stocks.
The Portfolio will not invest more than 25% of its total assets in the
securities of any single country, other than the U.S. Under normal
circumstances, the Portfolio will invest at least 65% of its total assets in
securities of issuers domiciled in at least three countries, one of which may
be the U.S., although the Sub-Adviser expects the Portfolio's investments to be
allocated among a larger number of countries. The percentage of the Portfolio's
assets invested in securities of U.S. issuers normally will be higher than that
invested in securities of issuers domiciled in any other single country.
However, it is possible that at times the Portfolio may have 65% or more (but
not more than 80%) of its total assets invested in foreign securities.
Market sectors within the asset categories include the industry, country or
bond markets available for investment.
The Portfolio's investment in stocks, bonds and cash securities may vary from
time to time, depending upon the Sub-Adviser's assessment of business, economic
and market conditions. If the Sub-Adviser's assessment determines these
conditions to be abnormal, the Portfolio may depart from its basic investment
objective and assume a temporary defensive position, with up to 100% of its
assets invested in U.S. Government and agency securities, investment grade
corporate bonds or cash securities such as domestic certificates of deposit and
bankers' acceptances, repurchase agreements and commercial paper. (See the SAI
for a description of these securities.)
The Portfolio reserves the right to hold equity, debt and cash securities, in
whatever proportion is deemed desirable, at any time for defensive purposes.
While the Portfolio is in a defensive position, the opportunity to achieve
capital growth will be limited; however, the ability to maintain a defensive
position enables the Portfolio to seek to avoid capital losses during market
downturns. Under normal market conditions, the Portfolio does not expect to
have a substantial portion of its assets invested in cash securities.
In selecting equity securities (common stocks and, to a lesser degree,
preferred stocks and securities convertible into common stocks, such as rights,
warrants and convertible debt securities) in which the Portfolio invests, the
Sub-Adviser attempts to identify companies that have demonstrated or, in the
Sub-Adviser's opinion, are likely to demonstrate in the future, strong earnings
growth relative to other companies in the same industry or country. The
dividend payment records of companies are also considered. Equity securities
may be issued by either established, well-capitalized companies or
newly-formed, small-cap companies, and may trade on regional or national stock
exchanges or in the OTC market.
Most of the debt securities (corporate bonds, commercial paper, debt securities
issued by the U.S. Government, its agencies and instrumentalities, or foreign
governments, asset-backed securities and zero coupon bonds) in which the
Portfolio may invest must be rated in the four highest grades as determined by
Moody's or S&P. However, the Portfolio may also invest up to 15% of its total
assets in debt securities rated below these four levels (commonly referred to
as "junk bonds"). In no event will the Portfolio ever invest in a debt security
rated below Caa by Moody's or CCC by S&P. (See Appendix A for a description of
debt securities ratings.)
In order to hedge its portfolio, the Portfolio may purchase and write options
on securities (including index options and options on foreign securities), and
may invest in futures contracts for the purchase or sale of debt securities and
instruments based on financial indexes (collectively, "futures contracts"),
options on futures contracts and interest rate swaps and swap-related products.
As a hedge against fluctuations in foreign exchange rates, pending the
settlement of transactions in foreign securities or during the time the
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Portfolio holds foreign securities, the Portfolio may enter into forward
foreign currency contracts.
Investments made by the Portfolio in short-term securities may include
repurchase agreements. The Portfolio may enter into repurchase agreements with
respect to debt instruments eligible for investment by the Portfolio.
/diamond/ TACTICAL ASSET ALLOCATION PORTFOLIO
The Tactical Asset Allocation Portfolio seeks to achieve its investment
objective by investing primarily in stocks, U.S. Treasury bonds, notes and
bills, and money market funds. The Portfolio will seek to achieve income yield
in excess of the dividend income yield of the S&P 500. The Portfolio seeks to
invest its assets primarily in income producing common or preferred stock,
while the remainder of the Portfolio will ordinarily be invested in debt
obligations, typically some of which will be convertible into common stock.
The principles by which the Sub-Adviser makes its stock selection are based on
value investing - combining safety of principal with above average returns. A
company is attractive if it is reasonably priced and the Sub-Adviser believes
it will perform better than the current expectations for earning/cash flow over
the next several years.
The Sub-Adviser's focus is on primarily high quality, liquid, large
capitalization stocks. The selection process starts with a "bottom-up"
screening of the market to identify stocks that are statistically undervalued,
based on financial characteristics such as Price to Cash Flow, Price to Sales,
Price to Earnings, Dividend Yield, and Return on Equity relative to the stock's
historical norms.
The Sub-Adviser believes that investors' expectations and the company's
operating performance ultimately determine which statistically "undervalued"
stocks make good investments. Finally, undervalued stocks, by definition, are
out of favor with most investors. Therefore, the analysis of the Sub-Adviser
includes a thorough fundamental and technical evaluation of stocks to determine
their likely prospects for positive investment performance. The Sub-Adviser's
goal is to choose stocks which the market has undervalued based on
"overreaction" to perceived risks.
A stock's fundamentals dominate the selection process. However, technical
analysis is used to improve the timeliness of the Sub-Adviser's trading
decisions.
The Sub-Adviser utilizes a series of linear statistical models that attempt to
forecast total stock market returns for both short (12 to 18 months) and long
(36 to 60 months) run time periods. These time series models assist the
Sub-Adviser in comparing the risks and rewards of holding stocks versus
treasury notes and money market funds, and assist the Sub-Adviser in
determining when to "tactically" adjust the asset allocation through a gradual
shifting of assets among stocks, U.S. Treasury bonds and notes, and money
market funds. A combination of fundamental, technical, subjective and monetary
variables are used in the forecasting models.
The Portfolio may invest up to 25% of its total assets in equity securities of
foreign issuers. It is anticipated that most of the Portfolio's investments in
securities of foreign issuers will be ADRs. The Portfolio may also invest in
American Depositary Shares ("ADSs").
The Portfolio may also invest in U.S. Government securities, corporate bonds
and debentures, high-grade commercial paper (rated Prime-1 by Moody's or A-1 by
S&P), preferred stocks, certificates of deposit or other securities of U.S.
issuers when the Sub-Adviser perceives attractive opportunities from such
securities, or so that the Portfolio may receive a competitive return on its
uninvested cash. The Portfolio may only invest in debt securities of U.S.
issuers. Corporate debt securities in which the Portfolio may invest will have
a rating within the four highest grades as determined by Moody's or S&P. In the
event that ratings decline after the Portfolio's investment in securities, the
Sub-Adviser will consider all such factors as it deems relevant to the
advisability of retaining such securities. (See Appendix A for a description of
debt securities ratings.)
The Portfolio may invest up to 10% of its total assets in money market funds,
within limits imposed by the 1940 Act upon investment by the Portfolio in other
investment companies. If the forecasting models predict a decline in the stock
market, the Sub-Adviser will reduce equity exposure which will increase the
Portfolio's cash position, including investment in money market funds.
The Portfolio may also invest in zero coupon bonds, "strips" and convertible
securities.
/diamonds/
/diamond/ STRATEGIC TOTAL RETURN PORTFOLIO
The Strategic Total Return Portfolio seeks to achieve its investment objective
by investing primarily in a blend of equity and fixed-income securities,
including common stocks, income producing securities convertible into common
stocks, and fixed-income securities. The Portfolio will primarily invest in
equity and debt securities of companies with established operating histories
and strong fundamental characteristics. The Portfolio seeks to achieve an
income yield in excess of the dividend
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income yield of the S&P 500 primarily by utilizing both equity and fixed-income
securities. It is anticipated that approximately 25% of the Portfolio's assets
will be invested in fixed-income securities, some of which may be convertible
into common stocks.
In selecting equity and fixed-income securities for the Portfolio, the
Sub-Adviser typically seeks companies which exhibit strong fundamental
characteristics and considers fundamental factors such as cash flow generation,
earnings and dividend growth record and outlook, balance sheet quality, and
profitability levels. However, the Sub-Adviser may select securities based on
factors other than those described above.
For example, some securities may be purchased at an apparent discount to their
appropriate value, anticipating that they will increase to that value over
time. The Sub-Adviser's objective in investing in such undervalued companies is
to purchase shares of these companies at a discount to net asset value and have
the investment accrue to that value over time. The Portfolio does not presently
intend to invest more than 20% of its total assets in equity securities which
do not pay a dividend. It is anticipated that a majority of the equity
securities in which the Portfolio invests will be listed on a national
securities exchange or traded on NASDAQ or in the U.S. OTCs.
The Portfolio may increase its cash position when the Sub-Adviser determines
that investment opportunities with desirable risk/reward characteristics are
unavailable.
The Portfolio may invest up to 10% of its total assets in foreign securities
not publicly traded in the United States. In addition, the Portfolio may invest
in ADRs.
The Portfolio may also invest in U.S. and foreign government securities,
corporate bonds and debentures, high-grade commercial paper (rated Prime-1 by
Moody's or A-1 by S&P), preferred stocks, certificates of deposit or other
securities of U.S. issuers when the Sub-Adviser perceives attractive
opportunities from such securities, or so that the Portfolio may receive a
competitive return on its uninvested cash. The Portfolio may invest in debt
securities of U.S. and foreign issuers. The Portfolio may invest up to 15% of
its net assets in illiquid securities.
Corporate debt securities in which the Portfolio invests will generally have a
rating within the four highest grades as determined by Moody's or S&P. (See
Appendix A for a description of debt securities ratings.)
/diamonds/
/diamond/ REAL ESTATE SECURITIES PORTFOLIO
The Real Estate Securities Portfolio seeks to achieve its investment objective
by investing primarily in the equity securities of real estate companies.
Equity securities include common stock, preferred stock and securities
convertible into common stock.
The Portfolio, under normal conditions, will invest at least 65% of its total
assets in the equity securities of real estate companies and may invest the
balance of its total assets in other securities. Other securities include,
among others, debt obligations and equity securities of companies that are not
real estate companies.
A company is considered to be a real estate company if at least 50% of its
revenues or at least 50% of the market value of its assets is attributable to
the ownership, construction, management or sale of residential, commercial or
industrial real estate. Real estate companies may include, but are not limited
to, equity real estate investment trusts, mortgage real estate investment
trusts, hybrid real estate investment trusts, real estate master limited
partnerships, real estate brokers and developers and real estate operating
companies. (See "Portfolio Securities and Risk Factors - Investments in the
Real Estate Industry and Real Estate Investment Trusts ("REITs")," p. .)
The Portfolio seeks to achieve a high total return primarily through stock
selection. The Sub-Adviser creates a target universe of real estate companies,
primarily consisting of companies contained in the National Association of Real
Estate Investment Trusts (NAREIT) Equity without Healthcare Index. Based on
internal fundamental equity and real estate research, and using a dividend
discount model, the Sub-Adviser ranks these companies within four broad sectors
of the real estate industry from relatively undervalued to overvalued. From
this target universe, the Sub-Adviser selects stocks for the Portfolio based on
a variety of criteria including managerial strength, geographical
diversification, prospects for growth and the company's competitive position.
Generally, the most undervalued 60% of the companies in the universe are
overweighted and the balance are underweighted relative to their respective
index capitalizations. As companies held in the Portfolio become relatively
overvalued, they become candidates for sale.
The Sub-Adviser uses a disciplined portfolio construction process seeking to
enhance returns and reduce volatility
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in the market value of the Portfolio relative to the NAREIT Equity without
Healthcare Index. The Sub-Adviser believes that under normal market conditions
the Portfolio will have sector weightings comparable to those of the NAREIT
Equity without Healthcare Index, although modest over- and underweightings may
occur based on the relative pricing of companies in the target universe.
The Portfolio may invest in debt securities to seek to enhance total return and
for temporary defensive purposes. Debt securities in which the Portfolio may
invest include, but are not limited to, debt securities of real estate and
non-real estate companies; mortgage-backed securities such as mortgage pass
through certificates, real estate mortgage investment conduit ("REMIC")
certificates, and collateralized mortgage obligations ("CMOs"); or short-term
debt investments.
Generally, debt securities in which the Portfolio may invest are investment
grade securities. These are securities rated Baa or better by Moody's, or BBB or
better by Standard and Poor's Ratings Group, or that are unrated but deemed to
be of comparable quality by the Sub-Adviser. The Portfolio may also invest up to
10% of its total assets in debt securities rated below investment grade. Such
securities are commonly referred to as "junk bonds." These standards must be
satisfied at the time an investment is made. In the event that ratings of
securities decline after the Portfolio's investment in such securities, the
Sub-Adviser will consider all factors it deems relevant to the advisibility of
retaining such securities. In no event will the Portfolio ever invest in a debt
securitiy rated below B by Moody's or by S&P. (See Appendix A for a description
of debt securities ratings.)
The Portfolio may purchase money market investments to invest temporary cash
balances or maintain liquidity to meet withdrawals. In addition, when the
Sub-Adviser judges that a temporary defensive posture is appropriate, the
Portfolio may hold all or a portion of its assets in money market instruments.
As a rule, the Sub-Adviser does not attempt to time the market and as a result,
portfolio cash will generally be below 5% of total portfolio value.
The Portfolio may invest up to 25% of its assets in foreign real estate
companies. The Portfolio may also purchase certain privately placed securities,
enter into repurchase and reverse repurchase agreements, purchase securities on
a when issued or delayed delivery basis, lend its securities and enter into
forward foreign currency exchange contracts. In addition, the Portfolio may use
options on securities and securities indexes, futures contracts and options on
futures contracts. (See "Portfolio Securities and Risk Factors" p. for more
information on these investments and investment techniques.)
The Portfolio is non-diversifed under the Federal securities laws. As a
non-diversified investment company the Portfolio may invest in a smaller number
of individual issuers than a diversified company. To the extent that the
Portfolio is invested in a smaller number of issuers, it will be more
susceptible to events affecting those issuers than it would be if it were more
broadly diversified.
/diamonds/
/diamond/ GROWTH & INCOME PORTFOLIO
The Growth & Income Portfolio seeks to achieve its investment objective by
investing its assets in a diversified portfolio of equity and debt securities
with an emphasis on sector investing. Industry sectors in which the Portfolio
may invest include, but are not limited to, utilities, financial services, real
estate investment trusts, health care, natural resources and energy sectors.
The Portfolio's investment approach is based on the conviction that over the
long-term, the economy will continue to expand and develop and that this
economic growth will be reflected in the growth of the revenues and earnings of
such companies. Sectors which have had historical emphasis in defensive
characteristics are selected for investment.
The Portfolio's stock selection emphasizes those common stocks in each sector
that have good value, attractive yield or dividend growth potential. The common
stocks are selected by the Portfolio's Sub-Adviser on the basis of traditional
research techniques, including assessment of earnings and dividend growth
prospects and of the risk and volatility of the company's industry. However,
other factors, such as product position, market share, or profitability will
also be considered by the Sub-Adviser. While the Portfolio invests primarily in
common stocks, it may invest in other securities such as convertible
securities, preferred stocks, U.S. Government securities, money market
instruments, corporate bonds, notes and warrants.
The Portfolio may invest in the securities of foreign issuers which are freely
traded on U.S. securities exchanges or in the OTC market in the form of ADRs,
as well as securities of foreign issuers that trade on foreign stock exchanges.
The Portfolio will limit its investment in foreign securities not publicly
traded on recognized exchanges to 15% of its total assets.
The Portfolio may invest in restricted and illiquid securities. Restricted
securities are any securities in which the
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Portfolio may otherwise invest pursuant to its investment objective and
policies, but which are subject to restriction on resale under federal
securities law. To the extent restricted securities are deemed to be illiquid,
the Portfolio will limit their purchase, including non-negotiable time
deposits, repurchase agreements providing for settlement in more than seven
days after notice, and certain restricted securities determined by the Fund's
Board not be be liquid, up to 15% of its net assets.
The Portfolio may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the 1933 Act.
The Portfolio may invest in convertible securities. Convertible securities are
fixed income securities which may be exchanged or converted into a
predetermined number of the issuer's underlying common stock at the option of
the holder during a specified time period.
The Portfolio may invest temporarily in cash, cash items, and short-term
instruments, including notes and commercial paper, for liquidity and during
times of unusual market conditions for defensive purposes (up to 100% of its
assets).
The Portfolio may purchase securities on a when-issued or delayed delivery
basis. The Portfolio will limit purchases of securities on a when-issued or
delayed delivery basis to no more than 10% of the value of its total assets.
The Portfolio may purchase put options on its portfolio securities. These
options will be used as a hedge to attempt to protect securities which the
Portfolio holds against decreases in value. The Portfolio will only purchase
puts which are traded on a recognized exchange.
The Portfolio may also write call options on all or any portion of its
portfolio to generate income for the Portfolio. The Portfolio will write call
options on securities either held in its portfolio or for which it has the
right to obtain without payment of further consideration or for which it has
segregated cash in the amount of any additional consideration. The call options
which the Portfolio writes must be listed on a recognized options exchange.
Although the Portfolio reserves the right to write covered call options on its
entire portfolio, it will not write such options on more than 25% of its total
assets unless a higher limit is authorized by the Fund's Board.
The Portfolio may purchase and sell financial futures contracts to hedge all or
a portion of its portfolio of long- term debt securities against changes in
interest rates.
The Portfolio may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. The Portfolio may not purchase or sell futures or
related options if, immediately thereafter, the sum of the amount of margin
deposits on the Portfolio's existing futures positions and premiums paid for
related options would exceed 5% of the market value of the Portfolio's total
assets.
/diamonds/
/diamond/ BALANCED PORTFOLIO
The Balanced Portfolio seeks to achieve its investment objective by investing
primarily in common stock, convertible securities and fixed-income securities.
The Portfolio may also invest in preferred stocks and interests in REITs. A
minimum of 25% of the Portfolio's assets will always be invested in
non-convertible fixed-income securities.
In seeking current income and growth opportunities, the Portfolio will
primarily select companies with established operating histories and potential
for dividend growth. The Portfolio will seek to achieve income yield in excess
of the dividend income yield of the S&P 500.
The Portfolio does not presently intend to invest more than 20% of its total
assets in equity securities which do not pay a dividend. It is anticipated that
almost all of the equity securities in which the Portfolio invests will be
listed on a national securities exchange or on NASDAQ or will be traded in the
U.S. OTC markets.
The Portfolio seeks to invest its assets primarily in income-producing common
or preferred stock when the Sub-Adviser believes that the relevant market
environment favors profitable investing in those securities.
In selecting equity securities and securities convertible into equity
securities for the Portfolio, the Sub-Adviser typically seeks companies which
exhibit strong fundamental characteristics such as balance sheet quality, cash
flow generation, earnings and dividend growth record and outlook, and
profitability levels. The Sub-Adviser presently intends to consider these and
other fundamental characteristics in determining attractive investment
opportunities. However, the Sub-Adviser may select securities based on factors
other than those described above.
The remainder of the Portfolio will ordinarily be invested in debt obligations,
typically some of which will be convertible into common stock. However, the
Portfolio may increase its cash position when the Sub-Adviser determines that
investment opportunities with desirable risk/ reward characteristics are
unavailable.
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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.
/diamonds/
/diamond/ BOND PORTFOLIO
The Bond Portfolio seeks to achieve its investment objective by investing at
least 65%, and usually a higher percentage, of its assets in debt securities
issued by the U.S. Government and its agencies and instrumentalities and in
other medium to high-quality debt securities.
Generally, the Portfolio will invest in debt securities that have a rating
within the three highest grades as determined by Moody's or S&P. The Portfolio
may, however, invest in debt securities within the fourth highest grade as
determined by Moody's or S&P, if the Sub-Adviser determines such investments
meet the Portfolio's investment objective. (See Appendix A for a description of
debt securities ratings.)
An increase in interest rates tends to reduce the market value of fixed income
investments, and a decline in interest rates tends to increase their value. The
Portfolio's performance is, accordingly, quite sensitive to market interest
rate fluctuations. To take advantage of differences in securities prices and
yields, or fluctuations in interest rates, consistent with its investment
objective, the Portfolio may trade for short-term profits.
The Portfolio may invest in debt securities of all types, e.g., bonds,
debentures, notes, trust preferreds 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,
taxable municipal bonds, bond warrants, obligations issued or guaranteed by
supranational issuers or collateralized mortgage obligations ("CMOs"). The
Portfolio may also invest in commercial paper (rated at least Prime-2 by
Moody's or A-2 by S&P).
The Portfolio may also invest in repurchase and reverse repurchase agreements,
illiquid securities (up to 15% of its net assets) when-issued securities (up to
10% of its assets), forward contracts, zero coupon bonds, variable rate bonds,
up to 5% in high-yield bonds, and, up to 25% of its net assets in foreign
securities.
/diamonds/
/diamond/ MONEY MARKET PORTFOLIO
The Money Market Portfolio seeks to maintain a constant net asset value of
$1.00 per share, although there can be no assurance that this will be achieved.
The Portfolio seeks to achieve its investment objective by maintaining a
dollar-weighted average portfolio maturity of not more than 90 days through
investment in U.S. dollar-denominated securities which have effective
maturities of not more than 13 months and which, in accordance with guidelines
adopted by the Fund's Board, are determined to present minimal credit risks.
(See the SAI for a more detailed description of these instruments.) Such
instruments may include:
1. Obligations issued or guaranteed by the U.S. Government and backed by
the full faith and credit of the United States. These securities
include U.S. Treasury securities, obligations of the Government
National Mortgage Association, the Farmers Home Administration and
the Export-Import Bank. The Portfolio may also invest in obligations
issued or guaranteed by U.S. Government agencies or instrumentalities
where the Portfolio must look principally to the issuing or
guaranteeing agency for ultimate repayment. Some examples of agencies
or instrumentalities issuing these obligations are the
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Federal Farm Credit System, the Federal Home Loan Banks and the
Federal National Mortgage Association.
2. Domestic and certain foreign bank obligations including time deposits,
certificates of deposit, bankers' acceptances and other bank
obligations. The Portfolio may invest in high quality U.S.
dollar-denominated obligations of (i) banks, savings and loan
associations and savings banks which have more than $2 billion in
total assets and are organized under U.S. Federal or state law, (ii)
foreign branches of these banks or of foreign banks of equivalent
size (Euros), and (iii) U.S. branches or subsidiaries of foreign
banks of equivalent size (Yankees). The Portfolio may also invest in
obligations of international banking institutions designated or
supported by national governments to promote economic reconstruction,
development or trade between nations (e.g., the European Investment
Bank, the Inter-American Development Bank, or the World Bank). These
obligations may be supported by appropriated but unpaid commitments
of their member countries, and there is no assurance these
commitments will be undertaken or met in the future.
3. Asset-backed securities.
4. Commercial paper, including variable amount master demand notes and
corporate bonds issued by U.S. corporations. The Portfolio may also
invest in bonds and commercial paper of foreign issuers if the
obligation is U.S. dollar-denominated and is not subject to foreign
withholding tax.
5. Repurchase and reverse repurchase agreements.
The Portfolio will limit its investment to securities that present minimum
credit risks, as determined by guidelines adopted by the Fund's Board. In
addition, the Portfolio will limit its investment in the securities of any one
issuer to 5% of its total assets, measured at the time of purchase. (U.S.
Government securities and securities that benefit from certain types of credit
enhancement arrangements are not included in this limitation.) The Portfolio
may invest up to 25% of its total assets in securities of a single issuer if
the securities will not be held for more than three business days.
Also, the Portfolio will not purchase any security (other than a U.S.
Government security) unless (i) it (or a comparable security of the same
issuer) is rated with the highest rating assigned to short-term debt securities
by at least two NRSROs, such as Moody's and S&P, or (ii) it (or a comparable
security of the same issuer) is rated by only one NRSRO, and is rated by that
NRSRO with the highest such rating, or (iii) it is not rated and is determined
to be of comparable quality as determined by the Fund's Board. The Fund's Board
must approve or ratify the acquisition of any unrated security or a security
rated by only one NRSRO.
These standards must be satisfied at the time an investment is made. If the
quality of the investment later declines below the quality required for
purchase, the Portfolio shall dispose of the investment in accordance with
procedures adopted by the Fund's Board, except in certain circumstances where
there is a finding by the Fund's Board that disposing of the investment would
not be in the Portfolio's best interest. (For a description of the NRSRO
ratings, see Appendix A.)
The Portfolio may also invest in securities of a when-issued or delayed
delivery basis and in certain privately-placed securities and repurchase and
reverse repurchase agreements. The Portfolio may invest up to 10% of its net
assets in illiquid securities.
The Portfolio may invest up to 10% of its total assets, calculated at the time
of purchase, in the securities of money market funds, which are investment
companies. The Portfolio may not invest (i) more than 5% of its total assets in
the securities of any one investment company or (ii) in more than 3% of the
voting securities of any other investment company. The Portfolio will
indirectly bear its proportionate share of any investment advisory fees and
expenses paid by the money market funds in which it invests, in addition to the
Portfolio's own investment advisory fee and expenses paid.
The Portfolio operates under a rule of the SEC that permits it, subject to
certain conditions, to use the amortized cost method of valuing its shares.
(See the SAI for a description of these conditions.)
/diamonds/
OTHER INVESTMENT POLICIES AND RESTRICTION
The Portfolios are subject to certain other investment policies and
restrictions which are described in the SAI for the Fund. 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 Policyowner 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
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these policies and elsewhere in this Prospectus apply only at the time of
purchase of the security.
/diamond/ CASH POSITION
A Portfolio may, at times, choose to hold some portion of its net assets in
cash, or to invest that cash in a variety of debt securities. This may be done
as a defensive measure at times when desirable risk/reward characteristics are
not available in stocks or to earn income from otherwise uninvested cash. When
a Portfolio increases its cash or debt investment position, its income may
increase while its ability to participate in stock market advances or declines
decreases.
/diamond/ DIVERSIFICATION AND CONCENTRATION
The 1940 Act classifies investment companies as either diversified or
non-diversified.
Diversification is the practice of spreading a portfolio's assets over a number
of investments, investment types, industries or countries to reduce risk. A
non-diversified portfolio has the ability to take larger positions in fewer
issuers. Because the appreciation or depreciation of a single security may have
a greater impact on the net asset value of a non-diversified portfolio, its
share price can be expected to fluctuate more than a comparable portfolio.
All of the Portfolios (except the Third Avenue Value Portfolio and the Real
Estate Securities Portfolio) qualify as diversified funds under the 1940 Act.
The diversified Portfolios are subject to the following diversification
requirements (which are set forth in full in the SAI):
/diamond/ As a fundamental policy, with respect to 75% of the total assets of a
Portfolio, the Portfolio may not own more than 10% of the outstanding
voting shares of any issuer (other than U.S. Government securities) as
defined in the 1940 Act and, with respect to some Portfolios, in other
types of cash items.
/diamond/ As a fundamental policy, with respect to 75% of the total assets of a
Portfolio, the Portfolio will not purchase a security of any issuer if
such purchase would cause the Portfolio's holdings of that issuer to
amount to more than 5% of the Portfolio's total assets.
/diamond/ As a fundamental policy governing concentration, no Portfolio will
invest more than 25% of its assets in any one particular industry,
other than U.S. Government securities.
The Third Avenue Value Portfolio and the Real Estate Securities Portfolio each
reserves the right to become a diversified investment company (as defined by
the 1940 Act).
The Third Avenue Value Portfolio and the Real Estate Securities Portfolio each
may invest a substantial amount of their respective assets in securities of a
small number of issuers. However, the Third Avenue Value Portfolio does not
expect to do so unless its Sub-Adviser sees the potential for substantial
capital appreciation in such investments. The Real Estate Securities Portfolio
intends to concentrate 25% or more of its investments in companies operating in
the real estate industry. These Portfolios intend to take advantage of the
flexibility of their non-diversification policy by investing more than 5% of
their respective total assets in the securities of one issuer.
To the extent that each of the Third Avenue Value Portfolio and the Real Estate
Securities Portfolio makes such single large investments, it increases its
exposure to credit and/or market risks, and to the profit potential, associated
with a single issuer. Both profit potential and risk are greater in a
non-diversified portfolio than in a diversified portfolio.
/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 pp. 1-9 for more information on historical turnover rates.)
The Third Avenue Value Portfolio's investment policies and objective, which
emphasizes long-term holdings, should tend to keep the number of portfolio
transactions relatively low. Because of this, the Third Avenue Value Portfolio
does not expect its annual portfolio turnover rate to exceed 50%. The Real
Estate Securities Portfolio does not expect its annual portfolio turnover
rate to exceed 100%.
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.
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Increased turnover results in higher brokerage costs or mark-up charges for a
Portfolio; these charges are ultimately borne by the Policyowners. For further
discussion of portfolio turnover, see the SAI.
/diamond/ BORROWING
Each Portfolio may borrow money from banks for temporary or emergency purposes.
As a fundamental policy, the amount borrowed shall not exceed 331/3% of total
assets for the Global Sector, the International Equity, the U.S. Equity, the
Aggressive Growth and the Real Estate Securities Portfolios; 10% of total
assets for the Value Equity Portfolio; 5% of total assets for the Third Avenue
Value Portfolio; and 25% of total assets for all other Portfolios. (The Growth
& Income Portfolio does not presently intend to borrow.)
To secure borrowings, a Portfolio may not mortgage or pledge its securities in
amounts that exceed 15% of its net assets (10% for the Value Equity Portfolio
and 5% for the Third Avenue Value Portfolio). (See the SAI for any exceptions
to this limitation.)
The Portfolios with a common Sub-Adviser may also borrow (or lend) money to
other funds that permit such transactions and are also advised by that
Sub-Adviser, provided each Portfolio seeks and obtains permission from the SEC.
There is no assurance that such permission would be granted.
The Aggressive Growth Portfolio may borrow for investment purposes - this is
called "leveraging." The Portfolio may borrow only from banks, not from other
investment companies. There are risks associated with leveraging:
/diamond/ If a Portfolio's asset coverage drops below 300% of borrowings, the
Portfolio may be required to sell securities within three days to
reduce its debt and restore the 300% coverage, even though it may be
disadvantageous to do so.
/diamond/ Leveraging may exaggerate the effect on net asset value of any
increase or decease in the market value of a Portfolio's securities.
/diamond/ Money borrowed for leveraging will be subject to interest costs. In
certain cases, interest costs may exceed the return received on the
securities purchased.
/diamond/ A Portfolio may be required to maintain minimum average balances in
connection with borrowing or to pay a commitment or other fee to
maintain a line of credit. Either of these requirements would increase
the cost of borrowing over the stated interest rate.
State laws and regulations may impose additional limitations on borrowings. See
the SAI for further information on borrowing.
/diamond/ LENDING
Each Portfolio may lend securities to broker-dealers and financial institutions
to realize additional income. As a fundamental policy, the Growth & Income,
Third Avenue Value, Global Sector and Real Estate Securities Portfolios will
not lend securities or other assets, if as a result, more than 331/3% of total
assets would be lent to other parties; the International Equity Portfolio and
the U.S. Equity Portfolio may lend up to 30% of total assets; and all other
Portfolios (except the Aggressive Growth Portfolio) may lend up to 25% of total
assets.
The Aggressive Growth Portfolio may not make loans to others, except through
buying qualified debt obligations, lending portfolio securities or entering
into repurchase agreements. The Aggressive Growth Portfolio will not lend
securities or other assets if, as a result, more than 20% of its total assets
would be lent to other parties.
If the borrower of a security defaults, a Portfolio may be delayed or prevented
from recovering collateral, or may be otherwise required to cover a transaction
in the security loaned.
If portfolio securities are loaned, collateral values must be continuously
maintained at no less than 100% by pricing both the securities loaned and the
collateral daily.
If a material event is to be voted upon affecting a Portfolio's investment in
securities which are on loan, the Portfolio will take such actions as may be
appropriate in order to vote its shares.
The Growth, Bond, Global, International Equity, Emerging Growth and Strategic
Total Return Portfolios may also lend (or borrow) money to other funds that are
managed by their respective Sub-Adviser provided each Portfolio seeks and
obtains permission from the SEC.
For more information about Portfolio lending, see the SAI.
/diamond/ SHORT SALES
Each Portfolio may sell securities "short against the box." A short sale is the
sale of a security that the Portfolio does not own. A short sale is "against
the box" if at all times when the short position is open, the Portfolio owns an
equal amount of the securities sold short or securities convertible into, or
exchangeable without further consideration for, securities of the same issue as
the securities sold short.
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/diamond/ OTHER INVESTMENT COMPANIES
Certain Portfolios may invest up to 10% of their total assets, calculated at
the time of purchase, in the securities of money market funds, which are
investment companies. The Portfolios may not invest (i) more than 5% of their
total assets in the securities of any one investment company or (ii) in more
than 3% of the voting securities of any other investment company. (Investments
by the International Equity and U.S. Equity Portfolios in the GEI Short-Term
Investment Trust, as described on p. under "Portfolio Securities and Risk
Factors - Money Market Instruments," are not considered an investment in
another investment company for purposes of these limitations.) A Portfolio will
indirectly bear its proportionate share of any investment advisory fees and
expenses paid by the funds in which it invests, in addition to the investment
advisory fee and expenses paid by the Portfolio. However, if the Growth or
Global Portfolio invests in a Janus money market fund, Janus Capital will remit
to such Portfolio the fees it receives from the Janus money market fund to the
extent such fees are based on the Portfolio's assets.
/diamond/ SPECIAL SITUATIONS
Each Portfolio may invest in "special situations" from time to time. A special
situation arises when, in the opinion of its Sub-Adviser, the securities of a
particular issuer will be recognized and appreciate in value due to a specific
development with respect to that issuer. Developments creating a special
situation might include, among others, a new product or process, a management
change, a technological breakthrough, or other extraordinary corporate event,
or differences in market supply and demand for the security.
Investment in special situations may carry an additional risk of loss in the
event that the anticipated development does not occur or does not attract the
expected attention. The impact of this strategy on a Portfolio will depend on a
Portfolio's size and the extent of the holdings of the special situation issuer
relative to its total assets.
PORTFOLIO SECURITIES
AND RISK FACTORS
This section provides a more detailed description of some of the types of
securities and other instruments in which a Portfolio may invest. A Portfolio
may invest in these instruments to the extent permitted by its investment
objective, policies, and restrictions. Not all of these instruments are used by
each Portfolio. A Portfolio is not limited by this discussion and may invest in
other types of instruments not precluded by the policies discussed above. (See
"Portfolio Policies and Techniques," p. 15, and the SAI for more information
regarding a Portfolio's investment objective and its policies, that include
limitations imposed on certain investments.)
/diamond/ EQUITY SECURITIES
Equity securities include common stocks, preferred stocks and securities
convertible into common stocks, such as rights, warrants and convertible debt
securities. Equity securities may also include certain equity-indexed
securities, the value of which is linked to a securities index (e.g., the S&P
500).
/diamond/ COMMON STOCK represents the basic ownership of a corporation. Common
stocks historically have provided the greatest long-term growth
potential in a company, but future results are not guaranteed. Owners
of common stock share directly in the success or failure of the
business.
/diamond/ PREFERRED STOCK ranks senior to common stock and, depending upon the
type of preferred stock and the nature of the issuer, has certain
fixed-income features (which may include direct or indirect dividend
redemption value guarantees). Preferred stockholders receive dividends
before they are distributed to the common stockholders.
/diamond/ RISK FACTORS
The price of any equity security rises and falls. Common stocks
generally represent the riskiest investment in a company. It is
possible that investors may lose their entire investment.
In addition to the risk associated with individual equity securities, an
equity-indexed security carries overall market risk and the risk of
fluctuation inherent in the indexed security as distinguished from the
securities comprising the applicable index.
Any equity security also presents the risks inherent in the particular
industry of the issuer of the equity security. Certain of these
sectors, and the risks presented by such sectors, are described below.
/diamond/ GOLD STOCK AND GOLD BULLION - Gold stocks are equity securities
involved in the exploration, mining, processing, or dealing or
investing in gold. Investments in gold bullion involve the purchase of
bars or ingots of the precious metal.
/diamond/ RISK FACTORS
Due to monetary and political policies on a national and international
level, the price of gold
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is subject to substantial fluctuations, which will have an effect on
the profitability of issuers of gold stocks and the market value of
their securities.
Changes in the political or economic climate for the two largest gold
producers - South Africa and the Commonwealth of Independent States
(the former Soviet Union) - may have a direct impact on the price of
gold worldwide.
A Portfolio's investments in gold bullion will earn no income return.
Appreciation in the market price of gold is the sole manner in which a
Portfolio would be able to realize gains on such investments.
Furthermore, a Portfolio may encounter storage and transaction costs
in connection with their ownership of gold bullion that may be higher
than those associated with the purchase, holding and disposition of
more traditional types of investments.
/diamond/ HEALTH CARE - Health care stocks are equity securities of companies
primarily engaged in the design, manufacture, or sale of products or
services used for, or in connection with, health care or medicine.
/diamond/ RISK FACTORS
Securities in the health care sector are subject to price fluctuations
based on industry changes, changes in a company's financial condition
and on overall market and economic conditions. Smaller companies are
especially sensitive to these factors.
/diamond/ FINANCIAL SERVICES - Financial services investing includes equity
securities of companies that provide financial services to consumers
and industry. A company is principally engaged in the industry if it
derives more than 15% of revenues or profits from brokerage or
investment management activities.
/diamond/ RISK FACTORS
Companies in the financial services industry are subject to various
risks related to that industry, such as government regulation, changes
in interest rates, and exposure on loans, including loans to foreign
borrowers. The performance of equity securities of this industry may
be affected by the conditions that affect this industry.
/diamond/ UTILITIES - Utility stocks are equity and debt securities of utility
companies that produce, transmit, or distribute gas and electric
energy as well as those companies that provide communications
facilities such as telephone and telegraph companies.
/diamond/ RISK FACTORS
Risks associated with the utility industry include difficulty in earning
adequate returns on investments despite frequent rate increases,
restriction on operation and increased costs and delays due to
government regulations, building or construction delays, environmental
regulations, difficulty of the capital markets in absorbing utility
debt and equity securities, and difficulties in obtaining fuel at
reasonable prices.
/diamond/ ENERGY - Energy stocks are equity securities of companies in the
energy service field, including those that provide services and
equipment to the conventional areas of oil, gas, electricity and coal,
and newer sources of energy such as nuclear, geothermal, oil shale and
solar power.
/diamond/ RISK FACTORS
Risks associated with the energy industry include difficulty in adequate
returns due to increased costs and delays due to government
regulations, building or construction delays, and environmental
regulations.
/diamond/ NATURAL RESOURCES - Natural resource stocks are equity securities of
domestic and foreign companies with substantial natural resource
assets. Natural resource assets are materials derived from natural
sources which have economic value. Examples of natural resource assets
include precious metals (e.g. gold, silver and platinum), ferrous and
nonferrous metals (e.g. iron, steel, aluminum and copper), strategic
metals (e.g., uranium and titanium), hydrocarbons (e.g., coal, oil and
natural gas), timber land, undeveloped real property and agricultural
commodities.
/diamond/ RISK FACTORS
During periods of economic or financial instability, the securities of
such companies are subject to extreme price fluctuations, reflecting
the high volatility of certain natural resources, such as precious
metals, during these periods. In addition, the instability of prices
of these natural resources may result in volatile earnings of related
companies, which in turn, may affect adversely the financial condition
of such companies.
/diamond/ SMALL CAPITALIZATION COMPANIES
A Portfolio may invest in equity securities issued by small-cap companies. For
these purposes, a Sub-Adviser may define small-cap companies differently.
Generally a small-cap company will have market capitalizations of $1 billion or
less. A Portfolio's investments in small capitalization stocks may include
companies that have limited operating histories, product lines, and financial
and managerial resources. These companies may
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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 securities such as corporate bonds and debentures;
commercial paper; trust preferred, debt securities issued by the U.S.
Government, its agencies and instrumentalities; or foreign governments;
asset-backed securities; CMOs; zero coupon bonds; floating rate, inverse
floating rate and index obligations; "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 "Portfolio Securities and Risk Factors - High
Yield/High-Risk Securities" on p. for a discussion of "junk bonds." See
Appendix A for a description of debt securities ratings.)
/diamond/ RISK FACTORS
Investments in debt securities are generally subject to both credit risk and
market risk. Credit risk relates to the ability of the issuer to meet interest
or principal payments, or both, as they come due. Market risk relates to the
fact that the market values of the debt securities in which the Portfolio
invests generally will be affected by changes in the level of interest rates.
An increase in interest rates will tend to reduce the market value of debt
securities, whereas a decline in interest rates will tend to increase their
value.
Generally, shorter term securities are less sensitive to interest rate changes,
but longer term securities offer higher yields. The Portfolio's share price and
yield will also depend, in part, on the quality of its investments in debt
securities.
Such securities may be affected by changes in the creditworthiness of the
issuer of the security. The extent that such changes are reflected in the
Portfolio's share price will depend upon the extent of the Portfolio's
investment in such securities.
/diamond/ CONVERTIBLE SECURITIES
Convertible securities include a spectrum of securities which can be exchanged
for or converted into common stock. Convertible securities may include, but are
not limited to: convertible bonds or debentures; convertible preferred stock;
units consisting of usable bonds and warrants; or securities which cap or
otherwise limit returns to the convertible security hold, such as DECS -
(Dividend Enhanced Convertible Stock, or Debt Exchangeable for Common Stock
when issued as a debt security), LYONS - (Liquid Yield Option Notes, which are
corporate bonds that are purchased at prices below par with no coupons and are
convertible into stock), PERCS - (Preferred Equity Redeemable Stock, an equity
issue that pays a high cash dividend, has a cap price and mandatory conversion
to common stock at maturity) and PRIDES - (Preferred Redeemable Increased
Dividend Securities, which are essentially the same as DECS; the difference is
little more than who initially underwrites the issue).
Convertible securities are often rated below investment grade or not rated
because they fall below debt obligations and just above common equity in order
of preference or priority on the issurer's balance sheet, hence, an issuer with
investment grade senior debt may issue convertible securities with ratings less
than investment grade or not rated. A Portfolio does not limit convertible
securities by rating, and there is no minimal acceptance rating for a
convertible security to be purchased or held by a Portfolio. Therefore, a
Portfolio may invest in convertible securities irrespective of their ratings.
This could result in a Portfolio purchasing and holding, without limit,
convertible securities rated below investment grade by
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an NRSRO or in a Portfolio holding such securities where they have acquired a
rating below investment grade after purchase.
/diamond/ RISK FACTORS
As with all debt securities, the market value of convertible debt securities
tends to decline as interest rates increase and, conversely, to increase as
interest rates decline.
Convertible securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. However, when the market price
of the common stock underlying a convertible security exceeds the conversion
price, the price of the convertible security tends to reflect the value of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield
basis, and thus may not depreciate to the same extent as the underlying common
stock.
/diamond/ REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
A repurchase agreement involves the purchase of a security by a Portfolio and a
simultaneous agreement (generally from a bank or broker-dealer) to repurchase
that security back from the Portfolio at a specified price and date upon
demand. This technique offers a method of earning income on idle cash. The
repurchase agreement is effectively secured by the value of the underlying
security. Repurchase agreements not terminable within seven days are considered
illiquid securities.
A Portfolio invests in a reverse repurchase agreement when it sells a portfolio
security to another party, such as a bank or broker-dealer, in return for cash,
and agrees to buy the security back at a future date and price. Reverse
repurchase agreements may be used to provide cash to satisfy unusually heavy
redemption requests or for other temporary or emergency purposes without the
necessity of selling portfolio securities or to earn additional income on
portfolio securities such as U.S. Treasury bills and notes. While a reverse
repurchase agreement is outstanding, a Portfolio will segregate with its
custodian cash and other liquid assets to cover its obligation under the
agreement. Reverse repurchase agreements are considered a form of borrowing by
the Portfolio for purposes of the 1940 Act.
/diamond/ RISK FACTORS
Repurchase agreements involve the risk that the seller will fail to repurchase
the security, as agreed. In that case, a Portfolio will bear the risk of market
value fluctuations until the security can be sold and may encounter delays and
incur costs in liquidating the security. In the event of bankruptcy or
insolvency of the seller, delays and costs are incurred.
Reverse repurchase agreements may expose a Portfolio to greater fluctuations in
the value of its assets.
/diamond/ MONEY MARKET INSTRUMENTS
Except as described below with respect to the International Equity and U.S.
Equity Portfolios, a Portfolio, other than the Money Market Portfolio, may
invest in the following types of money market instruments: U.S. Government
securities; obligations issued or guaranteed by foreign governments or by any
of their political subdivisions, authorities, agencies or instrumentalities;
bank obligations (including certificates of deposit, time deposits and bankers'
acceptances of foreign or domestic banks, domestic savings and loan
associations and other banking institutions); commercial paper; and repurchase
agreements.
The International Equity and U.S. Equity Portfolios may also invest in the GEI
Short-Term Investment Fund (the "Investment Fund"), a private investment fund
created specifically to serve as a vehicle for the collective investment of
cash balances of these Portfolios and other accounts advised by GE Investment
Management Incorporated ("GEIM") or its affiliate, General Electric Investment
Corporation ("GEIC"). The Investment Fund is not registered with the SEC as an
investment company. The Investment Fund invests exclusively in the money market
instruments described in (i) through (vii) below. The Investment Fund is
advised by GEIM. No advisory fee is charged by GEIM to the Investment Fund, nor
will a Portfolio incur any sales charge, redemption fee, distribution fee or
service fee in connection with its investments in the Investment Fund. The
International Equity and U.S. Equity Portfolios may each invest up to 25% of
its assets in the Investment Fund. The types of money market instruments in
which the International Equity and U.S. Equity Portfolios may invest directly
or indirectly through their investment in the Investment Fund are as follows:
(i) securities issued or guaranteed by the U.S. Government or one of its
agencies or instrumentalities; (ii) debt obligations of banks, savings and loan
institutions, insurance companies and mortgage bankers; (iii) commercial paper
and notes, including those with variable and floating rates of interest; (iv)
debt obligations of foreign branches of U.S. banks, U.S. branches of foreign
banks and foreign branches of foreign banks; (v) debt obligations issued or
guaranteed by one or more foreign governments or any of their political
subdivisions, agencies or instrumentalities, including obligations of
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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.
/diamond/ FOREIGN SECURITIES
Foreign securities include equity and debt securities of foreign issuers. Each
Portfolio may invest in foreign securities subject to its investment
limitations.
In addition to direct foreign investment, many of the Portfolios may invest in
foreign securities through ADRs or ADSs, which are dollar-denominated receipts
issued by domestic banks or securities firms. ADRs and ADSs are publicly traded
on U.S. exchanges, and may not involve the same risks as securities denominated
in foreign currency.
Some Portfolios may also indirectly invest in foreign securities through EDRs,
which are typically issued by European banks; in GDRs, which may be issued by
domestic or foreign banks; and in other types of receipts evidencing ownership
of foreign securities.
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/diamond/ RISK FACTORS
For U.S. investors, the returns on foreign securities are influenced not only
by the returns on the foreign investments themselves, but also by several risks
which include:
/diamond/ CURRENCY RISK. Changes in the value of the currencies in which the
securities are denominated relative to the U.S. dollar may affect the
value of foreign securities and the value of their dividend or
interest payments and, therefore, a Portfolio's share price and
returns.
Generally, in a period when the U.S. dollar commonly rises against foreign
currencies, the return on foreign securities for a U.S. investor are
diminished. By contrast, in a period when the U.S. dollar generally
declines, the returns on foreign securities generally are enhanced.
Exchange rates are affected by numerous factors, including relative interest
rates, balances of trade, levels of foreign investment and manipulation by
central banks. The foreign currency market is essentially unregulated and
can be subject to speculative trading. From time to time, many countries
impose exchange controls which limit or prohibit trading in certain
currencies.
ADRs and ADSs do not involve the same direct currency and liquidity risks as
securities denominated in foreign currencies. However, the value of the
currency in which the foreign security represented by the ADR or ADS is
denominated may affect the value of the ADR or ADS.
To the extent that a Portfolio invests in foreign securities denominated in
foreign currencies, its share price reflects the price movements both of
its securities and of the currencies in which they are denominated. The
share price of a Portfolio that invests in both U.S. and foreign
securities may have a low correlation with movements in the U.S. markets.
If most of the securities in a Portfolio are denominated in foreign
currencies or depend on the value of foreign currencies, the relative
strength of the U.S. dollar against those foreign currencies may be an
important factor in the Portfolio's performance.
/diamond/ CURRENCY TRADING COSTS. A Portfolio incurs costs in converting
foreign currencies into U.S. dollars, and vice versa.
/diamond/ DIFFERENT ACCOUNTING AND REPORTING PRACTICES. Foreign companies are
generally subject to tax laws and to accounting, auditing and
financial reporting standards, practices and requirements different
from those that apply in the U.S.
/diamond/ LESS INFORMATION AVAILABLE. There is generally less public information
available about foreign companies.
/diamond/ MORE DIFFICULT BUSINESS NEGOTIATIONS. A Portfolio may find it
difficult to enforce obligations in foreign countries or to negotiate
favorable brokerage commission rates.
/diamond/ REDUCED LIQUIDITY/INCREASED VOLATILITY. Some foreign securities are
less liquid and their prices more volatile, than securities of
comparable U.S. companies.
/diamond/ SETTLEMENT DELAYS. Settling foreign securities may take longer than
settlements in the U.S.
/diamond/ HIGHER CUSTODY CHARGES. Custodianship of shares may cost more for
foreign securities than it does for U.S. securities.
/diamond/ASSET VULNERABILITY. In some foreign countries, there is a risk of
direct seizure or appropriation through taxation of assets of a
Portfolio. Certain countries may also impose limits on the removal of
securities or other assets of a Portfolio. Interest, dividends and
capital gains on foreign securities held by a Portfolio may be subject
to foreign withholding taxes.
/diamond/ POLITICAL INSTABILITY. In some countries, political instability, war
or diplomatic developments could affect investments.
These risks may be greater in developing countries or in countries with limited
or developing markets. Securities prices in developing countries can be
significantly more volatile than in developed countries, reflecting the greater
uncertainties of investing in less developed markets and economies. In
particular, developing countries may have relatively unstable governments.
These governments may nationalize businesses, expropriate private property,
engage in confiscatory taxation or, in certain instances, revert to closed
market, centrally planned economies. Such countries may also have restrictions
on foreign ownership or prohibitions on the repatriation of assets, and may
have less protection of property rights than developed countries.
The economies of developing countries may be predominately based on only a few
industries or dependent on revenues from particular commodities or on
international aid or development assistance. These economies may be highly
vulnerable to changes in local or global trade conditions, and may suffer from
extreme and volatile debt burdens or inflation risks. In addition, securities
markets in developing countries may trade a small number of securities and may
be unable to respond effectively in trading volume. As a result such markets
may lack liquidity and securities traded on those markets may
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be more volatile. Also, securities markets in developing countries typically
offer less regulatory protection for investors.
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 Policyowners cannot make transactions.
ADRS AND ADSS are subject to some of the same risks as direct investments in
foreign securities, including the currency risk discussed above. The regulatory
requirements with respect to ADRs and ADSs that are issued in sponsored and
unsponsored programs are generally similar but the issuers of unsponsored ADRs
and ADSs are not obligated to disclose material information in the U.S., and,
therefore, such information may not be reflected in the market value of the
ADRs and ADSs.
/diamond/ ILLIQUID SECURITIES
Securities are considered illiquid because of the absence of a readily
available market or due to legal or contractual restrictions on resale.
However, certain restricted securities that are not registered for sale to the
general public but that can be sold to institutional investors ("Rule 144A
Securities") may not be considered illiquid, provided that a dealer or
institutional trading market exists. The institutional trading market is
relatively new and liquidity of a Portfolio's investments could be impaired if
such trading does not further develop or declines. The Sub-Advisers will
determine the liquidity of Rule 144A Securities under guidelines approved by
the Fund's Board. (See the SAI for a description of these guidelines.)
/diamond/ RISK FACTORS
Investments in illiquid securities involve certain risks to the extent that a
Portfolio may be unable to dispose of such securities at the time desired or at
a reasonable price. In addition, in order to resell a restricted security, the
Portfolio might have to bear the expense and incur the delays associated with
effecting a registration required in order to qualify for resale.
/diamond/ FUTURES, OPTIONS AND OTHER
DERIVATIVES
Instruments commonly called "derivatives" include options on securities or
foreign currency futures contracts, options on futures contracts, forward
contracts, interest rate swaps, caps and floors, stock index futures and
options on stock index futures. These instruments are commonly called
derivatives because their price is derived from an underlying index, security
or other measure of value.
A Portfolio may engage in futures contracts and options. The Portfolios intend
to use such derivatives primarily for bona fide hedging purposes, including to
protect portfolio positions against market, interest rate or currency
fluctuations, to equitize a cash position, for duration management, or to
reduce the risk inherent in the management of the portfolio involved. If used
for other purposes as may be permitted under applicable rules pursuant to which
the Portfolio would remain exempt from the definition of a "commodity pool
operator" under the rules of the CFTC, the aggregate initial margin and
premiums required to establish any non-hedging positions will not exceed 5% of
the fair market value of the Portfolio's net assets.
FORWARD CONTRACTS are contracts to purchase or sell a specified amount of
property for an agreed upon price at a specified time. Forward contracts are
not currently exchange traded and are typically negotiated on an individual
basis. A Portfolio may enter into forward currency contracts to hedge against
declines in the value of non-dollar denominated securities or to reduce the
impact of currency appreciation on purchases of non-dollar denominated
securities. A Portfolio may also enter into forward contracts to purchase or
sell securities or other financial indexes.
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
39
<PAGE>
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a contractually based principal amount from the party selling the
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a contractually based
principal amount from the party selling the interest rate floor.
OPTIONS are the right, but not the obligation, to buy or sell a specified
amount of securities or other assets on or before a fixed date at a
predetermined price. A Portfolio may purchase put and call options on
securities, securities indexes and foreign currencies, subject to its
investment restrictions.
CALL OPTIONS give a buyer the right to purchase a portfolio security at a
designated price until a certain date. The option must be "covered" - for
example, the seller may own the securities required to fulfill the
contract.
PUT OPTIONS give the buyer the right to sell the security at a designated
price until a certain date. Put options are "covered", for example, by
segregating an amount of cash or securities equal to the exercise price.
STOCK INDEX FUTURES obligate the seller to deliver (and the purchaser to take)
an amount of cash equal to a specific dollar amount times the difference
between the value of a specified stock index at the close of the last trading
day of the contract and the price at which the agreement is made. No physical
delivery of the underlying stocks in the index is made.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS, as contrasted with the direct
investment in such a contract, gives the purchaser the right, in return for the
premium paid, to assume a position in a stock index futures contract at a
specified exercise price at any time prior to the expiration date of the
option.
/diamond/ RISK FACTORS
There can be no assurance the use of derivatives will help a Portfolio achieve
its investment objective. Derivatives involve special risks and transaction
costs, and draw upon skills and experience which are different from those
needed to choose the other securities or instruments in which a Portfolio
invests. Special risks of these instruments include:
/diamond/ INACCURATE MARKET PREDICTIONS. If interest rates, securities prices or
currency markets do not move in the direction expected by a
Sub-Adviser who used derivatives based on those measures, these
instruments may fail in their intended purpose and result in losses to
the Portfolio.
/diamond/ IMPERFECT CORRELATION. Derivatives' prices may be imperfectly
correlated with the prices of the securities, interest rates or
currencies being hedged. When this happens, the expected benefits may
be diminished.
/diamond/ ILLIQUIDITY. A liquid secondary market may not be available for a
particular instrument at a particular time. A Portfolio may therefore
be unable to control losses by closing out a derivative position.
/diamond/ TAX CONSIDERATIONS. A Portfolio may have to delay closing out certain
derivative positions to avoid adverse tax consequences.
The risk of loss from investing in derivative instruments is potentially
unlimited.
/diamond/ FORWARD FOREIGN CURRENCY CONTRACTS
A forward foreign currency contract ("forward contract") is used to purchase or
sell foreign currencies at a future date as a hedge against fluctuations in
foreign exchange rates pending the settlement of transactions in foreign
securities or during the time a Portfolio has exposure to foreign currencies. A
forward contract, which is also included in the types of instruments commonly
known as derivatives, is an agreement between contracting parties to exchange
an amount of currency at some future time at an agreed upon rate.
/diamond/ RISK FACTORS
Investors should be aware that hedging against a decline in the value of a
currency in the foregoing manner does not eliminate fluctuations in the prices
of portfolio securities or prevent losses if the prices of portfolio securities
decline.
Furthermore, such hedging transactions preclude the opportunity for gain if the
value of the hedging currency should rise. Forward contracts may, from time to
time, be considered illiquid, in which case they would be subject to a
Portfolio's limitation on investing in illiquid securities.
/diamond/ WHEN-ISSUED, DELAYED SETTLEMENT AND FORWARD DELIVERY SECURITIES
Securities may be purchased and sold on a "when-issued," "delayed settlement,"
or "forward (delayed) delivery" basis.
"When-issued" or "forward delivery" refers to securities whose terms are
available, and for which a market exists, but which are not available for
immediate delivery. When-issued or forward delivery transactions may be
expected to occur a month or more before delivery is due.
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<PAGE>
A Portfolio may engage in when-issued transactions to obtain what is considered
to be an advantageous price and yield at the time of the transaction. When a
Portfolio engages in when-issued or forward delivery transactions, it will do
so for the purpose of acquiring securities consistent with its investment
objective and policies and not for the purpose of investment leverage.
"Delayed settlement" is a term used to describe settlement of a securities
transaction in the secondary market which will occur sometime in the future. No
payment or delivery is made by a Portfolio until it receives payment or
delivery from the other party to any of the above transactions.
The Portfolio will segregate with its custodian cash, U.S. Government
securities or other liquid assets at least equal to the value of purchase
commitments until payment is made. Such segregated securities will either
mature or, if necessary, be sold on or before the settlement date. Typically,
no income accrues on securities purchased on a delayed delivery basis prior to
the time delivery of the securities is made, although a Portfolio may earn
income in securities it has segregated to collateralize its delayed delivery
purchases.
New issues of stocks and bonds, private placements and U.S. Government
securities may be sold in this manner.
/diamond/ RISK FACTORS
At the time of settlement, the market value of the security may be more or less
than the purchase price. The Portfolio bears the risk of such market value
fluctuations. These transactions also involve risk to a Portfolio if the other
party to the transaction defaults on its obligation to make payment or
delivery, and the Portfolio is delayed or prevented from completing the
transaction.
/diamond/ MORTGAGE-AND OTHER ASSET-BACKED SECURITIES
Mortgage-backed securities represent interests in a pool of mortgages.
Principal and interest payments made on the mortgages in the underlying
mortgage pool are passed through to the Portfolio.
Mortgage-backed securities are issued or guaranteed by government agencies such
as the Government National Mortgage Association ("GNMA"), Federal National
Mortgage Association ("FNMA") and Federated Home Loan Mortgage Corporation
("FHLMC"), or by private entities. GNMA securities are backed by the full faith
and credit of the United States government while FNMA and FHLMC securities are
not.
Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage
Investment Conduit ("REMIC") certificates are multiclass bonds backed by
mortgages or mortgage backed securities. Each class has a specified fixed or
floating interest rate and stated maturity date. The principal and interest on
the underlying mortgages may be allocated among the several classes of CMOs in
many ways.
REMICs may be organized as trusts, partnerships, corporations, associations or
segregated pools of mortgages. Such entities elect to be treated as REMICs
under the Code, and thereby qualify for special tax treatment. Pursuant to the
Code, income is passed through a REMIC and is taxed to the person or persons
holding an interest in the REMIC. REMIC certificates represent an interest in a
REMIC and are issued in multiple classes.
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
These securities are often subject to more rapid repayment than their stated
maturity dates would indicate as a result of principal prepayments on the
underlying loans. This can result in significantly greater price and yield
volatility than with traditional fixed income securities. During periods of
declining interest rates, prepayments can be expected to accelerate, which will
shorten these securities' weighted average life and may lower their return.
Conversely, in a rising interest rate environment, a declining prepayment rate
will extend the weighted average life of these securities, which generally
should cause their values to fluctuate more widely in response to changes in
interest rates. 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 .
In addition, the mortgage securities market may be adversely affected by
changes in government regulation or tax policies.
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<PAGE>
/diamond/ INVESTMENTS IN THE REAL ESTATE
INDUSTRY AND REAL ESTATE INVESTMENT
TRUSTS ("REITS")
The real estate industry is discussed above under "The Portfolios In Detail -
Real Estate Securities Portfolio" in the context of real estate companies,
which operate in the real estate industry.
REITs are pooled investment vehicles which invest primarily in income producing
real estate, or real estate related loans or interests. REITs are generally
classified as equity REITs, mortgage REITs, or hybrid REITs.
Equity REITs invest the majority of their assets directly in real property and
derive income primarily from the collection of rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs invest the majority of their assets in real estate mortgages and
derive income from the collection of interest payments. Hybrid REITs invest
their assets in both real property and mortgages. REITs are not taxed on income
distributed to Policyowners provided they comply with several requirements of
the Internal Revenue Code of 1986, as amended (the "Code").
/diamond/ RISK FACTORS
Investments in the real estate industry are subject to risks associated with
direct investment in real estate. Such risks include, but are not limited to:
declining real estate values; risks related to general and local economic
conditions; over-building; increased competition for assets in local and
regional markets; changes in zoning laws; difficulties in completing
construction; changes in real estate value and property taxes; increases in
operating expenses or interest rates; changes in neighborhood values or the
appeal of properties to tenants; insufficient levels of occupancy; and
inadequate rents to cover operating expenses. The performance of securities
issued by companies in the real estate industry also may be affected by prudent
management of insurance risks, adequacy of financing available in capital
markets, competent management, changes in applicable laws and governmental
regulations (including taxes) and social and economic trends.
REITs also may subject a Portfolio to certain risks associated with the direct
ownership of real estate. As described above, 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," p. .)
/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.)
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<PAGE>
/diamond/ RISK FACTORS
The value of lower quality securities generally is more dependent on the
ability of the issuer to meet interest and principal payments (i.e., credit
risk) than is the case for higher quality securities. Conversely, the value of
higher quality securities may be more sensitive to interest rate movements than
lower rated securities. Issuers of high-yield securities may not be as strong
financially as those issuing bonds with higher credit ratings. Investments in
such companies are considered to be more speculative than higher quality
investments.
Issuers of high-yield securities are more vulnerable to real or perceived
economic changes (for instance, an economic downturn or prolonged period of
rising interest rates), political changes or adverse developments specific to
the issuer. Adverse economic, political or other developments may impair the
issuer's ability to service principal and interest obligations, to meet
projected business goals and to obtain additional financing, particularly if
the issuer is highly leveraged.
In the event of a default, a Portfolio would experience a reduction of its
income and could expect a decline in the market value of the defaulted
securities.
The market for lower quality securities is generally less liquid than the
market for higher quality bonds. Adverse publicity and investor perceptions, as
well as new or proposed laws, may also have a greater negative impact on the
market for lower quality securities. Unrated debt, while not necessarily of
lower quality than rated securities, may not have as broad a market as higher
quality securities.
/diamond/ VARIABLE RATE MASTER DEMAND NOTES
Variable rate master demand notes are unsecured commercial paper instruments
that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate. Because variable rate master demand notes are
direct lending arrangements between a Portfolio and the issuer, they are not
normally traded.
Although no active secondary market may exist for these notes, a Portfolio may
demand payment of principal and accrued interest at any time or may resell the
note to a third party.
While the notes are not typically rated by credit rating agencies, issuers of
variable rate master demand notes must satisfy a Sub-Adviser that the ratings
are within the two highest ratings of commercial paper. (See the SAI for
further information on these ratings.)
In addition, when purchasing variable rate master demand notes, a Sub-Adviser
will consider the earning power, cash flows, and other liquidity ratios of the
issuers of the notes and will continuously monitor their financial status and
ability to meet payment on demand.
/diamond/ RISK FACTORS
In the event an issuer of a variable rate master demand note defaulted on its
payment obligations, a Portfolio 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/ TRADE CLAIMS
Trade claims are interests in amounts owed to suppliers of goods or services
and are purchased from creditors of companies in financial difficulty. Trade
claims offer the potential for profits since they are often purchased at a
significant discount from face value and, consequently, may generate capital
appreciation in the event that the market value of the claim increases as the
debtor's financial position improves or the claim is paid.
/diamond/ RISK FACTORS
An investment in trade claims is speculative and carries a high degree of risk.
Trade claims are illiquid securities which generally do not pay interest and
there can be no guarantee that the debtor will ever be able to satisfy the
obligation on the trade claim. The markets in trade claims are not regulated by
Federal securities laws or
43
<PAGE>
the SEC. Because trade claims are unsecured, holders of trade claims may have a
lower priority in terms of payment than certain other creditors in a bankruptcy
proceeding.
MANAGEMENT OF THE FUND
/diamond/ DIRECTORS
The Fund's Board is responsible for managing the business affairs of the Fund.
It oversees the operation of the Fund by its officers. It also reviews the
management of the Portfolios' assets by the Investment Adviser and
Sub-Advisers. Information about the Directors and executive officers of the
Fund is contained in the SAI.
/diamond/ INVESTMENT ADVISER
WRL Management, located at 201 Highland Avenue, Largo, Florida 33770-2597,
serves as the Fund's Investment Adviser. The Investment Adviser is a direct,
wholly-owned subsidiary of WRL, which is wholly-owned by First AUSA Life
Insurance Company, a stock life insurance company, which is wholly-owned by
AEGON USA, Inc. ("AEGON USA"). AEGON USA is a financial services holding
company whose primary emphasis is on life and health insurance and annuity and
investment products. AEGON USA is a wholly-owned indirect subsidiary of AEGON
nv, a Netherlands corporation which is a publicly traded international
insurance group. The Investment Adviser has served as the investment adviser to
the Fund since January 1, 1997. Prior to this date, WRL served as investment
adviser to the Fund.
Subject to the supervision of the Fund's Board, the Investment Adviser is
responsible for furnishing continuous advice and recommendations to the Fund as
to the acquisition, holding or disposition of any or all of the securities or
other assets which the Portfolios may own or contemplate acquiring from time to
time; to cause its officers to attend meetings and furnish oral or written
reports, as the Fund may reasonably require, in order to keep the Fund's Board
and appropriate officers of the Fund fully informed as to the conditions of the
investment portfolio of each Portfolio, the investment recommendations of the
Investment Adviser, and the investment considerations which have given rise to
those recommendations; to supervise the purchase and sale of securities of the
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, 1997.
ADVISORY
PORTFOLIO FEE
Growth 0.80 %
Bond 0.45%(2)
Global 0.80 %
Money Market 0.40 %
Balanced 0.80 %
International Equity 1.00 %
Third Avenue Value 0.80%(1)
Emerging Growth 0.80 %
ADVISORY
PORTFOLIO FEE
Strategic Total Return 0.80 %
Aggressive Growth 0.80 %
Growth & Income 0.75 %
Tactical Asset Allocation 0.80 %
C.A.S.E. Growth 0.80 %
Global Sector 0.80 %
Value Equity 0.80 %
U.S. Equity 0.80 %
Real Estate Securities 0.80%(1)
- --------------
(1) No advisory fees were paid by these Portfolios in 1997 because they had not
commenced operations as of December 31, 1997.
(2) Effective January 1, 1998, the Advisory Fee for the Bond Portfolio was
reduced from 0.50% to 0.45%.
44
<PAGE>
/diamond/ ADVISORY FEE REIMBURSEMENT
The Investment Adviser has voluntarily undertaken, until at least April 30,
1999, to pay expenses on behalf of the Portfolios (except the Global Sector
Portfolio) to the extent normal operating expenses (including investment
advisory fees but excluding interest, taxes, brokerage fees, commissions and
extraordinary charges) exceed a certain percentage of each Portfolio's average
daily net assets. The table below shows the expense limit and actual expenses
for each Portfolio and the reimbursement a Portfolio received, if any, for the
fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
EXPENSE ACTUAL
PORTFOLIO LIMIT EXPENSES REIMBURSEMENT
<S> <C> <C> <C>
Growth 1.00% % NONE
Bond 0.70% % NONE
Global 1.00% % NONE
Money Market 0.70% % NONE
Balanced 1.00% % NONE
Emerging Growth 1.00% % NONE
Strategic Total Return 1.00% % NONE
Aggressive Growth 1.00% % NONE
Growth & Income 1.00% % NONE
Tactical Asset Allocation 1.00% % NONE
C.A.S.E. Growth 1.00% %
Value Equity 1.00% %
International Equity(1) 1.50% %
U.S. Equity(1) 1.30% %
Third Avenue Value Portfolio(2) 1.00% % NONE
Real Estate Securities Portfolio(2) 1.00% N/A NONE
<FN>
- ------------------------------
(1) This Portfolio commenced operations January 2, 1997.
(2) This Portfolio had not commenced operations as of December 31, 1997.
</FN>
</TABLE>
In addition to the Investment Adviser's responsibilities discussed above, the
Investment Adviser's advisory agreement with the Fund (the "Advisory
Agreement") contemplates that the Investment Adviser, in connection with the
performance of its responsibilities under the Advisory Agreement, will enter
into sub-advisory agreements ("Sub-Advisory Agreements") with Sub-Advisers to
provide each Portfolio with portfolio management. Under current law, each
Sub-Advisory Agreement must be submitted to and approved by shareholders of a
Portfolio before the Sub-Adviser can provide investment advice to that
Portfolio. For example, if a new Sub-Adviser were retained, shareholders would
be required to approve the Sub-Advisory Agreement with that Sub-Adviser.
Similarly, if a Sub-Advisory Agreement currently in effect were amended in any
material respect, such amendment would generally be deemed to result in a new
contract for which shareholder approval would also be required. Moreover, in
most instances when there is a change of control of a Sub-Adviser, shareholder
approval is required.
The Fund's Board has determined that shareholders of each Portfolio invest in
the Fund, in part, because the Investment Adviser will select one or more
Sub-Advisers best suited to achieve each Portfolio's investment objective. The
Fund's Board believes that part of a shareholder's investment decision is a
determination to have those selections made by the Investment Adviser, a
professional management organization with personnel having substantial
experience in making such evaluations, selections and terminations.
Under applicable law, the Fund is not generally required to hold annual
shareholders' meetings, and does not generally hold such meetings, unless
legally required to do so, in order to avoid the attendant costs. The Fund is
currently required to call a meeting of shareholders of a Portfolio whenever it
decides to employ new or additional Sub-Advisers, or to approve a new
Sub-Advisory Agreement after an "assignment," or due to a material change in
Sub-Advisory Agreement terms, with respect to such Portfolio. Given the nature
of the Fund's operations and shareholders' reasons for investing in various of
the Portfolios, such expenses are considered to provide little, if any, benefit
to shareholders. For these reasons, the Fund and the Investment Adviser have
applied to the SEC for an exemption from the provisions of the 1940 Act to
permit the Fund and the Investment Adviser, subject to certain conditions, to
enter into, materially amend, and terminate, and to permit Sub-Advisers to act
pursuant to,
45
<PAGE>
Sub-Advisory Agreements without shareholder approval (the "Proposed
Sub-Advisory Selection Arrangement").
If the SEC exemption is granted, certain conditions would apply. The conditions
are intended to ensure that shareholders receive adequate disclosure about the
Sub-Advisers or a decision by the Investment Adviser and the Fund's Board to
appoint a new Sub-Adviser or to change materially the terms of a Sub-Advisory
Agreement. In addition, before a Portfolio could rely on the exemption, the
Proposed Sub-Advisory Selection Arrangement must be approved by a majority of
the outstanding voting shares of the Portfolio.
/diamond/ DISTRIBUTION AND SERVICE PLANS
DISTRIBUTION PLAN AND DISTRIBUTION AGREEMENT
Effective January 1, 1997, the Fund adopted a Plan of Distribution pursuant to
Rule 12b-1 under the 1940 Act ("Distribution Plan") and pursuant to the Plan,
entered into a Distribution Agreement with InterSecurities, Inc. ("ISI"), whose
principal office is located at 201 Highland Avenue, Largo, Florida 33770. ISI
is an affiliate of the Investment Adviser, and serves as principal underwriter
for the Fund.
The expenses the Fund may pay pursuant to the Distribution Plan include, but
not necessarily be limited to, the following: costs of printing and mailing
Fund prospectuses and Statements of Additional Information, and any supplements
thereto to prospective investors; costs relating to development and preparation
of Fund advertisements, sales literature and brokers' and other promotional
materials describing and/or relating to the Fund; expenses in connection with
presentation of seminars and sales meetings describing the Fund; development of
consumer-oriented sales materials describing the Fund; and expenses
attributable to "distribution-related services" provided to the Fund (e.g.,
salaries and benefits, office expenses, equipment expenses (i.e., computers,
software, office equipment, etc.), training expenses, travel costs, printing
costs, supply expenses, programming time and data center expenses, each as they
relate to the promotion of the sale of Fund shares).
Under the Distribution Plan, the Fund, on behalf of the Portfolios, is
authorized to pay to various service providers, as direct payment for expenses
incurred in connection with the distribution of a Portfolio's shares, amounts
equal to actual expenses associated with distributing such Portfolio's shares,
up to a maximum rate of 0.15% on an annualized basis of the average daily net
assets. This fee is measured and accrued daily and paid monthly.
ISI will submit to the Fund's Board for approval annual distribution expenses
with respect to each Portfolio. ISI allocates to each Portfolio distribution
expenses specifically attributable to the distribution of shares of such
Portfolio. Distribution expenses not specifically attributable to the
distribution of shares of a particular Portfolio are allocated among the
Portfolios, based upon the ratio of net asset value of each Portfolio to the
net asset value of all Portfolios, or such other factors as ISI deems fair and
are approved by the Fund's Board. ISI has determined that it will not seek
payment by the Fund of distribution expenses incurred with respect to any
Portfolio during the fiscal year ending December 31, 1998. Prior to ISI seeking
reimbursement of future expenses, Policyowners will be notified in advance.
/diamond/ ADMINISTRATIVE AND TRANSFER
AGENCY SERVICES
Effective January 1, 1997, the Fund entered into an Administrative Services and
Transfer Agency Agreement with WRL Investment Services, Inc. ("WRL Services"),
located at 201 Highland Avenue, Largo, Florida 33770, an affiliate of WRL
Management and WRL, to furnish the Fund with administrative services to assist
the Fund in carrying out certain of its functions and operations. Under this
Agreement, WRL Services shall furnish to each Portfolio, subject to the overall
supervision of the Fund's Board, supervisory, administrative, and transfer
agency services, including recordkeeping and reporting. WRL Services is
reimbursed by the Fund monthly on a cost incurred basis. Prior to January 1,
1997, WRL performed these services in connection with its serving as the Fund's
investment adviser.
/diamond/ SUB-ADVISERS
Each Sub-Adviser provides investment advisory assistance and portfolio
management advice to the Investment Adviser for its respective Portfolio(s).
Subject to review and supervision by the Investment Adviser and the Fund's
Board, each Sub-Adviser is responsible for the actual investment management of
its Portfolio(s) and for making decisions to buy, sell or hold any particular
security. Each Sub-Adviser also places orders to buy or sell securities on
behalf of that Portfolio. Each Sub-Adviser bears all of its expenses in
connection with the performance of its services, such as compensating and
furnishing office space for its officers and employees connected with
investment and economic research, trading and investment management of its
Portfolio(s). Each Sub-Adviser is a registered investment adviser under the
Investment Advisers Act of 1940, as amended.
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<PAGE>
/diamondS/
JANUS CAPITAL CORPORATION
Janus Capital Corporation ("Janus Capital"), located at 100 Fillmore Street,
Denver, CO 80206, serves as the Sub-Adviser to the Growth and Global
Portfolios. Thomas H. Bailey is the President of Janus Capital. Kansas City
Southern Industries, Inc. owns approximately 83% of Janus Capital.
Janus Capital provides investment management and related services to other
mutual funds, and individuals, corporate, charitable and retirement accounts.
See "Management of the Fund - The Sub-Advisers" in the SAI for a more detailed
description of the previous experience of Janus Capital as an investment
adviser.
/diamond/ PORTFOLIO MANAGERS:
SCOTT W. SCHOELZEL has served as the Portfolio Manager for the Growth Portfolio
since January 2, 1996. Mr. Schoelzel also serves as co-portfolio manager of
other mutual funds. Mr. Schoelzel is a Vice President of Janus Capital, where
he has been employed since 1994. From 1991 to 1993, Mr. Schoelzel was a
portfolio manager with Founders Asset Management, Denver, Colorado. Prior to
1991, he was a general partner of Ivy Lane Investments, Denver, Colorado (a
real estate investment brokerage).
HELEN Y. HAYES has served as Portfolio Manager of the Global Portfolio since
its inception. Ms. Hayes also serves as a portfolio manager of other mutual
funds. Ms. Hayes is also an Executive Vice President of Janus Investment Fund
and Janus Aspen Series. Ms. Hayes has been employed by Janus Capital since
1987.
/diamonds/
J.P. MORGAN INVESTMENT MANAGEMENT INC.
J. P. Morgan Investment Management Inc. ("J.P. Morgan Investment"), located at
522 Fifth Avenue, New York, NY 10036, serves as the Sub-Adviser to the Money
Market and Real Estate Securities Portfolios. J.P. Morgan Investment is a
wholly-owned subsidiary of J.P. Morgan & Co. Incorporated. J.P. Morgan
Investment provides investment management and related services for corporate,
public, and union employee benefit funds, foundations, endowments, insurance
companies and government agencies.
/diamond/ PORTFOLIO MANAGERS:
ROBERT R. JOHNSON serves as Portfolio Manager of the Money Market Portfolio.
Mr. Johnson is responsible for several short-term fixed income portfolios and
the business development of short-term fixed income products. Mr. Johnson is a
Vice President of J.P. Morgan Investment. He is also a member of the Fixed
Income Peer Review Committee. Prior to joining J.P. Morgan Investment in 1988,
he founded and managed R.R. Johnson Associates, merchant bankers. He also held
senior positions with the Bank of Montreal and U.S. Steel. He is a graduate of
Dartmouth College and has done graduate work at both Wayne State and Duquesne
Universities.
DANIEL P. O'CONNOR has served as the Portfolio Manager of the Real Estate
Securities Portfolio since its inception. Mr. O'Connor has 12 years of
investment experience. He is the senior portfolio manager for all real estate
securities investment-related activity at J.P. Morgan Investment. Prior to
joining J.P. Morgan Investment in 1996, he served for two years as Director. In
that position, Mr. O'Connor was responsible for developing the firm's REIT
investment management process, including integrating the fundamental real
estate research process with securities analysis. He is experienced in both
REIT equity analysis and REIT portfolio management of Real Estate Securities at
INVESCO, an investment management firm.
Prior to joining INVESCO, Mr. O'Connor worked for twelve years at the Delta Air
Lines pension fund, most recently as its Supervisor of Investments, where he
managed the firm's $550 million real estate, $3 billion fixed income and $100
million currency overlay pension fund programs and helped plan and implement
investment strategies for the $7 billion corporate pension fund. Mr. O'Connor
received a B.S. from Indiana University, an M.S. from Clemson University, and
an M.B.A. in Finance from the University of Chicago. He is a Chartered
Financial Analyst and is a member of AIMR and the New York Society of
Securities Analysts. Mr. O'Connor serves on the editorial board of the
Institutional Real Estate Securities Newsletter.
/diamonds/
AEGON USA INVESTMENT MANAGEMENT, INC.
AEGON USA Investment Management, Inc. ("AIMI"), located at 4333 Edgewood Road,
N.E., Cedar Rapids, IA 52499, serves as the Sub-Adviser to the Bond and
Balanced Portfolios. AIMI is an indirect, wholly-owned subsidiary of AEGON USA.
/diamond/ PORTFOLIO MANAGERS:
CLIFFORD A. SHEETS, CFA, AND JARRELL D. FREY, CFA, serve as Portfolio Managers
of the Bond Portfolio. Mr. Sheets has served as the Portfolio Manager of the
Bond Portfolio since January, 1998. Mr. Sheets has been with AIMI since 1990
and is currently an Executive Vice President. Prior to joining AIMI, Mr. Sheets
was head of
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<PAGE>
the Fixed Income Management Department of the Trust and Asset Management Group
of Bank One, Indianapolis NA. Mr. Frey has served as Portfolio Manager for the
Bond Portfolio since January, 1998. Mr. Frey joined AIMI in 1994 and is
currently a Senior Securities Analyst. Prior to joining AIMI, Mr. Frey was
employed for five years by Woodmen Accident and Life Company in Lincoln, NE
where he analyzed fixed income (both public and private debt offerings) and
equity securities.
MICHAEL VAN METER has served as the Senior Portfolio Manager of the Balanced
Portfolio since its inception. Mr. Van Meter also serves as Chairman of the
Equity Investment Policy Committee of AIMI. Mr. Van Meter was President and
Managing Partner of Perpetual Investment Advisors from 1983 to 1989, when AEGON
USA acquired that firm.
/diamonds/
VAN KAMPEN AMERICAN CAPITAL ASSET
MANAGEMENT, INC.
Van Kampen American Capital Asset Management, Inc. ("Van Kampen"), located at
One Parkview Plaza, Oakbrook Terrace, IL 60181, serves as the Sub-Adviser to
the Emerging Growth Portfolio.
Van Kampen became an indirect wholly-owned subsidiary of Morgan Stanley Group
Inc. on October 31, 1996. On June , 1997, Morgan Stanley Group Inc. merged
with Dean Witter, Discover & Co., a financial services company.
/diamond/ PORTFOLIO MANAGER:
GARY M. LEWIS has served as Portfolio Manager for the Emerging Growth Portfolio
since its inception. Mr. Lewis has also served as portfolio manager at American
Capital Asset Management, Inc., a predecessor firm of Van Kampen American
Capital Asset Management, Inc. for over six years and portfolio manager for the
Van Kampen American Capital Emerging Growth Fund, Inc. since April, 1989.
/diamonds/
LUTHER KING CAPITAL
MANAGEMENT CORPORATION
Luther King Capital Management Corporation ("Luther King Capital"), located at
301 Commerce Street, Suite 1600, Fort Worth, TX 76102, serves as the
Sub-Adviser to the Strategic Total Return Portfolio. Ultimate control of Luther
King Capital is exercised by J. Luther King, Jr. Luther King Capital provides
investment management services to accounts of individual investors, mutual
funds and other institutional investors. See "Management of the Fund - The
Sub-Advisers" in the SAI for a more detailed description of the previous
experience of Luther King Capital as an investment adviser.
/diamond/ PORTFOLIO MANAGERS:
LUTHER KING, JR. AND SCOT HOLLMANN have served as Portfolio Managers of the
Strategic Total Return Portfolio since its inception. Mr. King has been
President of Luther King Capital since 1979. Mr. Hollmann has served as Vice
President of Luther King Capital since 1983.
/diamonds/
FRED ALGER MANAGEMENT, INC.
Fred Alger Management, Inc. ("Alger Management"), located at 75 Maiden Lane,
New York, NY 10038, serves as the Sub-Adviser to the Aggressive Growth
Portfolio. Alger Management is a wholly-owned subsidiary of Fred Alger &
Company, Incorporated ("Alger, Inc."), which, in turn, is a wholly-owned
subsidiary of Alger Associates, Inc., a financial services holding company
controlled by Fred M. Alger and David D. Alger. As of March 31, 1998, Alger
Management had approximately $ 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/
FEDERATED INVESTMENT COUNSELING
Federated Investment Counseling ("Federated"), located at Federated Investors
Tower, Pittsburgh, PA 15222-3779, serves as the Sub-Adviser to the Growth &
Income Portfolio. Federated is a Delaware business trust organized on April 11,
1989. It is a subsidiary of Federated Investors. Federated serves as investment
adviser to a number of investment companies and private
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<PAGE>
accounts. Total assets under management or administered by Federated and other
subsidiaries of Federated Investors is approximately $ billion.
/diamond/ PORTFOLIO MANAGERS:
LINDA A. DUESSEL and STEVEN J. LEHMAN serve as Co-Portfolio Managers of the
Growth & Income Portfolio. Ms. Duessel has been a Portfolio Manager of the
Growth & Income Portfolio since July, 1996. Ms. Duessel is a Chartered
Financial Analyst and also serves as a co-portfolio manager for other funds
managed by Federated. Ms. Duessel received her B.S., Finance from the Wharton
School of the University of Pennsylvania and her M.S.I.A. from Carnegie Mellon
University. Ms. Duessel has been a Vice President of an affiliate of Federated
since 1995, and was an Assistant Vice President from 1991 - 1995.
Mr. Lehman has served as Co-Portfolio Manager since September, 1997. Mr. Lehman
joined Federated in May, 1997 as a Vice President. From 1985 to May, 1997, Mr.
Lehman served as a Portfolio Manager, then Vice President/Senior Portfolio
Manager, at First Chicago NBD Investment Management Company. Mr. Lehman is a
Chartered Financial Analyst; he received his M.A. from the University of
Chicago.
/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, 1998, had $ 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 136 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/
C.A.S.E. MANAGEMENT, INC.
C.A.S.E. Management, Inc. ("C.A.S.E."), located at 5355 Town Center Road, Suite
702, Boca Raton, FL 33486, 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/
NWQ INVESTMENT MANAGEMENT COMPANY, INC.
NWQ Investment Management Company, Inc. ("NWQ Investment"), located at 2049
Century Park East, 4th Floor, Los Angeles, CA 90067, 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 January 31, 1998, NWQ Investment had over $ billion in
assets under management.
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<PAGE>
/diamond/ PORTFOLIO MANAGER:
An investment policy committee is responsible for the day-to-day management of
the Value Equity Portfolio's investments. David A. Polak, CFA, Edward C.
Friedel, CFA, James H. Galbreath, CFA, Phyllis G. Thomas, CFA, and Jon D.
Bosse, CFA, constitute the committee.
EDWARD C. FRIEDEL, CFA serves as Senior Portfolio Manager for the Value Equity
Portfolio. Mr. Friedel has been a managing director and investment
strategist/portfolio manager of NWQ Investment since 1983. From 1971 to 1983,
Mr. Friedel was a portfolio manager for Beneficial Standard Investment
Management. Mr. Friedel is a graduate of the University of California at
Berkeley (BS) and Stanford University (MBA).
/diamonds/
MERIDIAN INVESTMENT
MANAGEMENT CORPORATION
Meridian Investment Management Corporation ("Meridian"), located at 12835 East
Arapahoe Road, Tower II, Penthouse, Englewood, CO 80112, serves as Sub-Adviser
to the Global Sector Portfolio. Meridian is a wholly-owned subsidiary of
Meridian Management & Research Corporation ("MM&R"). Michael J. Hart and Dr.
Craig T. Callahan each own 50% of MM&R. Meridian provides investment management
and related services to other mutual fund portfolios and individual, corporate,
charitable and retirement accounts. Meridian manages seven mutual fund wrap-fee
programs which, as of March 1, 1998, had aggregate assets of approximately $
million. Meridian provides investment advisory assistance, portfolio management
advice and quantitative investment research to the Investment Adviser for the
Global Sector Portfolio.
/diamond/ PORTFOLIO MANAGER:
Meridian's Investment Committee determines the guidelines for asset, country,
industry and securities weightings based on Meridian's proprietary quantitative
research methods. The Committee is comprised of Dr. Craig T. Callahan, Michael
J. Hart, Patrick S. Boyle and Bryan M. Ritz. Dr. Craig T. Callahan is Chairman
of the Investment Committee and Chief Investment Officer of Meridian, and
directs Meridian's investment research and analysis. Dr. Callahan obtained his
D.B.A. from Kent State University. Michael Hart is President of Meridian
Investment Management and holds an M.B.A. from the University of Denver.
Patrick S. Boyle, a Chartered Financial Analyst, acts as a portfolio manager
for several of Meridian's private accounts. Bryan R. Ritz, also a Chartered
Financial Analyst, serves as a portfolio manager for Meridian's private
accounts. Mr. Ritz holds a Bachelor of Science in Business Administration and a
M.B.A. from the University of Denver. In performing sub-advisory services,
Meridian may draw upon additional members of its research team. These employees
are generally specialists within Meridian's research department. However, the
Investment Committee supervises the members of the research department and
remains fully responsible for all such services.
/diamonds/
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 January 31, 1998, Scottish Equitable plc had
approximately $ billion in assets under management. Like the Investment
Adviser, Scottish Equitable is also an indirect wholly-owned subsidiary of
AEGON nv. Scottish Equitable currently provides investment advisory and
management services to certain of its affiliates, including Scottish Equitable
plc and to external organizations.
/diamond/ PORTFOLIO MANAGERS:
At Scottish Equitable, investment strategy formulation is the responsibility of
the Investment Strategy Group ("ISG"), which consists of one full-time
Investment Strategist (currently, Alastair Bryne) working with a team of
analysts/fund managers drawn from our equity and fixed-income teams.
On a monthly basis, the ISG presents the proposed investment strategy to the
Investment Management Board ("IMB"). The IMB consists of Russell Hogan, Chief
Investment Officer, Tom Crombie, Chief Investment Manager, Colin Black,
Investment Actuary, Mike Craston, Investment Manager - Business Development,
Andrew Hartley, Investment Manager - UK Equities and Malcolm Jones, Investment
Manager - International Equities.
The role of the IMB is to review critically the proposed investment strategy,
testing the assumptions of the analysis and ensuring internal consistency. Once
the IMB is satisfied with the investment strategy proposal, it is adopted and
translated into asset allocations for the Portfolio. The adopted investment
strategy and model asset allocations are communicated to the whole investment
team, which also serves as a final check on the
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<PAGE>
adopted investment strategy. No one individual is responsible for managing the
Portfolio.
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, CT 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 71 years of investment management experience, and has
managed mutual funds since 1935. As of December 31, 1998, GEIM and GEIC
together managed assets in excess of $ billion.
/diamond/ PORTFOLIO MANAGERS:
RALPH R. LAYMAN leads a team of GEIM Portfolio Managers for the International
Equity Portfolio. Mr. Layman has more than 19 years of investment experience
and has held positions with GE Investments since 1991. From 1989 to 1991, Mr.
Layman served as Executive Vice President, Partner and Portfolio Manager of
Northern Capital Management, and prior thereto, served as Vice President and
portfolio manager of Templeton Investment Counsel. Mr. Layman is currently a
Director and Executive Vice President of GE Investments.
EUGENE K. BOLTON is responsible for the overall management of the U.S. Equity
Portfolio and has served in that capacity since its inception. Mr. Bolton is
specifically responsible for selecting the Portfolio Managers of the U.S.
Equity Portfolio, and is also responsible for monitoring the investment
strategies employed by the Portfolio Managers of the U.S. Equity Portfolio to
ensure that they are consistent with the Portfolio's investment objective and
strategies. Mr. Bolton has more than 13 years of investment experience and has
held positions with GE Investments since 1984. Mr. Bolton is currently a
Director and Executive Vice President of GE Investments.
DAVID B. CARLSON is one of the four Portfolio Managers for the U.S. Equity
Portfolio and has served in that capacity since its inception. He has more than
15 years of investment experience and has held positions with GE Investments
since 1982. Mr. Carlson is currently a Senior Vice president of GE Investments.
CHRISTOPHER D. BROWN is one of the four Portfolio Managers for the U.S. Equity
Portfolio and has served in that capacity since its inception. He has more than
11 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
37 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
16 years of investment experience and has held positions with GE Investments
since 1982. Mr. Reinhardt is currently a Senior Vice President of GE
Investments.
EQSF ADVISERS, INC.
EQSF Advisers, Inc. ("EQSF"), located at 767 Third Avenue, New York, NY
10017-2023, serves as Sub-Adviser to the Third Avenue Value Portfolio. EQSF is
a New York corporation organized in 1986, and is controlled by Martin J.
Whitman.
/diamond/ PORTFOLIO MANAGER:
Martin J. Whitman has served as Portfolio Manager of the Third Avenue Value
Portfolio since inception. Mr. Whitman is Chairman, President and Chief
Excutive Officer of the Sub-Adviser. During the past five years, Mr. Whitman
has also served in various executive capacities with M.J. Whitman, Inc. and
several other affiliated companies of the Sub-Adviser engaged in various
investment and financial businesses. Mr. Whitman has over 41 years experience
in the securities industry, has served as a Distinguished Management Fellow at
the Yale School of Management and has been a director of various public and
private companies, currently including Danielson Holding Corporation, an
insurance holding company, and Nabors Industries, Inc., an international oil
drilling contractor.
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<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 0.20% (Prior to January 1, 1998, Janus Capital
Corporation, previous Sub-Adviser, received 0.25%)
Global 0.40%
Money Market 0.15%
Balanced 0.40%, less 50% of amount of excess expenses(1)
Emerging Growth 0.40%, less 50% of amount of excess expenses(1)
Strategic Total Return 0.40%
Aggressive Growth 0.40%
Tactical Asset Allocation 0.40%, less 50% of amount of excess expenses(1)
C.A.S.E. Growth 0.40%
Growth & Income 0.50% of the first $30 million of
average daily net assets;
0.35% of the next $20 million of
average daily net assets;
and 0.25% of average daily net assets
in excess of $50 million
Value Equity 0.40%, less 50% of amount of excess expenses(1)
Global Sector 0.40%(3)
International Equity Scottish Equitable: 0.50% of assets managed by
Scottish Equitable, less 50% of amount of excess
expenses attributable to such assets
GEIM: 0.50% of assets managed by GEIM, less
50% of amount of excess expenses attributable to
such assets(2)
U.S. Equity 0.40%, less 50% of amount of excess expenses(2)
Third Avenue Value 0.40%, less 50% of amount of excess expenses(1)
Real Estate Securities 0.40%
<FN>
- ------------------------------
(1) Excess expenses are those expenses paid by the Investment Adviser on behalf
of a Portfolio pursuant to any expense limitation.
(2) Any amount borne by GEIM pursuant to any expense limitation constitutes an
agreement between the Investment Adviser and GEIM only for the first
twelve months following the Portfolio's commencement of operations.
Thereafter, any such arrangements will be as mutually agreed upon by GEIM
and the Investment Adviser.
(3) Prior to March 1, 1997, INVESCO Global Asset Management Limited ("INVESCO")
served as a co-sub-adviser to the Global Sector Portfolio; for periods
prior to that date, INVESCO received monthly compensation from the
Investment Adviser at the annual rate of 0.40% of first $100 million
average daily net assets of the Portfolio and 0.35% of assets in excess of
$100 million; and Meridian received monthly compensation from the
Investment Adviser at the annual rate of 0.30% of first $100 million of
average daily net assets of the Portfolio and 0.35% of assets in excess of
$100 million. Effective June 17, 1997, Meridian receives monthly
compensation from the Investment Adviser at an annual rate of 0.40% of
average daily net assets.
</FN>
</TABLE>
/diamonds/
/diamond/ PORTFOLIO TRANSACTIONS
Each Sub-Adviser is also responsible for selecting the broker-dealers who
execute the portfolio transactions for its respective Portfolio(s). In placing
portfolio business with all dealers, the Sub-Adviser seeks best execution of
each transaction and all brokerage placement must be consistent with the Rules
of Fair Practice of the National Association of Securities Dealers, Inc. Within
these parameters, each Sub-Adviser is authorized to consider sales of the
Policies or Annuity Contracts described in the accompanying prospectus by a
broker-dealer as a factor in the selection of broker-dealers to execute
portfolio transactions. The Sub-Adviser is authorized to pay higher commissions
to brokerage firms that provide it with investment and research information
than to firms which do not provide such services, if the Sub-Adviser
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<PAGE>
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 Balanced Portfolio, it is anticipated that AIMI may
occasionally place portfolio business with ISI and AEGON USA Securities, Inc.,
affiliated brokers of the Investment Adviser and AIMI.
With respect to the Third Avenue Value Portfolio, it is anticipated that EQSF
may occasionally place portfolio business with M.J. Whitman, Inc., an affiliate
of EQSF.
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 and Global Portfolios may
transfer uninvested cash balances on a daily basis into certain joint trading
accounts. Assets in the joint trading accounts are invested in money market
instruments. All other participants in the joint trading accounts will be other
clients, including registered mutual fund clients, of Janus Capital or its
affiliates. The Growth and Global Portfolios will participate in the joint
trading accounts only to the extent that the investments of the joint trading
accounts are consistent with each Portfolio's investment policies and
restrictions. Janus Capital anticipates that the 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/ PREPARING FOR THE YEAR 2000
Like all financial services providers, the Fund and the Investment Adviser
utilize systems that may be affected by Year 2000 transition issues, and the
Fund relies on service providers, including the Fund's custodian and the
Sub-Adviser, that also may be affected. The Fund and the Investment Adviser
have developed, and are in the process of implementing, a Year 2000 transition
plan, and are confirming that the Fund's service providers are also so engaged.
The resources that are being devoted to this effort are substantial. It is
difficult to predict with precision whether the amount of resources ultimately
devoted, or the outcome of these efforts, will have any negative impact on the
Fund or the Investment Adviser. However, as of the date of this Prospectus, it
is not anticipated that Policyowners will experience negative
53
<PAGE>
effects on their investment, or on the services provided in connection
therewith, as a result of Year 2000 transition implementation. The Fund and the
Investment Adviser currently anticipate that their systems will be Year 2000
compliant on or about , 1999, but there can be no assurance that the
Fund or the Investment Adviser will be successful, or that interaction with
other service providers will not impair the Fund's or the Investment Adviser's
services at that time.
/diamond/ VALUATION OF SHARES
Each Portfolio's net asset value per share is ordinarily determined, once
daily, as of the close of the regular session of business on the New York Stock
Exchange ("Exchange") (usually 4:00 p.m., Eastern Time), on each day the
Exchange is open.
Net asset value of a Portfolio share is computed by dividing the value of the
net assets of the Portfolio by the total number of shares outstanding in the
Portfolio.
Except for money market instruments maturing in 60 days or less, securities
held by Portfolios other than the Money Market Portfolio are valued at market
value. Securities for which market values are not readily available are valued
at fair value as determined in good faith by the Investment Adviser or
Sub-Adviser under the supervision of the Fund's Board. Money market instruments
maturing in 60 days or less are valued on the amortized cost basis. (See the
SAI for details.)
The Fund's Board has determined that the most appropriate method for valuing
the securities of the Money Market Portfolio is the amortized cost method.
Under this method, the net asset value of Portfolio shares is expected to
remain at a constant $1.00 per share, although there can be no assurance that
the Portfolio will be able to maintain a stable net asset value. (See the SAI
for details concerning the amortized cost valuation method, including the
conditions under which it may be used.)
/diamond/ THE FUND AND ITS SHARES
The Fund was incorporated under the laws of the State of Maryland on August 21,
1985 and is registered with the SEC as an open-end, management investment
company.
The Fund offers its shares only for purchase by the Separate Accounts of the
Life Companies to fund benefits under variable life insurance or variable
annuity contracts issued by the Life Companies. Shares may be offered to other
life insurance companies in the future. Because Fund shares are sold to
Separate Accounts established to receive and invest premiums received under
variable life insurance policies and purchase payments received under the
variable annuity contracts, it is conceivable that, in the future, it may
become disadvantageous for variable life insurance Separate Accounts and
variable annuity Separate Accounts of the Life Companies to invest in the Fund
simultaneously. Neither the Life Companies nor the Fund currently foresees any
such disadvantages or conflicts, either to variable life insurance
policyholders or to variable annuity contract owners. Any Life Company may
notify the Fund's Board of a potential or existing conflict. The Fund's Board
will then determine if a material conflict exists and what action, if any,
should be taken in response. Such action could include the sale of Fund shares
by one or more of the Separate Accounts, which could have adverse consequences.
Material conflicts could result from, for example, (1) changes in state
insurance laws, (2) changes in Federal income tax laws, or (3) differences in
voting instructions between those given by variable life insurance
policyholders and those given by variable annuity contract owners. The Fund's
Board might conclude that separate funds should be established for variable
life and variable annuity Separate Accounts. If this happens, the affected Life
Companies will bear the attendant expenses of establishing separate funds. As a
result, variable life insurance policyholders and variable annuity contract
owners would no longer have the economies of scale typically resulting from a
larger combined fund.
The Fund offers a separate class of Common Stock for each Portfolio. All shares
of a Portfolio have equal voting rights, but only shares of a particular
Portfolio are entitled to vote on matters concerning only that Portfolio. Each
of the issued and outstanding shares of a Portfolio is entitled to one vote and
to participate equally in dividends and distributions declared by the Portfolio
and, upon liquidation or dissolution, to participate equally in the net assets
of the Portfolio remaining after satisfaction of outstanding liabilities. The
shares of a Portfolio, when issued, will be fully paid and nonassessable, have
no preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights. The holders
of more than 50% of the shares of the Fund voting for the election of directors
can elect all of the directors of the Fund if they so choose. In such event,
holders of the remaining shares would not be able to elect any directors.
Only the Separate Accounts of the Life Companies may hold shares of the Fund
and are entitled to exercise the rights directly as described above. To the
extent required by law, the Life Companies will vote the Fund's shares held in
the Separate Accounts, including Fund shares
54
<PAGE>
which are not attributable to Policyowners, 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 Policyowner 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 Policyowners 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' Policyowners, 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 Policyowners each year.
/diamond/ CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 200 Clarendon Street, 16th Floor, Boston, MA
02116, acts as Custodian and Dividend Disbursing Agent of 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 Third Avenue Value and the Real Estate Securities
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 Policyowners. 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 Port-folio. 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
55
<PAGE>
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 Policyowners; see the
SAI for a more detailed discussion. Prospective investors are urged to consult
their tax advisors.
56
<PAGE>
APPENDIX A
BRIEF EXPLANATION OF RATING CATEGORIES
<TABLE>
<CAPTION>
BOND RATING EXPLANATION
------------- --------------------------------------------------------------------------------
<S> <C> <C>
STANDARD & POOR'S CORPORATION AAA Highest rating; extremely strong capacity to pay principal and interest.
AA High quality; very strong capacity to pay principal and interest.
A Strong capacity to pay principal and interest; somewhat more susceptible to
the adverse effects of changing circumstances and economic conditions.
BBB Adequate capacity to pay principal and interest; normally exhibit adequate
protection parameters, but adverse economic conditions or changing
circumstances more likely to lead to a weakened capacity to pay principal and
interest than for higher rated bonds.
BB,B, and Predominantly speculative with respect to the issuer's capacity to meet
CC,CC,C required interest and principal payments. BB - lowest degree of speculation;
C - the highest degree of speculation. Quality and protective characteristics
outweighed by large uncertainties or major risk exposure to adverse
conditions.
D In default.
PLUS (+) OR MINUS (-) - The ratings from "AA" to "BBB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
UNRATED - Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
MOODY'S INVESTORS SERVICE, INC. Aaa Highest quality, smallest degree of investment risk.
Aa High quality; together with Aaa bonds, they compose the high-grade bond
group.
A Upper-medium grade obligations; many favorable investment attributes.
Baa Medium-grade obligations; neither highly protected nor poorly secured. Inter-
est and principal appear adequate for the present but certain protective ele-
ments 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.
</TABLE>
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
A-1
<PAGE>
WRL SERIES FUND, INC.
OFFICE OF THE FUND:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, Florida 33770-2597
(800) 851-9777
(813) 585-6565
<TABLE>
<S> <C>
INVESTMENT ADVISER: CUSTODIAN:
WRL Investment Management, Inc. Investors Bank & Trust Company
201 Highland Avenue 200 Clarendon Street
Largo, FL 33770-2597 16th Floor
Boston, MA 02116
</TABLE>
<TABLE>
<S> <C> <C>
DISTRIBUTOR: INDEPENDENT ACCOUNTANTS: TRANSFER AGENT:
InterSecurities, Inc. Price Waterhouse LLP WRL Investment Services, Inc.
201 Highland Avenue 1055 Broadway 201 Highland Avenue
Largo, FL 33770-2597 Kansas City, MO 64105 Largo, FL 33770-2597
</TABLE>
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.
5355 Town Center Road
Suite 702
Boca Raton, FL 33486
J.P. MORGAN INVESTMENT MANAGEMENT INC.
522 Fifth Avenue
New York, NY 10036
MERIDIAN INVESTMENT MANAGEMENT CORPORATION
12835 East Arapahoe Road
Tower II, Penthouse
Englewood, CO 80112
EQSF ADVISERS, INC.
767 Third Avenue
New York, NY 10017-2023
AEGON USA INVESTMENT MANAGEMENT, INC.
4333 Edgewood Road, N.E.
Cedar Rapids, IA 52499
DEAN INVESTMENT ASSOCIATES
2480 Kettering Tower
Dayton, OH 45423-2480
FRED ALGER MANAGEMENT, INC.
75 Maiden Lane
New York, NY 10038
VAN KAMPEN AMERICAN CAPITAL ASSET
MANAGEMENT, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
NWQ INVESTMENT MANAGEMENT COMPANY, INC.
2049 Century Park East
4th Floor
Los Angeles, CA 90067
GE INVESTMENT MANAGEMENT INCORPORATED
3003 Summer Street
Stamford, CT 06905
SCOTTISH EQUITABLE INVESTMENT MANAGEMENT LIMITED
Edinburgh Park
Edinburgh EH12 9SE, Scotland
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY STATE
OR JURISDICTION OF THE UNITED STATES OR ANY COUNTRY WHERE SUCH OFFER WOULD BE
UNLAWFUL.
<PAGE>
WRL SERIES FUND, INC.
AGGRESSIVE GROWTH PORTFOLIO
EMERGING GROWTH PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
GLOBAL PORTFOLIO
GROWTH PORTFOLIO
THIRD AVENUE VALUE PORTFOLIO
C.A.S.E. GROWTH PORTFOLIO
U.S. EQUITY PORTFOLIO
VALUE EQUITY PORTFOLIO
GLOBAL SECTOR PORTFOLIO
TACTICAL ASSET ALLOCATION PORTFOLIO
STRATEGIC TOTAL RETURN PORTFOLIO
REAL ESTATE SECURITIES PORTFOLIO
GROWTH & INCOME PORTFOLIO
BALANCED PORTFOLIO
BOND PORTFOLIO
MONEY MARKET PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but supplements
and should be read in conjunction with the WRL Series Fund, Inc. (the "Fund")
Prospectus. A copy of the Prospectus may be obtained from the Fund by writing
the Fund at 201 Highland Avenue, Largo, Florida 33770-2597 or by calling the
Fund at (800) 851-9777.
Investment Adviser:
WRL INVESTMENT MANAGEMENT, INC.
Sub-Advisers:
FRED ALGER MANAGEMENT, INC.
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
SCOTTISH EQUITABLE INVESTMENT MANAGEMENT LIMITED
GE INVESTMENT MANAGEMENT INCORPORATED
JANUS CAPITAL CORPORATION
C.A.S.E. MANAGEMENT, INC.
NWQ INVESTMENT MANAGEMENT COMPANY, INC.
DEAN INVESTMENT ASSOCIATES
MERIDIAN INVESTMENT MANAGEMENT CORPORATION
LUTHER KING CAPITAL MANAGEMENT CORPORATION
FEDERATED INVESTMENT COUNSELING
AEGON USA INVESTMENT MANAGEMENT, INC.
J.P. MORGAN INVESTMENT MANAGEMENT INC.
EQSF ADVISERS, INC.
The date of the Prospectus to which this Statement of Additional Information
relates and the date of this Statement of Additional Information is May 1,
1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page in this Statement Cross-Reference
of to
Additional Information Page in Prospectus
------------------------ -------------------
<S> <C> <C>
INVESTMENT OBJECTIVES AND POLICIES 9 - 12
Investment Restrictions
Aggressive Growth Portfolio
Emerging Growth Portfolio
International Equity Portfolio
Global Portfolio
Third Avenue Value Portfolio
Growth, C.A.S.E. Growth and Bond Portfolios
U.S. Equity Portfolio
Value Equity Portfolio
Global Sector Portfolio
Tactical Asset Allocation Portfolio
Strategic Total Return Portfolio
Real Estate Securities Portfolio
Growth & Income Portfolio
Balanced Portfolio
Money Market Portfolio
Investment Policies
Lending
Borrowing
Foreign Securities
Investment Funds (International Equity Portfolio)
Repurchase and Reverse Repurchase
Agreements
U.S. Government Securities
Non-Investment Grade Debt Securities
Convertible Securities
Investments in Futures, Options and Other
Derivative Instruments
Zero Coupon, Pay-In-Kind and Step Coupon
Securities
Warrants and Rights
Mortgage-Backed Securities
Asset-Backed Securities
Pass-Through Securities
Other Income Producing Securities
Illiquid and Restricted/144A Securities
Other Investment Companies
Quality and Diversification Requirements (Money
Market Portfolio)
Bank and Thrift Obligations
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page in this Statement Cross-Reference
of to
Additional Information Page in Prospectus
------------------------ -------------------
<S> <C> <C>
Management of the Fund
Directors and Officers
The Investment Adviser
The Sub-Advisers
Portfolio Transactions and Brokerage
Portfolio Turnover
Placement of Portfolio Brokerage
Purchase and Redemption of Shares
Determination of Offering Price
Net Asset Valuation
Calculation of Performance Related Information
Total Return
Yield Quotations
Yield Quotations - Money Market Portfolio
Taxes
Capital Stock of the Fund
Registration Statement
Financial Statements
Other Information
Appendix A - Description of Portfolio Securities A-1
</TABLE>
ii
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Aggressive Growth Portfolio, Emerging Growth
Portfolio, International Equity Portfolio, Global Portfolio, Growth Portfolio,
Third Avenue Value Portfolio, C.A.S.E. Growth Portfolio, U.S. Equity Portfolio,
Value Equity Portfolio, Global Sector Portfolio, Tactical Asset Allocation
Portfolio, Strategic Total Return Portfolio, Real Estate Securities Portfolio,
Growth & Income Portfolio, Balanced Portfolio, Bond Portfolio and Money Market
Portfolio (a "Portfolio" or collectively, the "Portfolios") of the Fund are
described in the Portfolios' Prospectus. Shares of the Portfolios are sold only
to the separate accounts of Western Reserve Life Assurance Co. of Ohio ("WRL")
and to separate accounts of certain of its affiliated life insurance companies
(collectively, the "Separate Accounts") to fund the benefits under certain
variable life insurance policies (the "Policies") and variable annuity
contracts (the "Annuity Contracts").
As indicated in the Prospectus, each Portfolio's investment objective and,
unless otherwise noted, their investment policies and techniques may be changed
by the Board of Directors of the Fund without approval of shareholders or
holders of the Policies or Annuity Contracts (collectively, "Policyowners"). A
change in the investment objective or policies of a Portfolio may result in the
Portfolio having an investment objective or policies different from those which
a Policyowner deemed appropriate at the time of investment.
As indicated in the Prospectus, each Portfolio is subject to certain
fundamental policies and restrictions which may not be changed without the
approval of the holders of a majority of the outstanding voting securities of
the Portfolio. "Majority" for this purpose and under the Investment Company Act
of 1940, as amended (the "1940 Act") means the lesser of (i) 67% of the
outstanding voting securities represented at a meeting at which more than 50%
of the outstanding voting securities of a Portfolio are represented or (ii)
more than 50% of the outstanding voting securities of a Portfolio. A complete
statement of all such fundamental policies is set forth below. State insurance
laws and regulations may impose additional limitations on the Fund's
investments, including the Fund's ability to borrow, lend and use options,
futures and other derivative instruments. In addition, such laws and
regulations may require that a Portfolio's investments meet additional
diversification or other requirements.
INVESTMENT RESTRICTIONS
/diamond/ AGGRESSIVE GROWTH PORTFOLIO
The Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the Portfolio in the securities of such issuer exceeds
5% of the value of the Portfolio's total assets, or (b) the Portfolio owns more
than 10% of the outstanding voting securities of any one class of securities of
such issuer.
2. Purchase any securities that would cause more than 25% of the value of
the Portfolio's total assets to be invested in the securities of issuers
conducting their principal business activities in the same industry; provided
that there shall be no limit on the purchase of U.S. Government securities.
3. Invest in commodities except that the Portfolio may purchase or sell
stock index futures contracts and related options thereon if thereafter no more
than 5% of its total assets are invested in aggregate initial margin and
premiums.
4. Purchase or sell real estate or real estate limited partnerships,
except that the Portfolio may purchase and sell securities secured by real
estate, mortgages or interests therein and securities that are issued by
companies that invest or deal in real estate.
5. Make loans to others, except through purchasing qualified debt
obligations, lending portfolio securities or entering into repurchase
agreements.
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
7. Borrow money, except that the Portfolio may borrow from banks for
investment purposes as set forth in the Prospectus. Immediately after any
borrowing, including reverse repurchase agreements, the Portfolio will maintain
asset coverage of not less than 300% with respect to all borrowings.
8. Issue senior securities, except that the Portfolio may borrow from
banks for investment purposes so long as the Portfolio maintains the required
coverage.
1
<PAGE>
Furthermore, the Portfolio has adopted the following non-fundamental investment
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or Policyowner approval:
(A) The Portfolio may not sell securities short or purchase securities on
margin, except that the Portfolio may obtain any short-term credit necessary
for the clearance of purchases and sales of securities. These restrictions
shall not apply to transactions involving selling securities "short against the
box."
(B) The Portfolio may not invest in securities of other investment
companies, except as it may be acquired as part of a merger, consolidation,
reorganization, acquisition of assets or offer of exchange.
(C) The Portfolio may not pledge, hypothecate, mortgage or otherwise
encumber more than 10% of the value of the Portfolio's total assets except as
noted in (E) below. These restrictions shall not apply to transactions
involving reverse repurchase agreements or the purchase of securities subject
to firm commitment agreements or on a when-issued basis.
(D) The Portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 or any other securities
as to which the Board of Directors has made a determination as to liquidity, as
permitted under the 1940 Act.
(E) The Portfolio may not invest in companies for the purpose of
exercising control or management.
/diamond/ EMERGING GROWTH
The Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the Portfolio in the securities of such issuer exceeds
5% of the value of the Portfolio's total assets, or (b) the Portfolio owns more
than 10% of the outstanding voting securities of any one class of securities of
such issuer.
2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services; for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction. In addition, there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Portfolio from investing in securities or other instruments backed by physical
commodities).
4. Purchase or sell real estate (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real estate,
including mortgage-backed securities, or securities of companies engaged in the
real estate business).
5. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or repurchase
agreements).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
7. Borrow money except for temporary or emergency purposes (not for
leveraging or investment) in an amount exceeding 25% of the value of the
Portfolio's total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that exceed 25% of the value of the
Portfolio's total assets by reason of a decline in total assets will be reduced
within three business days to the extent necessary to comply with the 25%
limitation. This policy shall not prohibit reverse repurchase agreements.
8. Issue senior securities, except as permitted by the 1940 Act.
Furthermore, the Portfolio has adopted the following non-fundamental investment
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or Policyowner approval:
(A) The Portfolio may not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount to the securities
sold short, provided that margin payments and other deposits in connection with
transactions in options, futures contracts and options on futures contracts
shall not be deemed to constitute selling securities short.
(B) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the clearance
of transactions and that margin payments and other deposits in connection with
transactions in options, futures contracts and options on futures contracts
shall not be deemed to constitute purchasing securities on margin.
(C) The Portfolio may not (i) purchase securities of other investment
companies, except in the open market
2
<PAGE>
where no commission except the ordinary broker's commission is paid, or (ii)
purchase or retain securities issued by other open-end investment companies.
Limitations (i) and (ii) do not apply to money market funds or to securities
received as dividends, through offers of exchange, or as a result of a
consolidation, merger or other reorganization.
(D) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets, provided that this limitation does not apply in the
case of assets deposited to provide margin or guarantee positions in options,
futures contracts and options on futures contracts or the segregation of assets
in connection with such contracts.
(E) The Portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 or any other securities
as to which the Board of Directors has made a determination as to liquidity, as
permitted under the 1940 Act.
(F) The Portfolio may not invest in companies for the purpose of
exercising control or management.
(G) The Portfolio may not invest in securities of foreign issuers
denominated in foreign currency and not publicly traded in the United States if
at the time of acquisition more than 20% of the Portfolio's total assets would
be invested in such securities.
/diamond/ INTERNATIONAL EQUITY PORTFOLIO
The Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the Portfolio in the securities of such issuer exceeds
5% of the value of the Portfolio's total assets, or (b) the Portfolio owns more
than 10% of the outstanding voting securities of any one class of securities of
such issuer. All securities of a foreign government and its agencies will be
treated as a single issuer for purposes of this restriction.
2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services; for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction, provided that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances. For
purposes of this restriction, (a) the government of a country, other than the
United States, will be viewed as one industry; and (b) all supranational
organizations together will be viewed as one industry.
3. Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this shall not
prevent the Portfolio from purchasing or selling options, futures, swaps and
forward contracts or from investing in securities or other instruments backed
by physical commodities).
4. Invest directly in real estate or interests in real estate; however,
the Portfolio may own securities or other instruments backed by real estate,
including mortgage-backed securities, or debt or equity securities issued by
companies engaged in those businesses.
5. Lend any security or make any other loan if, as a result, more than
30% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
7. Borrow money, except for temporary or emergency purposes (not for
leveraging or investment) in an amount exceeding 33-1/3% of the value of the
Portfolio's total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that exceed 33-1/3% of the value of the
Portfolio's total assets by reason of a decline in net assets will be reduced
within three business days to the extent necessary to comply with the 33-1/3%
limitation. This policy shall not prohibit reverse repurchase agreements or
deposits of assets to margin or guarantee positions in futures, options, swaps
or forward contracts, or the segregation of assets in connection with such
contracts.
8. Issue senior securities, except as permitted by the 1940 Act.
Furthermore, the Portfolio has adopted the following non-fundamental investment
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or Policyowner approval:
(A) The Portfolio may not (i) enter into any futures contracts or options
on futures contracts for purposes other than bona fide hedging transactions
within the meaning of Commodity Futures Trading Commission regulations if the
aggregate initial margin deposits and
3
<PAGE>
premiums required to establish positions in futures contracts and related
options that do not fall within the definition of bona fide hedging
transactions would exceed 5% of the fair market value of the Portfolio's net
assets, after taking into account unrealized profits and losses on such
contracts it has entered into and (ii) enter into any futures contracts or
options on futures contracts if the aggregate amount of the Portfolio's
commitments under outstanding futures contracts positions and options on
futures contracts would exceed the market value of its total assets.
(B) The Portfolio may not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount to the securities
sold short and provided that transactions in options, swaps and forward futures
contracts are not deemed to constitute selling securities short.
(C) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the clearance
of transactions, provided that margin payments and other deposits in connection
with transactions in options, futures, swaps and forward contracts shall not be
deemed to constitute purchasing securities on margin.
(D) The Portfolio may not purchase securities of other investment
companies, other than a security acquired in connection with a merger,
consolidation, acquisition, reorganization or offer of exchange and except as
otherwise permitted under the 1940 Act. Investments by the Portfolio in GEI
Short-Term Investment Fund, a private investment fund advised by GE Investment
Management Incorporated ("GEIM"), created specifically to serve as a vehicle
for the collective investment of cash balances of the Portfolio and other
accounts advised by GEIM or General Electric Investment Corporation ("GEIC"),
are not subject to this restriction, pursuant to and in accordance with
necessary regulatory approvals.
(E) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets, provided that this limitation does not apply to reverse
repurchase agreements or in the case of assets deposited to margin or guarantee
positions in futures, options, swaps or forward contracts or the segregation of
assets in connection with such contracts.
(F) The Portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 or any other securities
as to which a determination as to liquidity has been made pursuant to
guidelines adopted by the Board of Directors, as permitted under the 1940 Act.
(G) The Portfolio may not invest in companies for the purpose of
exercising control or management.
With respect to investment restriction 2. above, the Portfolio may use the
industry classifications reflected by the S&P 500 Composite Stock Index, if
applicable at the time of determination. For all other Portfolio holdings, the
Portfolio may use the Directory of Companies Required to File Annual Reports
with the Securities and Exchange Commission ("SEC") and Bloomberg Inc. In
addition, the Portfolio may select its own industry classifications, provided
such classifications are reasonable.
/diamond/ GLOBAL PORTFOLIO
The Portfolio may not, as a matter of fundamental policy:
1. (a) With respect to 75% of the Portfolio's assets, invest in the
securities (other than Government securities as defined in the 1940 Act) of any
one issuer if immediately thereafter, more than 5% of the Portfolio's total
assets would be invested in securities of that issuer; or (b) with respect to
100% of the Portfolio's assets, own more than either (i) 10% in principal
amount of the outstanding debt securities of an issuer, or (ii) 10% of the
outstanding voting securities of an issuer, except that such restrictions shall
not apply to Government securities, bank money market instruments or bank
repurchase agreements.
2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services; for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction, provided that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this shall not
prevent the Portfolio from purchasing or selling options, futures, swaps and
forward contracts or from investing in securities or other instruments backed
by physical commodities).
4. Invest directly in real estate or interests in real estate; however,
the Portfolio may own debt or equity securities issued by companies engaged in
those businesses.
5. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).
4
<PAGE>
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
7. Borrow money, except for temporary or emergency purposes (not for
leveraging or investment) in an amount exceeding 25% of the value of the
Portfolio's total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that exceed 25% of the value of the
Portfolio's total assets by reason of a decline in net assets will be reduced
within three business days to the extent necessary to comply with the 25%
limitation. This policy shall not prohibit reverse repurchase agreements or
deposits of assets to margin or guarantee positions in futures, options, swaps
or forward contracts, or the segregation of assets in connection with such
contracts.
8. Issue senior securities, except as permitted by the 1940 Act.
Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyowner approval:
(A) The Portfolio may not (i) enter into any futures contracts or options
on futures contracts for purposes other than bona fide hedging transactions
within the meaning of Commodity Futures Trading Commission regulations if the
aggregate initial margin deposits and premiums required to establish positions
in futures contracts and related options that do not fall within the definition
of bona fide hedging transactions would exceed 5% of the fair market value of
the Portfolio's net assets, after taking into account unrealized profits and
losses on such contracts it has entered into and (ii) enter into any futures
contracts or options on futures contracts if the aggregate amount of the
Portfolio's commitments under outstanding futures contracts positions and
options on futures contracts would exceed the market value of its total assets.
(B) The Portfolio may not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount to the securities
sold short and provided that transactions in options, swaps and forward futures
contracts are not deemed to constitute selling securities short.
(C) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the clearance
of transactions, provided that margin payments and other deposits in connection
with transactions in options, futures, swaps and forward contracts shall not be
deemed to constitute purchasing securities on margin.
(D) The Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies.
Limitations (i) and (ii) do not apply to money market funds or to securities
received as dividends, through offers of exchange, or as a result of a
consolidation, merger or other reorganization.
(E) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets, provided that this limitation does not apply to reverse
repurchase agreements or in the case of assets deposited to margin or guarantee
positions in futures, options, swaps or forward contracts or the segregation of
assets in connection with such contracts.
(F) The Portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 or any other securities
as to which the Board of Directors has made a determination as to liquidity, as
permitted under the 1940 Act.
(G) The Portfolio may not invest in companies for the purpose of
exercising control or management.
/diamond/ THIRD AVENUE VALUE PORTFOLIO
The Portfolio may not, as a matter of fundamental policy:
1. Act as underwriter of securities issued by other persons, except to
the extent that, in connection with the disposition of portfolio securities, it
may technically be deemed to be an underwriter under certain securities laws.
2. Invest 25% or more of the value of its total assets in the securities
of issuers (other than Government securities) which are determined to be
engaged in the same industry or similar trades or businesses or related trades
or businesses.
3. Invest in interests in oil, gas, or other mineral exploration or
development programs, although it may invest in the marketable securities of
companies which invest in or sponsor such programs.
4. Buy or sell commodities or commodity contracts or future contracts
(other than gold or foreign currencies unless acquired as a result of ownership
of securities).
5. Invest directly in real estate or interests in real estate, including
limited partnership interests; however, the Portfolio may own debt or equity
securities issued by companies engaged in those businesses.
5
<PAGE>
6. Borrow money or pledge, mortgage or hypothecate any of its assets
except that the Portfolio may borrow on a secured or unsecured basis as a
temporary measure for extraordinary or emergency purposes. Such temporary
borrowing may not exceed 5% of the value of the Portfolio's total assets when
the borrowing is made.
7. Issue any senior security except as permitted by the 1940 Act.
8. Lend any security or make any other loan if, as a result, more than
33-1/3% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).
Furthermore, the Portfolio has adopted the following non-fundamental investment
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or Policyowner approval:
(A) The Portfolio may not make short sales of securities or maintain a
short position.
(B) The Portfolio may not participate on a joint or joint and several
basis in any trading account in securities.
(C) The Portfolio may not invest in securities of other investment
companies if the Portfolio, after such purchase or acquisition owns, in the
aggregate, (i) more than 3% of the total outstanding voting stock of the
acquired company; (ii) securities issued by the acquired company having an
aggregate value in excess of 5% of the value of the total assets of the
Portfolio, or (iii) securities issued by the acquired company and all other
investment companies (other than treasury stock of the Portfolio) having an
aggregate value in excess of 10% of the value of the total assets of the
Portfolio.
/diamond/ GROWTH PORTFOLIO, C.A.S.E. GROWTH
PORTFOLIO AND BOND PORTFOLIO
A Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than cash items and "Government securities"
as defined in the 1940 Act) if immediately after and as a result of such
purchase (a) the value of the holdings of the Portfolio in the securities of
such issuer exceeds 5% of the value of the Portfolio's total assets, or (b) the
Portfolio owns more than 10% of the outstanding voting securities of any one
class of securities of such issuer.
2. Invest more than 25% (15% for C.A.S.E. Growth Portfolio) of the value
of the Portfolio's assets in any particular industry (other than Government
securities).
3. Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this restriction
shall not prevent the Portfolio from purchasing or selling options, futures
contracts, caps, floors and other derivative instruments, engaging in swap
transactions or investing in securities or other instruments backed by physical
commodities).
4. Invest directly in real estate or interests in real estate, including
limited partnership interests; however, the Portfolio may own debt or equity
securities issued by companies engaged in those businesses.
5. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of portfolio securities of the Portfolio.
6. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).
7. Borrow money, except for temporary or emergency purposes (not for
leveraging or investment) in an amount exceeding 25% of the value of the
Portfolio's total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that exceed 25% of the value of the
Portfolio's total assets by reason of a decline in net assets will be reduced
within three business days to the extent necessary to comply with the 25%
restriction. This policy shall not prohibit reverse repurchase agreements or
deposits of assets to provide margin or guarantee positions in connection with
transactions in options, future contracts, swaps, forward contracts, or other
derivative instruments or the segregation of assets in connection with such
transactions.
8. Issue senior securities, except as permitted by the 1940 Act.
Furthermore, the Portfolios have adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyowners approval:
(A) A Portfolio may not, as a matter of non-fundamental policy: (i) enter
into any futures contracts or options on futures contracts for purposes other
than bona fide hedging transactions within the meaning of Commodity Futures
Trading Commission regulations if the aggregate initial margin deposits and
premiums required to establish positions in futures contracts and related
options that do not fall within the definition of bona fide hedging transactions
would exceed 5% of the fair market value of the Portfolio's net assets, after
taking into account unrealized profits and losses on such contracts it has
entered into and (ii) enter into any futures
6
<PAGE>
contracts or options on futures contracts if the aggregate amount of the
Portfolio's commitments under outstanding futures contracts positions and
options on futures contracts would exceed the market value of its total assets.
(B) A Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets, provided that this limitation does not apply to reverse
repurchase agreements or in the case of assets deposited to provide margin or
guarantee positions in options, futures contracts, swaps, forward contracts or
other derivative instruments or the segregation of assets in connection with
such transactions.
(C) A Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities sold
short, and provided that transactions in options, futures contracts, swaps,
forward contracts and other derivative instruments are not deemed to constitute
selling securities short.
(D) A Portfolio may not purchase securities on margin, except that a
Portfolio may obtain such short-term credits as are necessary for the clearance
of transactions, and provided that margin payments and other deposits made in
connection with transactions in options, futures contracts, swaps, forward
contracts, and other derivative instruments shall not be deemed to constitute
purchasing securities on margin.
(E) A Portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 or any securities for
which the Board of Directors or the Sub-Adviser has made a determination of
liquidity, as permitted under the 1940 Act.
(F) A Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Restrictions (i) and (ii) do not apply to
money market funds or to securities received as dividends, through offers to
exchange, or as a result of reorganization, consolidation, or merger. If the
Portfolio invests in a money market fund, the Investment Adviser will reduce
its advisory fee by the amount of any investment advisory or administrative
service fees paid to the investment manager of the money market fund.
(G) A Portfolio may not invest more than 25% of its net assets at the
time of purchase in the securities of foreign issuers and obligors.
(H) A Portfolio may not invest in companies for the purpose of exercising
control or management.
/diamond/ U.S. EQUITY PORTFOLIO
The Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the Portfolio in the securities of such issuer exceeds
5% of the value of the Portfolio's total assets, or (b) the Portfolio owns more
than 10% of the outstanding voting securities of any one class of securities of
such issuer. All securities of a foreign government and its agencies will be
treated as a single issuer for purposes of this restriction.
2. Purchase any security that would cause more than 25% of the value of
the Portfolio's total assets to be invested in the securities of issuers
conducting their principal business activities in the same industry; provided
that there shall be no limit on the purchase of U.S. Government securities (as
defined in the 1940 Act). For purposes of this restriction, (a) the government
of a country, other than the United States, will be viewed as one industry; and
(b) all supranational organizations together will be viewed as one industry.
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Portfolio from purchasing or selling options, futures, swaps and forward
contracts or from investing in securities or other instruments backed by
physical commodities).
4. Purchase or sell real estate (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real-estate,
including mortgage-backed securities, or securities of companies engaged in the
real estate business).
5. Lend any security or make any other loan if, as a result, more than
30% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or repurchase
agreements).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
7. Borrow money or issue senior securities (as defined in the 1940 Act),
except that the Portfolio may borrow money from banks for temporary or
emergency purposes (not for leveraging or investment) in an aggregate amount
not exceeding 33-1/3% of the value of its
7
<PAGE>
total assets (including the amount borrowed) less liabilities (other than
borrowings) at the time the borrowing is made. Whenever borrowings, including
reverse repurchase agreements, of 5% or more of the Portfolio's total assets
are outstanding, the Portfolio will not purchase securities.
Furthermore, the Portfolio has adopted the following non-fundamental investment
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or Policyowner approval:
(A) The Portfolio may not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount of the securities
sold short.
(B) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for clearance of
transactions. (For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with futures contracts, financial
futures contracts or related options, and options on securities, options on
securities indexes and options on currencies will not be deemed to be a
purchase of securities on margin by the Portfolio.)
(C) The Portfolio may not purchase securities of other investment
companies, other than a security acquired in connection with a merger,
consolidation, acquisition, reorganization or offer of exchange and except as
otherwise permitted under the 1940 Act. Investments by the Portfolio in GEI
Short-Term Investment Fund, a private investment fund advised by GEIM, created
specifically to serve as a vehicle for the collective investment of cash
balances of the Portfolio and other accounts advised by GEIM or GEIC are not
subject to this restriction, pursuant to and in accordance with necessary
regulatory approvals.
(D) The Portfolio may not invest more than 15% of its net assets in
illiquid securities. For purposes of this restriction, illiquid securities are
securities that cannot be disposed of by the Portfolio within seven days in the
ordinary course of business at approximately the amount at which the Portfolio
has valued the securities. This Restriction does not include securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933 or
any other securities as to which a determination as to liquidity has been made
pursuant to guidelines adopted by the Board of Directors, as permitted under
the 1940 Act.
(E) The Portfolio may not purchase restricted securities if more than 10%
of the total assets of the Portfolio would be invested in restricted
securities. Restricted securities are securities that are subject to
contractual or legal restrictions on transfer, excluding for purposes of this
restriction, restricted securities that are eligible for resale pursuant the
Rule 144A under the Securities Act of 1933, as amended ("Rule 144A
Securities), that have been determined to be liquid under guidelines
established by the Fund's Board of Directors. In no event, will the Portfolio's
investment in illiquid and non-publicly traded securities, in the aggregate,
exceed 15% of its net assets.
(F) The Portfolio may not invest in companies for the purpose of
exercising control or management, except to the extent that exercise by the
Fund of its rights under agreements related to Portfolio securities would be
deemed to constitute such control.
(G) The Portfolio may not purchase or sell put options, call options,
spreads or combinations of put options, call options and spreads, except that
the Portfolio may purchase and sell covered put and call options on securities
and stock indexes, and futures contracts and options on futures contracts.
With respect to investment restriction 2. above, the Portfolio may use the
industry classifications reflected by the S&P 500 Composite Stock Index, if
applicable at the time of determination. For all other Portfolio holdings, the
Portfolio may use the Directory of Companies Required to File Annual Reports
with the SEC and Bloomberg Inc. In addition, the Portfolio may select its own
industry classifications, provided such classifications are reasonable.
/diamond/ VALUE EQUITY PORTFOLIO
The Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the Portfolio in the securities of such issuer exceeds
5% of the value of the Portfolio's total assets, or (b) the Portfolio owns more
than 10% of the outstanding voting securities of such issuer.
2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services; for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction. In addition, there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Make loans except (i) by purchasing debt securities in accordance with
its investment objectives and
8
<PAGE>
policies or by entering into repurchase agreements or (ii) by lending the
Portfolio securities to banks, brokers, dealers and other financial
institutions so long as such loans are not inconsistent with the 1940 Act or
the rules and regulations or interpretations of the SEC thereunder.
4. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments.
5. Purchase or sell real estate or real estate limited partnerships (but
this shall not prevent the Portfolio from investing in securities or other
instruments backed by real estate, including mortgage-backed securities, or
securities of companies engaged in the real estate business).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
7. Borrow money, except from banks for temporary or emergency purposes
(not for leveraging or investment) in an amount exceeding 10% of the value of
the Portfolio's total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that exceed 10% of the value of the
Portfolio's total assets by reason of a decline in net assets will be reduced
within three business days to the extent necessary to comply with the 10%
limitation. The Portfolio may not purchase additional securities when
borrowings exceed 5% of total assets.
8. Issue senior securities, except as permitted by the 1940 Act.
Furthermore, the Portfolio has adopted the following non-fundamental investment
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or Policyowner approval:
(A) The Portfolio may not purchase on margin or sell short.
(B) The Portfolio may not invest more than an aggregate of 15% of the net
assets of the Portfolio, determined at the time of investment, in illiquid
securities, subject to legal or contractual restrictions on resale or
securities for which there are no readily available markets.
(C) The Portfolio may not invest in companies for the purpose of
exercising control or management.
(D) The Portfolio may not pledge, mortgage or hypothecate any of its
assets to an extent greater than 10% of its total assets at fair market value.
(E) The Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Limitations (i) and (ii) do not apply to
money market funds or to securities received as dividends, through offers of
exchange, or as a result of a consolidation, merger or other reorganization.
/diamond/ GLOBAL SECTOR PORTFOLIO
The Portfolio may not, as a matter of fundamental policy:
1. With respect to seventy-five percent (75%) of the Portfolio's total
assets, purchase the securities of any one issuer, except cash items and
"government securities" as defined under the 1940 Act, if the purchase would
cause the Portfolio to have more than 5% of the value of its total assets
invested in the securities of such issuer or to own more than 10% of the
outstanding voting securities of such issuer.
2. Borrow money from banks or issue senior securities (as defined in the
1940 Act), except that the Portfolio may borrow money from banks for temporary
or emergency purposes (not for leveraging or investment) and may enter into
reverse repurchase agreements in an aggregate amount not exceeding 33-1/3% of
the value of its total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that come to exceed 33-1/3% of the value
of the Portfolio's total assets by reason of a decline in net assets will be
reduced within three business days to the extent necessary to comply with the
33-1/3% limitation. This restriction shall not prohibit deposits of assets to
margin or guarantee positions in futures, options, swaps or forward contracts,
or the segregation of assets in connection with such contracts.
3. Invest directly in real estate or interests in real estate; however,
the Portfolio may own debt or equity securities issued by companies engaged in
those businesses.
4. Purchase or sell physical commodities other than gold or foreign
currencies unless acquired as a result of ownership of securities (but this
shall not prevent the Portfolio from purchasing or selling options, futures,
swaps and forward contracts or from investing in securities or other
instruments backed by physical commodities).
5. Lend any security or make any other loan if, as a result, more than
33-1/3% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).
9
<PAGE>
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of portfolio securities of the Portfolio.
7. Invest more than 25% of the value of its total assets in any
particular industry (other than government securities).
Furthermore, the Portfolio has adopted the following non-fundamental investment
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or Policyowner approval:
(A) The Portfolio will not (i) enter into any futures contracts or
options on futures contracts if immediately thereafter the aggregate margin
deposits on all outstanding futures contracts positions held by the Portfolio
and premiums paid on outstanding options on futures contracts, after taking
into account unrealized profits and losses, would exceed 5% of the market value
of the total assets of the Portfolio, or (ii) enter into any futures contracts
if the aggregate net amount of the Portfolio's commitments under outstanding
futures contracts positions of the Portfolio would exceed the market value of
the total assets of the Portfolio.
(B) The Portfolio may not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount to the securities
sold short without the payment of any additional consideration therefor, and
provided that transactions in options, swaps and forward futures contracts are
not deemed to constitute selling securities short.
(C) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the clearance
of transactions, and provided that margin payments and other deposits in
connection with transactions in options, futures, swaps and forward contracts
shall not be deemed to constitute purchasing securities on margin.
(D) The Portfolio may not (i) purchase securities of closed-end
investment companies, except in the open market where no commission except the
ordinary broker's commission is paid, or (ii) purchase or retain securities
issued by other open-end investment companies. Limitations (i) and (ii) do not
apply to money market funds, funds that are the only practical means, or one of
the few practical means, of investing in a particular emerging country, or to
securities received as dividends, through offers of exchange, or as a result of
a reorganization, consolidation, or merger.
(E) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net asset value, provided that this limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or placed
in a segregated account in connection with such contracts.
(F) The Portfolio may not purchase any security or enter into a
repurchase agreement if, as a result, more than 15% of its net assets would be
invested in any combination of: (i) repurchase agreements not entitling the
holder to payment of principal and interest within seven days, and (ii)
securities that are illiquid by virtue of legal or contractual restrictions on
resale or the absence of a readily available market. The Board of Directors, or
the Portfolio's Sub-Adviser acting pursuant to authority delegated by the Board
of Directors, may determine that a readily available market exists for
securities eligible for resale pursuant to Rule 144A under the Securities Act
of 1933 Act, or any successor to such rule. According to the determination,
such securities would not be subject to the foregoing limitation.
(G) The Portfolio may not invest in companies for the purpose of
exercising control or management, except to the extent that exercise by the
Fund of its rights under agreements related to Portfolio securities would be
deemed to constitute such control.
With respect to investment restriction (F) above, the Fund's Board of Directors
has delegated to the Sub-Adviser the authority to determine that a liquid
market exists for securities eligible for resale pursuant to Rule 144A under
the Securities Act of 1933, or any successor to such rule and that such
securities are not subject to such restriction. Under guidelines established by
the Board of Directors, the Sub-Adviser will consider the following factors,
among others, in making this determination: (1) the frequency of trades and
quotes for the security; (2) the number of dealers willing to purchase or sell
the security and the number of other potential purchasers; (3) the willingness
of dealers to undertake to make a market in the security; and (4) the nature of
the security and the nature of marketplace trades (E.G., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer).
/diamond/ TACTICAL ASSET ALLOCATION PORTFOLIO
The Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase
10
<PAGE>
(a) the value of the holdings of the Portfolio in the securities of such issuer
exceeds 5% of the value of the Portfolio's total assets, or (b) the Portfolio
owns more than 10% of the outstanding voting securities of such issuer.
2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services; for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction. In addition, there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments.
4. Purchase or sell real estate (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real estate,
including mortgage-backed securities, or securities of companies engaged in the
real estate business).
5. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper or debt securities).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
7. Borrow money, except for temporary or emergency purposes (not for
leveraging or investment) in excess of 25% of the value of the Portfolio's
total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that exceed 25% of the value of the Portfolio's
total assets by reason of a decline in net assets will be reduced within three
business days to the extent necessary to comply with the 25% limitation.
8. Issue senior securities, except as permitted by the 1940 Act.
Furthermore, the Portfolio has adopted the following non-fundamental investment
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or Policyowner approval:
(A) The Portfolio may not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount to the securities
sold short.
(B) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the clearance
of transactions.
(C) The Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Limitations (i) and (ii) do not apply to
money market funds or to securities received as dividends, through offers of
exchange, or as a result of a consolidation, merger or other reorganization.
(D) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets.
(E) The Portfolio may not invest in companies for the purpose of
exercising control or management.
(F) The Portfolio may not invest in securities of foreign issuers
denominated in foreign currency and not publicly traded in the United States if
at the time of acquisition more than 25% of the Portfolio's total assets would
be invested in such securities. SEE "Foreign Securities", p. 18.
/diamond/ STRATEGIC TOTAL RETURN PORTFOLIO
The Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the Portfolio in the securities of such issuer exceeds
5% of the value of the Portfolio's total assets, or (b) the Portfolio owns more
than 10% of the outstanding voting securities of such issuer.
2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services, for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction. In addition, there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Portfolio from investing in securities or other instruments backed by physical
commodities).
11
<PAGE>
4. Purchase or sell real estate (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real estate,
including mortgage-backed securities, or securities of companies engaged in the
real estate business).
5. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper or debt securities).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
7. Borrow money, except for temporary or emergency purposes (not for
leveraging or investment) in an amount exceeding 25% of the value of the
Portfolio's total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that exceed 25% of the value of the
Portfolio's total assets by reason of a decline in net assets will be reduced
within three business days to the extent necessary to comply with the 25%
limitation.
8. Issue senior securities, except as permitted by the 1940 Act.
Furthermore, the Portfolio has adopted the following non-fundamental investment
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or Policyowner approval:
(A) The Portfolio may not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount to the securities
sold short, and provided that margin payments and other deposits in connection
with transactions in options, swaps and forward futures contracts are not
deemed to constitute selling securities short.
(B) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the clearance
of transactions, and that margin payments and other deposits in connection with
transactions in options, futures, swaps and forward contracts shall not be
deemed to constitute purchasing securities on margin.
(C) The Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies.
Limitations (i) and (ii) do not apply to money market funds or to securities
received as dividends, through offers of exchange, or as a result of a
consolidation, merger or other reorganization.
(D) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets, provided that this limitation does not apply in the
case of assets deposited to margin or guarantee positions in options, futures
contracts and options on futures contracts or placed in a segregated account in
connection with such contracts.
(E) The Portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 Act or any other
securities as to which the Board of Directors has made a determination as to
liquidity, as permitted under the 1940 Act.
(F) The Portfolio may not invest in companies for the purpose of
exercising control or management.
(G) The Portfolio may not invest in securities of foreign issuers
denominated in foreign currency and not publicly traded in the United States if
at the time of acquisition more than 10% of the Portfolio's total assets would
be invested in such securities.
/diamond/ REAL ESTATE SECURITIES PORTFOLIO
The Portfolio may not, as a matter of fundamental policy:
1. Invest less than 25% of its assets in securities of issuers primarily
engaged in the real estate industry. The Portfolio will not invest more than
25% of its assets in the securities of issuers primarily engaged in any other
single industry, provided that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.
2. Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this shall not
prevent the Portfolio from purchasing or selling options, futures, swaps and
forward contracts or from investing in securities or other instruments backed
by physical commodities).
3. Invest directly in real estate or interests in real estate; however,
the Portfolio may own securities or other instruments backed by real estate,
including mortgage-backed securities, or debt or equity securities issued by
companies engaged in those businesses and the Portfolio may hold and sell real
estate acquired by the Portfolio as a result of the ownership of securities.
4. Make loans, except that the Portfolio (i) may lend portfolio
securities with a value not exceeding one-third of the Portfolio's total
assets, (ii) enter into repurchase agreements, and (iii) purchase all or a
portion of an issue of debt obligations (including privately issued debt
obligations), loan participation interests, bank certificates
12
<PAGE>
of deposit, bankers' acceptances, debentures or other securities, whether or
not the purchase is made upon the original issuance of the securities.
5. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
6. Borrow money except for temporary or emergency purposes (not for
leveraging or investment) in an amount not exceeding 33-1/3% of the value of the
Portfolio's total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that exceed 33-1/3% of the value of the
Portfolio's total assets by reason of the decline in net assets will be reduced
within three business days to the extent necessary to comply with the 33-1/3%
limitation. This policy shall not prohibit reverse repurchase agreements or
deposits of assets to margin or guarantee positions in futures, options, swaps
or forward contracts, or the segregation of assets in connection with such
contracts.
7. Issue senior securities, except as permitted by the 1940 Act.
Furthermore, the Portfolio has adopted the following non-fundamental investment
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or Policyowner approval:
(A) The Portfolio may not (i) enter into any futures contracts or options
on futures contracts for purposes other than bona fide hedging transactions
within the meaning of Commodity Futures Trading Commission regulations if the
aggregate initial margin deposits and premiums required to establish positions
in futures contracts and related options that do not fall within the definition
of bona fide hedging transactions would exceed 5% of the fair market value of
the Portfolio's net assets, after taking into account unrealized profits and
losses on such contracts it has entered into and (ii) enter into any futures
contracts or options on futures contracts if the aggregate amount of the
Portfolio's commitments under outstanding futures contracts positions and
options on futures contracts would exceed the market value of its total assets.
(B) The Portfolio may not sell securities short, unless it owns or has
the right to obtain securities equivalant in kind and amount to the securities
sold short and provided that transactions in options, futures contracts, swaps,
forward contracts and other derivative instruments are not deemed to constitute
selling securities short.
(C) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the clearance
of transactions, provided that margin payments and other deposits in connection
with transactions in options, futures contracts, swaps and forward contracts
and other derivative instruments shall not be deemed to constitute purchasing
securities on margin.
(D) The Portfolio may not purchase securities of other investment
companies, other than a security acquired in connection with a merger,
consolidation, acquisition, reorganization or offer of exchange and except as
otherwise permitted under the 1940 Act.
(E) The Portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 or any other securities
as to which a determination as to liquidity has been made pursuant to
guidelines adopted by the Board of Directors, as permitted under the 1940 Act.
(F) The Portfolio may not invest in companies for the purpose of
exercising control or management.
/diamond/ GROWTH & INCOME PORTFOLIO
The Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the Portfolio in the securities of such issuer exceeds
5% of the value of the Portfolio's total assets, or (b) the Portfolio owns more
than 10% of the outstanding voting securities of any one class of securities of
such issuer.
2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services, for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction. In addition, there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell commodities. However, the Portfolio may purchase put
options on portfolio securities and on financial futures contracts. In
addition, the Portfolio reserves the right to hedge the Portfolio by entering
into financial futures contracts and to sell calls on financial futures
contracts.
4. Purchase or sell real estate, although it may invest in the securities
of companies whose business
13
<PAGE>
involves the purchase or sale of real estate or in securities which are secured
by real estate or interests in real estate.
5. Lend any of its assets except portfolio securities up to one-third of
the value of its total assets. This shall not prevent the purchase or holding
of corporate bonds, debentures, notes, certificates of indebtedness or other
debt securities of an issuer, repurchase agreements, or other transactions
which are permitted by the Portfolio's investment objective and policies.
6. Underwrite any issue of securities, except as it may be deemed to be
an underwriter under the 1933 Act in connection with the sale of restricted
securities which the Portfolio may purchase pursuant to its investment
objective and policies.
7. Borrow money or engage in reverse repurchase agreements for investment
leverage, but rather as a temporary, extraordinary, or emergency measure to
facilitate management of the Portfolio by enabling the Portfolio to meet
redemption requests when the liquidation of portfolio securities is deemed to
be inconvenient or disadvantageous. The Portfolio will not purchase any
securities while any borrowings are outstanding. However, during the period any
reverse repurchase agreements are outstanding, but only to the extent necessary
to assure completion of the reverse repurchase agreements, the Portfolio will
restrict the purchase of portfolio instruments to money market instruments
maturing on or before the expiration date of the reverse repurchase agreements.
8. Issue senior securities, except that the Portfolio may borrow money
and engage in reverse repurchase agreements in amounts up to one-third of the
value of its net assets, including the amounts borrowed.
Furthermore, the Portfolio has adopted the following non-fundamental investment
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or Policyowner approval:
(A) The Portfolio will not sell securities short unless: (i) during the
time the short position is open, it owns an equal amount of the securities sold
or securities readily and freely convertible into or exchangeable, without
payment of additional consideration, for securities of the same issue as, and
equal in amount to, the securities sold short; and (ii) not more than 10% of
the Portfolio's net assets (taken at current value) is held as collateral for
such sales at any one time.
(B) The Portfolio will not purchase securities on margin, other than in
connection with the purchase of put options on financial futures contracts, but
may obtain such short-term credits as may be necessary for the clearance of
transactions.
(C) The Portfolio will not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 or any securities for
which the Board of Directors or the Sub-Adviser has made a determination of
liquidity, as permitted under the 1940 Act.
(D) The Portfolio will not purchase securities of a company for the
purpose of exercising control or management. However, the Portfolio will
acquire no more than 10% of the voting securities of an issuer and may exercise
its voting power in the Portfolio's best interest. From time to time, the
Portfolio, together with other investment companies advised by affiliates or
subsidiaries of Federated Investors, may together buy and hold substantial
amounts of a company's voting stock. All such stock may be voted together. In
some cases, the Portfolio and the other investment companies might collectively
be considered to be in control of the company in which they have invested.
(E) The Portfolio will not purchase the securities of any issuer (other
than the U.S. Government, its agencies, or instrumentalities or instruments
secured by securities of such issuers, such as repurchase agreements or cash or
cash items) if, as a result, more than 5% of the value of its total assets
would be invested in the securities of such issuer, or acquire more than 10% of
any class of voting securities of any issuer. For these purposes the Portfolio
takes all common stock and all preferred stock of an issuer each as a single
class, regardless of priorities, series, designations, or other differences.
(F) The Portfolio will not write call options on securities unless the
securities are held in the Portfolio's portfolio or unless the Portfolio is
entitled to them in deliverable form without further payment or after
segregating cash in the amount of any further payment. The Portfolio will not
purchase put options on securities unless the securities are held in the
Portfolio's portfolio.
/diamond/ BALANCED PORTFOLIO
The Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the Portfolio in the securities of such issuer exceeds
5% of the value of the Portfolio's total assets, or (b) the Portfolio owns more
than 10% of the outstanding voting securities of such issuer.
2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same
14
<PAGE>
industry. Utilities will be divided according to their services, for example,
gas, gas transmission, electric and telephone, and each will be considered a
separate industry for purposes of this restriction. In addition, there shall be
no limitation on the purchase of obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, or of certificates of deposit
and bankers' acceptances.
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Portfolio from purchasing or selling options, futures, swaps and forward
contracts or from investing in securities or other instruments backed by
physical commodities).
4. Purchase or sell real estate (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real estate,
including mortgage-backed securities, or securities of companies engaged in the
real estate business).
5. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchase of commercial paper or debt securities).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
7. Borrow money, except for temporary or emergency purposes (not for
leveraging or investment) in excess of 25% of the value of the Portfolio's
total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that exceed 25% of the value of the Portfolio's
total assets by reason of decline in net assets will be reduced within three
business days to the extent necessary to comply with the 25% limitation.
8. Issue senior securities, except as permitted by the 1940 Act.
Furthermore, the Portfolio has adopted the following non-fundamental investment
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or Policyowner approval:
(A) The Portfolio may not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount to the securities
sold short.
(B) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the clearance
of transactions.
(C) The Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Limitations (i) and (ii) do not apply to
money market funds or to securities received as dividends, through offers of
exchange, or as a result of a consolidation, merger or other reorganization.
(D) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets.
(E) The Portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 or any other securities
as to which the Board of Directors has made a determination as to liquidity, as
permitted under the 1940 Act.
(F) The Portfolio may not invest in companies for the purpose of
exercising control or management.
(G) The Portfolio may not invest in securities of foreign issuers
denominated in foreign currency and not publicly traded in the United States if
at the time of acquisition more than 25% of the Portfolio's total assets would
be invested in such securities. SEE "Foreign Securities", p. 18.
/diamond/ MONEY MARKET PORTFOLIO
The Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than cash items and "Government securities"
as defined in the 1940 Act) if immediately after and as a result of such
purchase (a) the value of the holdings of the Portfolio in the securities of
such issuer exceeds 5% of the value of the Portfolio's total assets, or (b) the
Portfolio owns more than 10% of the outstanding voting securities of any one
class of securities of such issuer.
2. Invest more than 25% of the value of the Portfolio's assets in any
particular industry (other than Government securities or obligations of U.S.
branches of U.S. banks).
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities.
4. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real estate (including real estate limited partnerships), commodities,
or commodity contracts or interest in oil, gas or mineral exploration or
15
<PAGE>
development programs or leases. However, the Portfolio may purchase debt
securities or commercial paper issued by companies which invest in real estate
or interest therein, including real estate investment trusts.
5. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of portfolio securities of the Portfolio.
6. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).
7. Borrow money, except for temporary or emergency purposes (not for
leveraging or investment) in an amount exceeding 25% of the value of the
Portfolio's total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that exceed 25% of the value of the
Portfolio's total assets by reason of a decline in net assets will be reduced
within three business days to the extent necessary to comply with the 25%
restriction. This policy shall not prohibit reverse repurchase agreements or
the segregation of assets in connection with such transactions.
8. Issue senior securities, except as permitted by the 1940 Act.
Furthermore, the Portfolio has adopted the following non-fundamental investment
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or Policyowner approval:
(A) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets, provided that this limitation does not apply to reverse
repurchase agreements or the segregation of assets in connection with such
transactions.
(B) The Portfolio may not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount to the securities
sold short.
(C) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the clearance
of transactions.
(D) The Portfolio may not invest more than 10% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 or any securities for
which the Board of Directors or the Sub-Adviser has made a determination of
liquidity, as permitted under the 1940 Act.
(E) The Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Restrictions (i) and (ii) do not apply to
securities received as dividends, through offers to exchange, or as a result of
reorganization, consolidation, or merger.
(F) The Portfolio may not invest in companies for the purpose of
exercising control or management.
Except with respect to borrowing money, if a percentage limitation set forth
above in the investment restrictions for each Portfolio is complied with at the
time of the investment, a subsequent change in the percentage resulting from
any change in value of a Portfolio's net assets will not result in a violation
of such restriction. State laws and regulations may impose additional
limitations on borrowing, lending, and the use of options, futures, and other
derivative instruments. In addition, such laws and regulations may require a
Portfolio's investments in foreign securities to meet additional
diversification and other requirements.
INVESTMENT POLICIES
This section explains certain other Portfolio policies, subject to each
Portfolio's investment restrictions. PLEASE CAREFULLY REVIEW THE "INVESTMENT
RESTRICTIONS" FOR EACH PORTFOLIO LISTED ABOVE. (For a complete discussion of
each Portfolio's investment policies and restrictions, please refer to the
Fund's Prospectus for these Portfolios.)
/diamond/ LENDING
Each of the Portfolios may lend its portfolio securities subject to the
restrictions stated in this Statement of Additional Information. Under
applicable regulatory requirements (which are subject to change), the following
conditions apply to securities loans: (a) the loan must be continuously secured
by liquid assets maintained on a current basis in an amount at least equal to
the market value of the securities loaned; (b) each Portfolio must receive any
dividends or interest paid by the issuer on such securities; (c) each Portfolio
must have the right to call the loan and obtain the securities loaned at any
time upon notice of not more than five business days, including the right to
call the loan to permit voting of the securities; and (d) each Portfolio must
receive either interest from the investment of collateral or a fixed fee from
the borrower.
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Securities loaned by a Portfolio remain subject to fluctuations in market
value. A Portfolio may pay reasonable finders, custodian and administrative
fees in connection with a loan. Securities lending, as with other extensions of
credit, involves the risk that the borrower may default. Although securities
loans will be fully collateralized at all times, a Portfolio may experience
delays in, or be prevented from, recovering the collateral. During the period
that the Portfolio seeks to enforce its rights against the borrower, the
collateral and the securities loaned remain subject to fluctuations in market
value. The Portfolios do not have the right to vote securities on loan, but
would terminate the loan and regain the right to vote if it were considered
important with respect to the investment. A Portfolio may also incur expenses
in enforcing its rights. If a Portfolio has sold a loaned security, it may not
be able to settle the sale of the security and may incur potential liability to
the buyer of the security on loan for its costs to cover the purchase.
The Growth, Bond, Global, International Equity, Emerging Growth and Strategic
Total Return Portfolios may also lend (or borrow) money to other funds that are
managed by their respective Sub-Adviser, provided each Portfolio seeks and
obtains permission from the SEC. (See "Other Investment Policies And
Restrictions - Borrowing" in the Fund's Prospectus.)
/diamond/ BORROWING
Subject to its investment restrictions, each Portfolio may borrow money from
banks for temporary or emergency purposes. (The Aggressive Growth Portfolio may
also borrow for investment purposes.) For a complete discussion of Portfolio
borrowing, see "Other Investment Policies And Restrictions - Borrowing" in the
Fund's Prospectus.
/diamond/ FOREIGN SECURITIES
Subject to the limitations set forth above, a Portfolio may purchase certain
foreign securities. Investments in foreign securities, particularly those of
non-governmental issuers, involve considerations which are not ordinarily
associated with investing in domestic issuers. These considerations include:
/bullet/ CURRENCY TRADING COSTS. A Portfolio incurs costs in converting
foreign currencies into U.S. dollars, and vice versa.
/bullet/ 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.
/bullet/ LESS INFORMATION AVAILABLE. There is generally less public
information available about foreign companies.
/bullet/ MORE DIFFICULT BUSINESS NEGOTIATIONS. A Portfolio may find it
difficult to enforce obligations in foreign countries or to negotiate
favorable brokerage commission rates.
/bullet/ REDUCED LIQUIDITY/INCREASED VOLATILITY. Some foreign securities
are less liquid and their prices more volatile, than securities of
comparable U.S. companies.
/bullet/ SETTLEMENT DELAYS. Settling foreign securities may take longer
than settlements in the U.S.
/bullet/ HIGHTER CUSTODY CHARGES. Custodianship of shares may cost more
for foreign securities than it does for U.S. securities.
/bullet/ 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.
/bullet/ POLITICAL INSTABILITY. In some countries, political instability,
war or diplomatic developments could affect investments.
These risks maybe greater in developing countries.
A Portfolio may also purchase American Depositary Receipts ("ADRs"), which are
dollar-denominated receipts issued generally by domestic banks and represent
the deposit with the bank of a security of a foreign issuer. A Portfolio may
also invest in American Depositary Shares ("ADSs"), European Depositary
Receipts ("EDRs") or Global Depositary Receipts ("GDRs") and other types of
receipts of shares evidencing ownership of the underlying foreign security.
FOREIGN EXCHANGE TRANSACTIONS. To the extent a Portfolio invests directly in
foreign securities, a Portfolio will engage in foreign exchange transactions.
The foreign currency exchange market is subject to little government
regulation, and such transactions generally occur directly between parties
rather than on an exchange or in an organized market. This means that a
Portfolio is subject to the full risk of default by a counterparty in such a
transaction. Because such transactions often take place between different time
zones, a Portfolio may be required to complete a currency exchange transaction
at a time outside of normal business hours in the counterparty's location,
making prompt settlement of
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such transaction impossible. This exposes a Portfolio to an increased risk that
the counterparty will be unable to settle the transaction. Although the
counterparty in such transactions is often a bank or other financial
institution, currency transactions are generally not covered by insurance
otherwise applicable to such institutions. For a more detailed explanation
regarding the special risks of investing in foreign securities, see "Portfolio
Securities And Risk Factors - Foreign Securities" and "Portfolio Securities And
Risk Factors - Foreign Bank Obligations" in the Fund's Prospectus.
/diamond/ INVESTMENT FUNDS (INTERNATIONAL EQUITY
PORTFOLIO)
The International Equity Portfolio may invest in investment funds which have
been authorized by the governments of certain countries specifically to permit
foreign investment in securities of companies listed and traded on the stock
exchanges in these respective countries. If the Portfolio invests in such
investment funds, the Portfolio's shareholders will bear not only their
proportionate share of the expenses of the Portfolio (including operating
expenses and the fees of the Investment Adviser), but also will bear indirectly
similar expenses of the underlying investment funds. In addition, the
securities of these investment funds may trade at a premium over their net
asset value.
/diamond/ REPURCHASE AND REVERSE REPURCHASE
AGREEMENTS
Subject to a Portfolio's investment restrictions and Policies, a Portfolio may
enter into repurchase or reverse repurchase agreements.
In a repurchase agreement, a Portfolio purchases a security and simultaneously
commits to resell that security to the seller at an agreed upon price on an
agreed upon date within a number of days (usually not more than seven) from the
date of purchase. The resale price reflects the purchase price plus an agreed
upon incremental amount that is unrelated to the coupon rate or maturity of the
purchased security. A repurchase agreement involves the obligation of the
seller to pay the agreed upon price, which obligation is in effect secured by
the value (at least equal to the amount of the agreed upon resale price and
marked-to-market daily) of the underlying security. A Portfolio may engage in a
repurchase agreement with respect to any security in which it is authorized to
invest. While it does not presently appear possible to eliminate all risks from
these transactions (particularly the possibility of a decline in the market
value of the underlying securities, as well as delays and costs to a Portfolio
in connection with bankruptcy proceedings), it is the policy of the Portfolio
to limit repurchase agreements to those parties whose creditworthiness has been
reviewed and found satisfactory by a Portfolio's Sub-Adviser. (See "Repurchase
and Reverse Repurchase Agreements", in the Fund's Prospectus.)
In a reverse repurchase agreement, a Portfolio sells a portfolio security to
another party, such as a bank or broker-dealer, in return for cash and agrees
to repurchase the instrument at a particular price and time. While a reverse
repurchase agreement is outstanding, the Portfolio will segregate with its
custodian cash and appropriate liquid assets to cover its obligation under the
agreement. A Portfolio will enter into reverse repurchase agreements only with
parties that the Portfolio's Sub-Adviser deems creditworthy.
/diamond/ U.S. GOVERNMENT SECURITIES
Subject to a Portfolio's investment restrictions or policies, a Portfolio may
invest in U.S. Government obligations which generally include direct
obligations of the U.S. Treasury (such as U.S. Treasury bills, notes, and
bonds) and obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. Examples of the types of U.S. Government securities that the
Portfolio may hold include the Federal Housing Administration, Small Business
Administration, General Services Administration, Federal Farm Credit Banks,
Federal Intermediate Credit Banks, and Maritime Administration. U.S. Government
securities may be supported by the full faith and credit of the U.S. Government
(such as securities of the Small Business Administration); by the right of the
issuer to borrow from the U.S. Treasury (such as securities of the Federal Home
Loan Bank); by the discretionary authority of the U.S. Government to purchase
the agency's obligations (such as securities of the Federal National Mortgage
Association); or only by the credit of the issuing agency.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. Government are: Federal Land Banks; Central
Bank for Cooperatives; Federal Intermediate Credit Banks; Federal Home Loan
Banks; Farmers Home Administration; and Federal National Mortgage Association
("FNMA").
/diamond/ NON-INVESTMENT GRADE DEBT SECURITIES
Subject to limitations set forth in a Portfolio's investment policies, a
Portfolio may invest its assets in debt securities below the four highest
grades ("lower grade debt securities" commonly referred to as "junk bonds"), as
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determined by Moody's Investors Service, Inc. ("Moody's") (lower than Baa) or
Standard & Poor's Corporation ("S&P") (lower than BBB). Bonds and preferred
stock rated "B" or "b" by Moody's are not considered investment grade debt
securities. (See Appendix A in the Prospectus for a description of debt
securities ratings.)
Before investing in any lower-grade debt securities, a Portfolio's Sub-Adviser
will determine that such investments meet the Portfolio's investment objective
and that the lower-grade debt securities ratings are supported by an internal
credit review, which the Portfolio's Sub-Adviser will conduct in each such
instance. Lower-grade debt securities usually have moderate to poor protection
of principal and interest payments, have certain speculative characteristics,
and involve greater risk of default or price declines due to changes in the
issuer's creditworthiness than investment-grade debt securities. Because the
market for lower-grade debt securities may be thinner and less active than for
investment grade debt securities, there may be market price volatility for
these securities and limited liquidity in the resale market. Market prices for
lower-grade debt securities may decline significantly in periods of general
economic difficulty or rising interest rates. Through portfolio diversification
and credit analysis, investment risk can be reduced, although there can be no
assurance that losses will not occur.
The quality limitation set forth in each Portfolio's investment policies is
determined immediately after the Portfolio's acquisition of a given security.
Accordingly, any later change in ratings will not be considered when
determining whether an investment complies with the Portfolio's investment
policies.
/diamond/ CONVERTIBLE SECURITIES
Subject to any investment limitations set forth in a Portfolio's policies or
investment restrictions, a Portfolio may invest in convertible securities.
Convertible securities may include corporate notes or preferred stock, but
ordinarily are a long-term debt obligation of the issuer convertible at a
stated exchange rate into common stock of the issuer. As with all debt
securities, the market value of convertible securities tends to decline as
interest rates increase and, conversely, to increase as interest rates decline.
Convertible securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. However, when the market price
of the common stock underlying a convertible security exceeds the conversion
price, the price of the convertible security tends to reflect the value of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield
basis, and thus may not depreciate to the same extent as the underlying common
stock.
DECS (Dividend Enhanced Convertible Stock, or Debt Exchangeable for Common
Stock when-issued as a debt security) offer a substantial dividend advantage
with the possibility of unlimited upside potential if the price of the
underlying common stock exceeds a certain level. DECS convert to common stock
at maturity. The amount received is dependent on the price of the common stock
at the time of maturity. DECS contain two call options at different strike
prices. The DECS participate with the common stock up to the first call price.
They are effectively capped at that point unless the common stock rises above a
second price point, at which time they participate with unlimited upside
potential.
PERCS (Preferred Equity Redeemable Stock, into an equity issue that pays a high
cash dividend, has a cap price and mandatory conversion to common stock at
maturity) offer a substantial dividend advantage, but capital appreciation
potential is limited to a predetermined level. PERCS are less risky and less
volatile than the underlying common stock because their superior income
mitigates declines when the common falls, while the cap price limits gains when
the common rises.
Convertible securities generally rank senior to common stocks in an issuer's
capital structure and are consequently of higher quality and entail less risk
of declines in market value than the issuer's common stock. However, the extent
to which such risk is reduced depends in large measure upon the degree to which
the convertible security sells above its value as a fixed-income security. In
evaluating investment in a convertible security, primary emphasis will be given
to the attractiveness of the underlying common stock. The convertible debt
securities in which a Portfolio may invest are subject to the same rating
criteria as the Portfolio's investment in non-convertible debt securities.
/diamond/ INVESTMENTS IN FUTURES, OPTIONS AND
OTHER DERIVATIVE INSTRUMENTS
The following investments are subject to limitations as set forth in each
Portfolio's investment restrictions and policies:
FUTURES CONTRACTS. A Portfolio may enter into contracts for the purchase or
sale for future delivery of equity or fixed-income securities, foreign
currencies or contracts based on financial indices, including interest rates or
indices of U.S. Government or foreign government securities or equity or
fixed-income securities ("futures contracts"). U.S. futures contracts are
traded on exchanges that have been designated "contract markets" by the
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Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant ("FCM"), or brokerage firm, which is a member of
the relevant contract market. Through their clearing corporations, the
exchanges guarantee performance of the contracts as between the clearing
members of the exchange. Since all transactions in the futures market are made
through a member of, and are offset or fulfilled through a clearinghouse
associated with, the exchange on which the contracts are traded, a Portfolio
will incur brokerage fees when it buys or sells futures contracts.
When a Portfolio buys or sells a futures contract, it incurs a contractual
obligation to receive or deliver the underlying instrument (or a cash payment
based on the difference between the underlying instrument's closing price and
the price at which the contract was entered into) at a specified price on a
specified date. Transactions in futures contracts generally will not be made
other than to seek to hedge against potential changes in interest or currency
exchange rates or the prices of a security or a securities index which might
correlate with or otherwise adversely affect either the value of a Portfolio's
securities or the prices of securities which the Portfolio is considering
buying at a later date.
The buyer or seller of futures contracts is not required to deliver or pay for
the underlying instrument unless the contract is held until the delivery date.
However, both the buyer and seller are required to deposit "initial margin" for
the benefit of an FCM when the contract is entered into. Initial margin
deposits are equal to a percentage of the contract's value, as set by the
exchange on which the contract is traded, and may be maintained in cash or
certain high-grade liquid assets. If the value of either party's position
declines, that party will be required to make additional "variation margin"
payments with an FCM to settle the change in value on a daily basis. The party
that has a gain may be entitled to receive all or a portion of this amount.
Initial and variation margin payments are similar to good faith deposits or
performance bonds, unlike margin extended by a securities broker, and initial
and variation margin payments do not constitute purchasing securities on margin
for purposes of the Portfolio's investment limitations. In the event of the
bankruptcy of an FCM that holds margin on behalf of a Portfolio, the Portfolio
may be entitled to return of margin owed to the Portfolio only in proportion to
the amount received by the FCM's other customers. The Portfolio's Sub-Adviser
will attempt to minimize the risk by careful monitoring of the creditworthiness
of the FCM with which the Portfolio does business and by depositing margin
payments in a segregated account with the custodian when practical or otherwise
required by law.
Although a Portfolio would hold cash and liquid assets in a segregated account
with a value sufficient to cover the Portfolio's open futures obligations, the
segregated assets would be available to the Portfolio immediately upon closing
out the futures position, while settlement of securities transactions could
take several days. However, because the Portfolio's cash that may otherwise be
invested would be held uninvested or invested in liquid assets so long as the
futures position remains open, the Portfolio's return could be diminished due
to the opportunity cost of foregoing other potential investments.
The acquisition or sale of a futures contract may occur, for example, when a
Portfolio holds or is considering purchasing equity securities and seeks to
protect itself from fluctuations in prices without buying or selling those
securities. For example, if prices were expected to decrease, a Portfolio might
sell equity index futures contracts, thereby hoping to offset a potential
decline in the value of equity securities in the Portfolio by a corresponding
increase in the value of the futures contract position held by the Portfolio
and thereby preventing a Portfolio's net asset value from declining as much as
it otherwise would have. A Portfolio also could seek to protect against
potential price declines by selling portfolio securities and investing in money
market instruments. However, since the futures market is more liquid than the
cash market, the use of futures contracts as an investment technique allows a
Portfolio to maintain a defensive position without having to sell portfolio
securities.
Similarly, when prices of equity securities are expected to increase, futures
contracts may be bought to attempt to hedge against the possibility of having
to buy equity securities at higher prices. This technique is sometimes known as
an anticipatory hedge. Since the fluctuations in the value of futures contracts
should be similar to those of equity securities, a Portfolio could take
advantage of the potential rise in the value of equity securities without
buying them until the market has stabilized. At that time, the futures
contracts could be liquidated and the Portfolio could buy equity securities on
the cash market. To the extent a Portfolio enters into futures contracts for
this purpose, the assets in the segregated asset account maintained to cover
the Portfolio's obligations with respect to futures contracts will consist of
liquid assets from its portfolio in an amount equal to the difference between
the contract price and the aggregate value of the initial and variation margin
payments made by the Portfolio with respect to the futures contracts.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants
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in the futures market are subject to initial margin and variation margin
requirements. Rather than meeting additional variation margin requirements,
investors may close out futures contracts through offsetting transactions which
could distort the normal price relationship between the cash and futures
markets. Second, the liquidity of the futures market depends on participants
entering into offsetting transactions rather than making or taking delivery. To
the extent participants decide to make or take delivery, liquidity in the
futures market could be reduced and prices in the futures market distorted.
Third, from the point of view of speculators, the margin deposit requirements
in the futures market are less onerous than margin requirements in the
securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility of
the foregoing distortions, a correct forecast of general price trends by a
Portfolio's Sub-Adviser still may not result in a successful use of futures
contracts.
Futures contracts entail risks. Although each Portfolio's Sub-Adviser believes
that use of such contracts can benefit a Portfolio, if the Sub-Adviser's
investment judgment is incorrect, a Portfolio's overall performance could be
worse than if the Portfolio had not entered into futures contracts. For
example, if a Portfolio has attempted to hedge against the effects of a
possible decrease in prices of securities held by the Portfolio and prices
increase instead, the Portfolio may lose part or all of the benefit of the
increased value of these securities because of offsetting losses in the
Portfolio's futures positions. In addition, if the Portfolio has insufficient
cash, it may have to sell securities from its portfolio to meet daily variation
margin requirements. Those sales may, but will not necessarily, be at increased
prices which reflect the rising market and may occur at a time when the sales
are disadvantageous to a Portfolio.
The prices of futures contracts depend primarily on the value of their
underlying instruments. Because there are a limited number of types of futures
contracts, it is possible that the standardized futures contracts available to
a Portfolio will not match exactly the Portfolio's current or potential
investments. A Portfolio may buy and sell futures contracts based on underlying
instruments with different characteristics from the securities in which it
typically invests - for example, by hedging investments in portfolio securities
with a futures contract based on a broad index of securities - which involves a
risk that the futures position will not correlate precisely with the
performance of the Portfolio's investments.
Futures prices can also diverge from the prices of their underlying
instruments, even if the underlying instruments correlate with a Portfolio's
investments. Futures prices are affected by such factors as current and
anticipated short-term interest rates, changes in volatility of the underlying
instruments, and the time remaining until expiration of the contract. Those
factors may affect securities prices differently from futures prices. Imperfect
correlations between a Portfolio's investments and its futures positions may
also result from differing levels of demand in the futures markets and the
securities markets, from structural differences in how futures and securities
are traded, and from imposition of daily price fluctuation limits for futures
contracts. A Portfolio may buy or sell futures contracts with a greater or
lesser value than the securities it wishes to hedge or is considering
purchasing in order to attempt to compensate for differences in historical
volatility between the futures contract and the securities, although this may
not be successful in all cases. If price changes in a Portfolio's futures
positions are poorly correlated with its other investments, its futures
positions may fail to produce desired gains or result in losses that are not
offset by the gains in the Portfolio's other investments.
Because futures contracts are generally settled within a day from the date they
are closed out, compared with longer settlement periods for some types of
securities, the futures markets can provide superior liquidity to the
securities markets. Nevertheless, there is no assurance a liquid secondary
market will exist for any particular futures contract at any particular time.
In addition, futures exchanges may establish daily price fluctuation limits for
futures contracts and may halt trading if a contract's price moves upward or
downward more than the limit in a given day. On volatile trading days when the
price fluctuation limit is reached, it may be impossible for a Portfolio to
enter into new positions or close out existing positions. If the secondary
market for a futures contract is not liquid because of price fluctuation limits
or otherwise, a Portfolio may not be able to promptly liquidate unfavorable
positions and potentially be required to continue to hold a futures position
until the delivery date, regardless of changes in its value. As a result, the
Portfolio's access to other assets held to cover its futures positions also
could be impaired.
Although futures contracts by their terms call for the delivery or acquisition
of the underlying commodities or a cash payment based on the value of the
underlying commodities, in most cases the contractual obligation is offset
before the delivery date of the contract by buying, in the case of a
contractual obligation to sell, or selling, in the case of a contractual
obligation to buy, an identical futures contract on a commodities exchange.
Such a transaction cancels the obligation to make or take delivery of the
commodities.
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Each Portfolio intends to comply with guidelines of eligibility for exclusion
from the definition of the term "commodity pool operator" with the CFTC and the
National Futures Association, which regulate trading in the futures markets.
Such guidelines presently require that to the extent that a Portfolio enters
into futures contracts or options on a futures position that are not for bona
fide hedging purposes (as defined by the CFTC), the aggregate initial margin
and premiums on these positions (excluding the amount by which options are
"in-the-money") may not exceed 5% of the Portfolio's net assets.
OPTIONS ON FUTURES CONTRACTS. A Portfolio may buy and write options on futures
contracts. An option on a futures contract gives the Portfolio the right (but
not the obligation) to buy or sell a futures contract at a specified price on
or before a specified date. The purchase and writing of options on futures
contracts is similar in some respects to the purchase and writing of options on
individual securities. See "Options on Securities" on page 27. Transactions in
options on futures contracts will generally not be made other than to attempt
to hedge against potential changes in interest rates or currency exchange rates
or the price of a security or a securities index which might correlate with or
otherwise adversely affect either the value of the Portfolio's securities or
the process of securities which the Portfolio is considering buying at a later
date.
The purchase of a call option on a futures contract may or may not be less
risky than ownership of the futures contract or the underlying instrument,
depending on the pricing of the option compared to either the price of the
futures contract upon which it is based or the price of the underlying
instrument. As with the purchase of futures contracts, when a Portfolio is not
fully invested it may buy a call option on a futures contract to attempt to
hedge against a market advance.
The writing of a call option on a futures contract may constitute a partial
hedge against declining prices of the security or foreign currency which is
deliverable under, or of the index comprising, the futures contract. If the
futures price at the expiration of the option is below the exercise price, the
Portfolio will retain the full amount of the option premium which provides a
partial hedge against any decline that may have occurred in the Portfolio's
holdings. The writing of a put option on a futures contract may constitute a
partial hedge against increasing prices of the security or foreign currency
which is deliverable under, or of the index comprising, the futures contract.
If the futures price at expiration of the option is higher than the exercise
price, the Portfolio will retain the full amount of the option premium which
provides a partial hedge against any increase in the price of securities which
the Portfolio is considering buying. If a call or put option a Portfolio has
written is exercised, the portfolio will incur loss which will be reduced by
the amount of the premium it received. Depending on the degree of correlation
between change in the value of its portfolio securities and changes in the
value of the futures positions, a Portfolio's losses from existing options on
futures may to some extent be reduced or increase by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is similar in some respect
to the purchase of protective put options on portfolio securities. For example,
a Portfolio may buy a put option on a futures contract to attempt to hedge the
Portfolio's securities against the risk of falling prices.
The amount of risk a Portfolio assumes when it buys an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the options bought.
FORWARD CONTRACTS. A Portfolio may enter into forward foreign currency exchange
contracts ("forward currency contracts") to attempt to minimize the risk to the
Portfolio from adverse changes in the relationship between the U.S. dollar and
other currencies. A forward currency contract is an obligation to buy or sell
an amount of a specified currency for an agreed price (which may be in U.S.
dollars or a foreign currency) at a future date which is individually
negotiated between currency traders and their customers. A Portfolio may invest
in forward currency contracts with stated contract values of up to the value of
the Portfolio's assets.
A Portfolio may exchange foreign currencies for U.S. dollars and for other
foreign currencies in the normal course of business and may buy and sell
currencies through forward currency contracts in order to fix a price for
securities it has agreed to buy or sell. A Portfolio may enter into a forward
currency contract, for example, when it enters into a contract to buy or sell a
security denominated in or exposed to fluctuations in a foreign currency in
order to "lock in" the U.S. dollar price of the security ("transaction hedge").
Additionally, when a Portfolio's Sub-Adviser believes that a foreign currency
in which portfolio securities are denominated may suffer a substantial decline
against the U.S. dollar, a Portfolio may enter into a forward currency contract
to sell an amount of that foreign currency (or a proxy currency whose
performance is expected to
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replicate the performance of that currency) for U.S. dollars approximating the
value of some or all of the portfolio securities denominated in that currency
(not exceeding the value of the Portfolio's assets denominated in that
currency) or by participating in options or futures contracts with respect to
the currency, or, when the Portfolio's Sub-Adviser believes that the U.S.
dollar may suffer a substantial decline against a foreign currency for a fixed
U.S. dollar amount ("position hedge"). This type of hedge seeks to minimize the
effect of currency appreciation as well as depreciation, but does not protect
against a decline in the security's value relative to other securities
denominated in the foreign currency.
A Portfolio also may enter into a forward currency contract with respect to a
currency where the Portfolio is considering the purchase of investments
denominated in that currency but has not yet done so ("anticipatory hedge").
In any of the above circumstances a Portfolio may, alternatively, enter into a
forward currency contract with respect to a different foreign currency when a
Portfolio's Sub-Adviser believes that the U.S. dollar value of that currency
will correlate with the U.S. dollar value of the currency in which portfolio
securities of, or being considered for purchase by, the Portfolio are
denominated ("cross-hedge"). For example, if a Portfolio's Sub-Adviser believes
that a particular foreign currency may decline relative to the U.S. dollar, a
Portfolio could enter into a contract to sell that currency or a proxy currency
(up to the value of the Portfolio's assets denominated in that currency) in
exchange for another currency that the Sub-Adviser expects to remain stable or
to appreciate relative to the U.S. dollar. Shifting a Portfolio's currency
exposure from one foreign currency to another removes the Portfolio's
opportunity to profit from increases in the value of the original currency and
involves a risk of increased losses to the Portfolio if the Portfolio's Sub-
Adviser's projection of future exchange rates is inaccurate.
A Portfolio also may enter into forward contracts to buy or sell at a later
date instruments in which a Portfolio may invest directly or on financial
indices based on those instruments. The market for those types of forward
contracts is developing and it is not currently possible to identify
instruments on which forward contracts might be created in the future.
A Portfolio will cover outstanding forward currency contracts by maintaining
liquid portfolio securities denominated in the currency underlying the forward
contract or the currency being hedged. To the extent that a Portfolio is not
able to cover its forward currency positions with underlying portfolio
securities, the Fund's custodian will segregate cash or other liquid assets
having a value equal to the aggregate amount of the Portfolio's commitments
under forward contracts entered into with respect to position hedges and
cross-hedges. If the value of the segregated securities declines, additional
cash or liquid assets will be segregated on a daily basis so that the value of
the account will be equal to the amount of the Portfolio's commitments with
respect to such contracts. As an alternative to maintaining all or part of the
segregated assets, a Portfolio may buy call options permitting the Portfolio to
buy the amount of foreign currency subject to the hedging transaction by a
forward sale contract or the Portfolio may buy put options permitting the
Portfolio to sell the amount of foreign currency subject to a forward buy
contract.
While forward contracts are not currently regulated by the CFTC, the CFTC may
in the future assert authority to regulate forward contracts. In such event a
Portfolio's ability to utilize forward contracts in the manner set forth in the
Prospectus may be restricted. Forward contracts will reduce the potential gain
from a positive change in the relationship between the U.S. dollar and foreign
currencies. Unforeseen changes in currency prices may result in poorer overall
performance for a Portfolio than if it had not entered into such contracts. The
use of foreign currency forward contracts will not eliminate fluctuations in
the underlying U.S. dollar equivalent value of the proceeds of or rates of
return on a Portfolio's foreign currency denominated portfolio securities.
The matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency denominated asset that
is the subject of the hedging transaction generally will not be precise. In
addition, a Portfolio may not always be able to enter into forward contracts at
attractive prices and accordingly may be limited in its ability to use these
contracts in seeking to hedge the Portfolio's assets.
Also, with regard to a Portfolio's use of cross-hedging transactions, there can
be no assurance that historical correlations between the movement of certain
foreign currencies relative to the U.S. dollar will continue. Thus, at any time
poor correlation may exist between movements in the exchange rates of the
foreign currencies underlying a Portfolio's cross-hedges and the movements in
the exchange rates of the foreign currencies in which the Portfolio's assets
that are subject of the cross-hedging transactions are denominated.
OPTIONS ON FOREIGN CURRENCIES. A Portfolio may buy put and call options and may
write covered put and call options on foreign currencies for hedging purposes
in a manner similar to that in which futures contracts or forward contracts on
foreign currencies may be utilized. For
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example, a decline in the U.S. dollar value of a foreign currency in which
portfolio securities are denominated will reduce the U.S. dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
a Portfolio may buy put options on the foreign currency. If the value of the
currency declines, the Portfolio will have the right to sell such currency for
a fixed amount in U.S. dollars and will thereby offset, in whole or in part,
the adverse effect on its portfolio which otherwise would have resulted.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a Portfolio may buy call options thereon. The purchase
of such options could offset, at least partially, the effects of the adverse
movements in exchange rates. The purchase of an option on a foreign currency
may constitute an effective hedge against fluctuations in exchange rates,
although, in the event of exchange rate movements adverse to a Portfolio's
option position, the Portfolio could sustain losses on transactions in foreign
currency options which would require that the Portfolio lose a portion or all
of the benefits of advantageous changes in those rates. In addition, in the
case of other types of options, the benefit to a Portfolio from purchases of
foreign currency options will be reduced by the amount of the premium and
related transaction costs.
A Portfolio may write options on foreign currencies for the same types of
hedging purposes. For example, in attempting to hedge against a potential
decline in the U.S. dollar value of foreign currency denominated securities due
to adverse fluctuations in exchange rates, a Portfolio could, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurs, the option will most likely not be exercised and the
diminution in value of portfolio securities will be offset by the amount of the
premium received.
Similarly, instead of purchasing a call option to attempt to hedge against a
potential increase in the U.S. dollar cost of securities to be acquired, a
Portfolio could write a put option on the relevant currency which, if rates
move in the manner projected, will expire unexercised and allow the Portfolio
to hedge the increased cost up to the amount of premium. As in the case of
other types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium received, and
only if exchange rates move in the expected direction. If that does not occur,
the option may be exercised and the Portfolio would be required to buy or sell
the underlying currency at a loss which may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, a Portfolio also
may lose all or a portion of the benefits which might otherwise have been
obtained from favorable movements in exchange rates.
A Portfolio may write covered call options on foreign currencies. A call option
written on a foreign currency by a Portfolio is "covered" if the Portfolio owns
the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated
account by its custodian) upon conversion or exchange of other foreign currency
held in its portfolio. A call option is also covered if the Portfolio has a
call on the same foreign currency and in the same principal amount as the call
written if the exercise price of the call held (i) is equal to or less than the
exercise price of the call written or (ii) is greater than the exercise price
of the call written, and if the difference is maintained by the Portfolio in
cash or high-grade liquid assets in a segregated account with the Fund's
custodian.
A Portfolio may also write call options on foreign currencies for cross-hedging
purposes that may not be deemed to be covered. A call option on a foreign
currency is for cross-hedging purposes if it is not covered but is designed to
provide a hedge against a decline due to an adverse change in the exchange rate
in the U.S. dollar value of a security which the Portfolio owns or has the
right to acquire and which is denominated in the currency underlying the
option. In such circumstances, the Portfolio collateralizes the option by
maintaining segregated assets in an amount not less than the value of the
underlying foreign currency in U.S. dollars marked-to-market daily.
A Portfolio may buy or write options in privately negotiated transactions on
the types of securities and indices based on the types of securities in which
the Portfolio is permitted to invest directly. A Portfolio will effect such
transactions only with investment dealers and other financial institutions
(such as commercial banks or savings and loan institutions) deemed
creditworthy, and only pursuant to procedures adopted by the Portfolio's Sub-
Adviser for monitoring the creditworthiness of those entities. To the extent
that an option bought or written by a Portfolio in a negotiated transaction is
illiquid, the value of an option bought or the amount of the Portfolio's
obligations under an option written by the Portfolio, as the case may be, will
be subject to the Portfolio's limitation on illiquid investments. In the case
of illiquid options, it
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may not be possible for the Portfolio to effect an offsetting transaction at
the time when the Portfolio's Sub-Adviser believes it would be advantageous for
the Portfolio to do so.
OPTIONS ON SECURITIES. In an effort to reduce fluctuations in net asset value,
a Portfolio may write covered put and call options and may buy put and call
options and warrants on securities that are traded on United States and foreign
securities exchanges and over-the-counter ("OTC"). A Portfolio also may write
call options that are not covered for cross-hedging purposes. A Portfolio may
write and buy options on the same types of securities that the Portfolio could
buy directly and may buy options on financial indices as described above with
respect to futures contracts. There are no specific limitations on a
Portfolio's writing and buying options on securities.
A put option gives the holder the right, upon payment of a premium, to deliver
a specified amount of a security to the writer of the option on or before a
fixed date at a predetermined price. A call option gives the holder the right,
upon payment of a premium, to call upon the writer to deliver a specified
amount of a security on or before a fixed date at a predetermined price.
A put option written by a Portfolio is "covered" if the Portfolio (i) maintains
cash not available for investment or other liquid assets with a value equal to
the exercise price in a segregated account with its custodian or (ii) holds a
put on the same security and in the same principal amount as the put written
and the exercise price of the put held is equal to or greater than the exercise
price of the put written. The premium paid by the buyer of an option will
reflect, among other things, the relationship of the exercise price to the
market price and the volatility of the underlying security, the remaining term
of the option, supply and demand and interest rates. A call option written by a
Portfolio is "covered" if the Portfolio owns the underlying security covered by
the call or has an absolute and immediate right to acquire that security
without additional cash consideration (or has segregated additional cash
consideration with its custodian) upon conversion or exchange of other
securities held in its portfolio. A call option is also deemed to be covered if
the Portfolio holds a call on the same security and in the same principal
amount as the call written and the exercise price of the call held (i) is equal
to or less than the exercise price of the call written or (ii) is greater than
the exercise price of the call written if the difference is maintained by the
Portfolio in cash and high-grade liquid assets in a segregated account with its
custodian.
A Portfolio collateralizes its obligation under a written call option for
cross-hedging purposes by segregating with its custodian cash or other liquid
assets in an amount not less than the market value of the underlying security,
marked-to-market daily. A Portfolio would write a call option for cross-hedging
purposes, instead of writing a covered call option, when the premium to be
received from the cross-hedge transaction would exceed that which would be
received from writing a covered call option and the Portfolio's Sub-Adviser
believes that writing the option would achieve the desired hedge.
If a put or call option written by a Portfolio was exercised, the Portfolio
would be obligated to buy or sell the underlying security at the exercise
price. Writing a put option involves the risk of a decrease in the market value
of the underlying security, in which case the option could be exercised and the
underlying security would then be sold by the option holder to the Portfolio at
a higher price than its current market value. Writing a call option involves
the risk of an increase in the market value of the underlying security, in
which case the option could be exercised and the underlying security would then
be sold by the Portfolio to the option holder at a lower price than its current
market value. Those risks could be reduced by entering into an offsetting
transaction. The Portfolio retains the premium received from writing a put or
call option whether or not the option is exercised.
The writer of an option may have no control when the underlying security must
be sold, in the case of a call option, or bought, in the case of a put option,
since with regard to certain options, the writer may be assigned an exercise
notice at any time prior to the termination of the obligation. Whether or not
an option expires unexercised, the writer retains the amount of the premium.
This amount, of course, may, in the case of a covered call option, be offset by
a decline in the market value of the underlying security during the option
period. If a call option is exercised, the writer experiences a profit or loss
from the sale of the underlying security. If a put option is exercised, the
writer must fulfill the obligation to buy the underlying security.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is
that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the holder
of an option may liquidate its position by effecting
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a "closing sale transaction." This is accomplished by selling an option of the
same series as the option previously bought. There is no guarantee that either
a closing purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit a Portfolio to write another call option on the underlying security with
either a different exercise price or expiration date or both or, in the case of
a written put option, will permit a Portfolio to write another put option to
the extent that the exercise price thereof is secured by deposited high-grade
liquid assets. Also, effecting a closing transaction will permit the cash or
proceeds from the concurrent sale of any securities subject to the option to be
used for other portfolio investments. If a Portfolio desires to sell a
particular security on which the Portfolio has written a call option, the
Portfolio will effect a closing transaction prior to or concurrent with the
sale of the security.
A Portfolio may realize a profit from a closing transaction if the price of the
purchase transaction is less than the premium received from writing the option
or the price received from a sale transaction is more than the premium paid to
buy the option; a Portfolio may realize a loss from a closing transaction if
the price of the purchase transaction is less than the premium paid to buy the
option. Because increases in the market of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the repurchase of a call option is likely to be offset in whole or in part
by appreciation of the underlying security owned by the Portfolio.
An option position may be closed out only where there exists a secondary market
for an option of the same series. If a secondary market does not exist, it
might not be possible to effect closing transactions in particular options with
the result that a Portfolio would have to exercise the options in order to
realize any profit. If a Portfolio is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or the Portfolio delivers the underlying
security upon exercise. Reasons for the absence of a liquid secondary market
may include the following: (i) there may be insufficient trading interest in
certain options, (ii) restrictions may be imposed by a national securities
exchange on which the option is traded ("Exchange") on opening or closing
transactions or both, (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options or
underlying securities, (iv) unusual or unforeseen circumstances may interrupt
normal operations on an Exchange, (v) the facilities of an Exchange or the
Options Clearing Corporation ("OCC") may not at all times be adequate to handle
current trading volume, or (vi) one or more Exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
would cease to exist, although outstanding options on that Exchange that had
been issued by the OCC as a result of trades on that Exchange would continue to
be exercisable in accordance with their terms.
A Portfolio may write options in connection with buy-and-write transactions;
that is, a Portfolio may buy a security and then write a call option against
that security. The exercise price of a call option may be below ("in-the-
money"), equal to ("at-the-money") or above ("out-of-the-money") the current
value of the underlying security at the time the option is written.
Buy-and-write transactions using in-the-money call options may be used when it
is expected that the price of the underlying security will remain flat or
decline moderately during the option period. Buy-and-write transactions using
at-the-money call options may be used when it is expected that the price of the
underlying security will remain fixed or advance moderately during the option
period. Buy-and-write transactions using out-of-the-money call options may be
used when it is expected that the premiums received from writing the call
option plus the appreciation in the market price of the underlying security up
to the exercise price will be greater than the appreciation in the price of the
underlying security alone. If the call options are exercised in such
transactions, a Portfolio's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
Portfolio's purchase price of the security and the exercise price. If the
options are not exercised and the price of the underlying security declines,
the amount of such decline will be offset by the amount of premium received.
The writing of covered put options is similar in terms of risk and return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and a Portfolio's gain will be limited to the
premium received. If the market price of the underlying security declines or
otherwise is below the exercise price, the Portfolio may elect to close the
position or take delivery of the security at the exercise price and a
Portfolio's return will be the premium received
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from the put options minus the amount by which the market price of the security
is below the exercise price.
A Portfolio may buy put options to attempt to hedge against a decline in the
value of its securities. By using put options in this way, a Portfolio will
reduce any profit it might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.
A Portfolio may buy call options to attempt to hedge against an increase in the
price of securities that the Portfolio may buy in the future. The premium paid
for the call option plus any transaction costs will reduce the benefit, if any,
realized by a Portfolio upon exercise of the option, and, unless the price of
the underlying security rises sufficiently, the option may expire worthless to
the Portfolio.
In purchasing an option, a Portfolio would be in a position to realize a gain
if, during the option period, the price of the underlying security increased
(in the case of a call) or decreased (in the case of a put) by an amount in
excess of the premium paid and would realize a loss if the price of the
underlying security did not increase (in the case of a call) or decrease (in
the case of a put) during the period by more than the amount of the premium. If
a put or call option brought by a Portfolio were permitted to expire without
being sold or exercised, the Portfolio would lose the amount of the premium.
Although they entitle the holder to buy equity securities, warrants on and
options to purchase equity securities do not entitle the holder to dividends or
voting rights with respect to the underlying securities, nor do they represent
any rights in the assets of the issuer of those securities.
INTEREST RATE SWAPS AND SWAP-RELATED PRODUCTS. In order to attempt to protect
the value of a Portfolio's investments from interest rate or currency exchange
rate fluctuations, a Portfolio may enter into interest rate swaps, and may buy
or sell interest rate caps and floors. A Portfolio expects to enter into these
transactions primarily to attempt to preserve a return or spread on a
particular investment or portion of its portfolio. A Portfolio also may enter
into these transactions to attempt to protect against any increase in the price
of securities the Portfolio may consider buying at a later date. A Portfolio
does not intend to use these transactions as a speculative investment. Interest
rate swaps involve the exchange by a Portfolio with another party of their
respective commitments to pay or receive interest, E.G., an exchange of
floating rate payments for fixed rate payments. The exchange commitments can
involve payments to be made in the same currency or in different currencies.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a contractually based principal amount from the party selling the
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a contractually based
principal amount from the party selling the interest rate floor.
Swap and swap-related products are specialized OTC instruments and their use
involves risks specific to the markets in which they are entered into. A
Portfolio will usually enter into interest rate swaps on a net basis, I.E., the
two payment streams are netted out, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. The net amount of the
excess, if any, of a Portfolio's obligations over its entitlements with respect
to each interest rate swap will be calculated on a daily basis and an amount of
cash or other liquid assets having an aggregate net asset value of at least
equal to the accrued excess will be segregated with the Fund's custodian. If a
Portfolio enters into an interest rate swap on other than a net basis, the
Portfolio would segregate assets in the full amount accrued on a daily basis of
the Portfolio's obligations with respect to the swap. A Portfolio will not
enter into any interest rate swap, cap or floor transaction unless the
unsecured senior debt or the claims-paying ability of the other party thereto
is rated in one of the three highest rating categories of at least one
nationally recognized statistical rating organization at the time of entering
into such transaction. A Portfolio's Sub-Adviser will monitor the
creditworthiness of all counterparties on an ongoing basis. If there is a
default by the other party to such a transaction, a Portfolio will have
contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. The Sub-Advisers have determined
that, as a result, the swap market has become relatively liquid. Caps and
floors are more recent innovations for which standardized documentation has not
yet been developed and, accordingly, they are less liquid than swaps. To the
extent a Portfolio sells (I.E., writes) caps and floors, it will segregate with
the custodian cash or other liquid assets having an aggregate net asset value
at least equal to the full
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amount, accrued on a daily basis, of the Portfolio's obligations with respect
to any caps or floors.
Interest rate swap transactions are subject to limitations set forth in each
Portfolio's policies. These transactions may in some instances involve the
delivery of securities or other underlying assets by a Portfolio or its
counterparty to collateralize obligations under the swap. Under the
documentation currently used in those markets, the risk of loss with respect to
interest rate swaps is limited to the net amount of the interest payments that
a Portfolio is contractually obligated to make. If the other party to an
interest rate swap that is not collateralized defaults, a Portfolio would risk
the loss of the net amount of the payments that the Portfolio contractually is
entitled to receive. A Portfolio may buy and sell (I.E., write) caps and floors
without limitation, subject to the segregated account requirement described
above.
In addition to the instruments, strategies and risks described in this
Statement of Additional Information and in the Prospectus, there may be
additional opportunities in connection with options, futures contracts, forward
currency contracts, and other hedging techniques, that become available as each
Portfolio's Sub-Adviser develops new techniques, as regulatory authorities
broaden the range of permitted transactions and as new instruments and
techniques are developed. A Sub-Adviser may use these opportunities to the
extent they are consistent with each Portfolio's respective investment
objective and are permitted by each Portfolio's respective investment
limitations and applicable regulatory requirements.
SPECIAL INVESTMENT CONSIDERATIONS AND RISKS. The successful use of the
investment practices described above with respect to futures contracts, options
on futures contracts, forward contracts, options on securities and on foreign
currencies, and swaps and swap-related products draws upon skills and
experience which are different from those needed to select the other
instruments in which the Portfolios invest. Should interest or exchange rates
or the prices of securities or financial indices move in an unexpected manner,
a Portfolio may not achieve the desired benefits of futures, options, swaps and
forwards or may realize losses and thus be in a worse position than if such
strategies had not been used. Unlike many exchange-traded futures contracts and
options on futures contracts, there are no daily price fluctuation limits with
respect to options on currencies, forward contracts and other negotiated or OTC
instruments, and adverse market movements could therefore continue to an
unlimited extent over a period of time. In addition, the correlation between
movements in the price of the securities and currencies hedged or used for
cover will not be perfect and could produce unanticipated losses.
A Portfolio's ability to dispose of its positions in the foregoing instruments
will depend on the availability of liquid markets in the instruments. Markets
in a number of the instruments are relatively new and still developing, and it
is impossible to predict the amount of trading interest that may exist in those
instruments in the future. Particular risks exist with respect to the use of
each of the foregoing instruments and could result in such adverse consequences
to a Portfolio as the possible loss of the entire premium paid for an option
bought by the Portfolio, the inability of the Portfolio, as the writer of a
covered call option, to benefit from the appreciation of the underlying
securities above the exercise price of the option and the possible need to
defer closing out positions in certain instruments to avoid adverse tax
consequences. As a result, no assurance can be given that a Portfolio will be
able to use those instruments effectively for the purposes set forth above.
In connection with certain of its hedging transactions, assets must be
segregated with the Fund's custodian bank to ensure that the Portfolio will be
able to meet its obligations under these instruments. Assets held in a
segregated account generally may not be disposed of for so long as the
Portfolio maintains the positions giving rise to the segregation requirement.
Segregation of a large percentage of the Portfolio's assets could impede
implementation of the Portfolio's investment policies or the Portfolio's
ability to meet redemption requests or other current obligations.
ADDITIONAL RISKS OF OPTIONS ON FOREIGN CURRENCIES, FORWARD CONTRACTS AND
FOREIGN INSTRUMENTS. Unlike transactions entered into by a Portfolio in futures
contracts, options on foreign currencies and forward contracts are not traded
on contract markets regulated by the CFTC or (with the exception of certain
foreign currency options) by the SEC. To the contrary, such instruments are
traded through financial institutions acting as market-makers, although foreign
currency options are also traded OTC. In an OTC trading environment, many of
the protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of
time. Although the buyer of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, an option writer and a buyer or seller of futures or forward
contracts could lose amounts substantially in excess of
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any premium received or initial margin or collateral posted due to the
potential additional margin and collateral requirements associated with such
positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges are available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the OCC, thereby reducing the
risk of counterparty default. Further, a liquid secondary market in options
traded on a national securities exchange may be more readily available than in
the OTC market, potentially permitting a Portfolio to liquidate open positions
at a profit prior to exercise or expiration, or to limit losses in the event of
adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the OTC market. For example, exercise
and settlement of such options must be made exclusively through the OCC, which
has established banking relationships in applicable foreign countries for this
purpose. As a result, the OCC may, if it determines that foreign government
restrictions or taxes would prevent the orderly settlement of foreign currency
option exercises, or would result in undue burdens on the OCC or its clearing
member, impose special procedures on exercise and settlement, such as technical
changes in the mechanics of delivery of currency, the fixing of dollar
settlement prices or prohibitions, on exercise.
In addition, options on U.S. Government securities, futures contracts, options
on futures contracts, forward contracts and options on foreign currencies may
be traded on foreign exchanges and OTC in foreign countries. Such transactions
are subject to the risk of governmental actions affecting trading in or the
prices of foreign currencies or securities. The value of such positions also
could be adversely affected by (i) other complex foreign political and economic
factors, (ii) lesser availability than in the United States of data on which to
make trading decisions, (iii) delays in a Portfolio's ability to act upon
economic events occurring in foreign markets during nonbusiness hours in the
United States, (iv) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States, and (v) low
trading volume.
/diamond/ ZERO COUPON, PAY-IN-KIND AND
STEP COUPON SECURITIES
Subject to any limitations set forth in the policies and investment
restrictions for a Portfolio, a Portfolio may invest in zero coupon,
pay-in-kind or step coupon securities. Zero coupon and step coupon bonds are
issued and traded at a discount from their face amounts. They do not entitle
the holder to any periodic payment of interest prior to maturity or prior to a
specified date when the securities begin paying current interest. The discount
from the face amount or par value depends on the time remaining until cash
payments begin, prevailing interest rates, liquidity of the security and the
perceived credit quality of the issuer. Pay-in-kind securities may pay all or a
portion of their interest or dividends in the form of additional securities.
Because they do not pay current income, the price of pay-in-kind securities can
be very volatile when interest rates change.
Current Federal income tax law requires holders of zero coupon securities and
step coupon securities to report the portion of the original issue discount on
such securities that accrues that year as interest income, even though the
holders receive no cash payments of interest during the year. In order to
qualify as a "regulated investment company" under the Internal Revenue Code,
each Portfolio must distribute its investment company taxable income, including
the original issue discount accrued on zero coupon or step coupon bonds.
Because a Portfolio will not receive cash payments on a current basis in
respect of accrued original-issue discount on zero coupon bonds or step coupon
bonds during the period before interest payments begin, in some years a
Portfolio may have to distribute cash obtained from other sources in order to
satisfy the distribution requirements under the Code. A Portfolio might obtain
such cash from selling other portfolio holdings. These actions are likely to
reduce the assets to which a Portfolio's expenses could be allocated and to
reduce the rate of return for the Portfolio. In some circumstances, such sales
might be necessary in order to satisfy cash distribution requirements even
though investment considerations might otherwise make it undesirable for the
Portfolio to sell the securities at the time.
Generally, the market prices of zero coupon, step coupon and pay-in-kind
securities are more volatile than the prices of securities that pay interest
periodically and in cash and are likely to respond to changes in interest
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rates to a greater degree than other types of debt securities having similar
maturities and credit quality.
/diamond/ WARRANTS AND RIGHTS
Subject to its investment limitations, a Portfolio may invest in warrants and
rights. Warrants are, in effect, longer-term call options. They give the holder
the right to purchase a given number of shares of a particular company at
specified prices, usually higher than the market price at the time of issuance,
for a period of years or to perpetuity. The purchaser of a warrant expects the
market price of the security will exceed the purchase price of the warrant plus
the exercise price of the warrant, thus giving him a profit. Of course, because
the market price may never exceed the exercise price before the expiration date
of the warrant, the purchaser of the warrant risks the loss of the entire
purchase price of the warrant. Warrants generally trade in the open market and
may be sold rather than exercised. Warrants are sometimes sold in unit form
with other securities of an issuer. Units of warrants and common stock may be
employed in financing young unseasoned companies. The purchase price of a
warrant varies with the exercise price of the warrant, the current market value
of the underlying security, the life of the warrant and various other
investment factors.
In contrast, rights, which also represent the right to buy common shares,
normally have a subscription price lower than the current market value of the
common stock and a life of two to four weeks.
Warrants and rights may be considered more speculative than certain other types
of investments in that they do not entitle a holder to dividends or voting
rights with respect to the securities which may be purchased, nor do they
represent any rights in the assets of the issuing company. Also, the value of a
warrant or right does not necessarily change with the value of the underlying
securities and a warrant or right ceases to have value if it is not exercised
prior to the expiration date.
/diamond/ MORTGAGE-BACKED SECURITIES
A Portfolio may invest in mortgage-backed securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, or institutions such as
banks, insurance companies, and savings and loans. Some of these securities,
such as Government National Mortgage Association ("GNMA") certificates, are
backed by the full faith and credit of the U.S. Treasury while others, such as
Federal Home Loan Mortgage Corporation ("Freddie Mac") certificates, are not.
Mortgage-backed securities represent interests in a pool of mortgages.
Principal and interest payments made on the mortgages in the underlying
mortgage pool are passed through to the Portfolio. These securities are often
subject to more rapid repayment than their stated maturity dates would indicate
as a result of principal prepayments on the underlying loans. This can result
in significantly greater price and yield volatility than with traditional fixed
income securities. During periods of declining interst rates, prepayments can
be expected to accelerate which will shorten these securities weighted average
life and may lower their return. Conversely, in a rising interst rate
environment, a declining prepayment rate will extend the weighted average life
of these securities which generally would cause their values to fluctuate more
widely in respnse to changes.
The value of these securities also may change because of changes in the
market's perception of the creditworthiness of the federal agency or private
institution that issued them. In addition, the mortgage securities market in
general may be adversely affected by changes in governmental regulation or tax
policies.
/diamond/ ASSET-BACKED SECURITIES
Asset-backed securities represent interests in pools of consumer loans
(generally unrelated to mortgage loans) and most often are structured as
pass-through securities. Interest and principal payments ultimately depend on
payment of the underlying loans by individuals, although the securities may be
supported by letters of credit or other credit enhancements. The underlying
assets (E.G., loans) are subject to prepayments which shorten the securities'
weighted average life and may lower their returns. If the credit support or
enhancement is exhausted, losses or delays in payment may result if the
required payments of principal and interest are not made. The value of these
securities also may change because of changes in the market's perception of the
creditworthiness of the servicing agent for the pool, the originator of the
pool, or the financial institution providing the credit support or enhancement.
A Portfolio will invest its assets in asset-backed securities subject to any
limitations set forth in its investment policies or restrictions.
/diamond/ PASS-THROUGH SECURITIES
Subject to a Portfolio's investment restrictions and policies, a Portfolio may
invest its net assets in various types of pass-through securities, such as
mortgage-backed securities, asset-backed securities and participation
interests. A pass-through security is a share or certificate of interest in a
pool of debt obligations that
30
<PAGE>
have been repackaged by an intermediary, such as a bank or broker-dealer. The
purchaser receives an undivided interest in the underlying pool of securities.
The issuers of the underlying securities make interest and principal payments
to the intermediary which are passed through to purchasers, such as the
Portfolio. The most common type of pass-through securities are mortgage-backed
securities. GNMA Certificates are mortgage-backed securities that evidence an
undivided interest in a pool of mortgage loans. GNMA Certificates differ from
traditional bonds in that principal is paid back monthly by the borrowers over
the term of the loan rather than returned in a lump sum at maturity. The
Portfolio will generally purchase "modified pass-through" GNMA Certificates,
which entitle the holder to receive a share of all interest and principal
payments paid and owned on the mortgage pool, net of fees paid to the "issuer"
and GNMA, regardless of whether or not the mortgagor actually makes the
payment. GNMA Certificates are backed as to the timely payment of principal and
interest by the full faith and credit of the U.S. Government.
The Federal Home Loan Mortgage Corporation ("FHLMC") issues two types of
mortgage pass-through securities: mortgage participation certificates ("PCs")
and guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates
in that each PC represents a pro rata share of all interest and principal
payments made and owned on the underlying pool. FHLMC guarantees timely
payments of interest on PCs and the full return of principal. GMCs also
represent a pro rata interest in a pool of mortgages. However, these
instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. This type of security is guaranteed by FHLMC as to
timely payment of principal and interest, but is not backed by the full faith
and credit of the U.S. Government.
FNMA issues guaranteed mortgage pass-through certificates ("FNMA Certificates").
FNMA Certificates resemble GNMA Certificates in that each FNMA Certificate
represents a pro rata share of all interest and principal payments made and
owned on the underlying pool. This type of security is guaranteed by FNMA as to
timely payment of principal and interest, but it is not backed by the full faith
and credit of the U.S. Government.
/diamond/ OTHER INCOME PRODUCING
SECURITIES
Subject to each Portfolio's investment restrictions and policies, other types
of income producing securities that a Portfolio may purchase include, but are
not limited to, the following types of securities:
VARIABLE AND FLOATING RATE OBLIGATIONS. These types of securities are
relatively long-term instruments that often carry demand features
permitting the holder to demand payment of principal at any time or at
specified intervals prior to maturity.
STANDBY COMMITMENTS. These instruments, which are similar to a put,
give a Portfolio the option to obligate a broker, dealer or bank to
repurchase a security held by the Portfolio at a specified price.
TENDER OPTION BONDS. Tender option bonds are relatively long-term bonds
that are coupled with the agreement of a third party (such as a broker,
dealer or bank) to grant the holders of such securities the option to
tender the securities to the institution at periodic intervals.
INVERSE FLOATERS. Inverse floaters are instruments whose interest bears
an inverse relationship to the interest rate on another security. A
Portfolio will not invest more than 5% of its assets in inverse floaters.
See "Debt Securities And Fixed-Income Investing," in the Fund's Prospectus for
a description of risks involved with these securities.
A Portfolio will purchase instruments with demand features, standby commitments
and tender option bonds primarily for the purpose of increasing the liquidity
of its portfolio. (See Appendix A in this Statement of Additional Information
regarding income producing securities in which a Portfolio may invest.)
/diamond/ ILLIQUID AND RESTRICTED/144A SECURITIES
A Portfolio may invest up to 15% (the Money Market Portfolio may only invest up
to 10%) of its net assets in illiquid securities (I.E., securities that are not
readily marketable).
In recent years, a large institutional market has developed for certain
securities that are not registered under the Securities Act of 1933 ("1933
Act"). Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend on an
efficient institutional market in which such unregistered securities can
readily be resold or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not dispositive of the
liquidity of such investments.
Rule 144A under the 1933 Act established a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. Institutional markets for restricted securities that
might develop as a result of Rule 144A could provide
31
<PAGE>
both readily ascertainable values for restricted securities and the ability to
liquidate an investment in order to satisfy share redemption orders. An
insufficient number of qualified institutional buyers interested in purchasing
a Rule 144A-eligible security held by a Portfolio could, however, adversely
affect the marketability of such portfolio security and the Portfolio might be
unable to dispose of such security promptly or at reasonable prices.
The Fund's Board of Directors has authorized each Portfolio's Sub-Adviser to
make liquidity determinations with respect to Rule 144A securities in
accordance with the guidelines established by the Board of Directors. Under the
guidelines, the Portfolio's Sub-Adviser will consider the following factors in
determining whether a Rule 144A security is liquid: 1) the frequency of trades
and quoted prices for the security; 2) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers; 3)
the willingness of dealers to undertake to make a market in the security; and
4) the nature of the marketplace trades, including the time needed to dispose
of the security, the method of soliciting offers and the mechanics of the
transfer. The sale of illiquid securities often requires more time and results
in higher brokerage charges or dealer discounts and other selling expenses than
does the sale of securities eligible for trading on national securities
exchanges or in the OTC markets. The Portfolio may be restricted in its ability
to sell such securities at a time when a Portfolio's Sub-Adviser deems it
advisable to do so. In addition, in order to meet redemption requests, a
Portfolio may have to sell other assets, rather than such illiquid securities,
at a time which is not advantageous.
/diamond/ OTHER INVESTMENT COMPANIES
In accordance with certain provisions of the 1940 Act, certain Portfolios may
invest up to 10% of their total assets, calculated at the time of purchase, in
the securities of money market funds, which are investment companies. The 1940
Act also provides that a Portfolio generally may not invest (i) more than 5% of
its total assets in the securities of any one investment company or (ii) in
more than 3% of the voting securities of any other investment company. A
Portfolio will indirectly bear its proportionate share of any investment
advisory fees and expenses paid by the funds in which it invests, in addition
to the investment advisory fee and expenses paid by the Portfolio. However, if
the Growth, Bond or Global Portfolio invests in a Janus money market fund,
Janus Capital will remit to such Portfolio the fees it receives from the Janus
money market fund to the extent such fees are based on the Portfolio's assets.
The International Equity and U.S. Equity Portfolios may not purchase securities
of other investment companies, other than a security acquired in connection
with a merger, consolidation, acquisition, reorganization or offer of exchange
and except as otherwise permitted under the 1940 Act. Investments by the
International Equity and U.S. Equity Portfolios in the GEI Short-Term
Investment Fund, an investment fund advised by GEIM, created specifically to
serve as a vehicle for the collective investment of cash balances of these
Portfolios and other accounts advised by GEIM or GEIC, is not considered an
investment in another investment company for purposes of these restrictions.
The GEI Short-Term Investment Fund is not registered with the SEC as an
investment company.
/diamond/ QUALITY AND DIVERSIFICATION
REQUIREMENTS (MONEY MARKET PORTFOLIO)
For the purpose of maintaining a stable net asset value per share, the Money
Market Portfolio will (i) limit its investment in the securities (other than
U.S. Government securities and securities that benefit from certain types of
credit enhancement arrangements) of any one issuer to no more than 5% of its
total assets, measured at the time of purchase, except at any time for an
investment in a single issuer of up to 25% of the Portfolio's total assets held
for not more than three business days; and (ii) limit investments to securities
that present minimal credit risks and securities (other than U.S. Government
securities) that are rated within the highest short-term rating category by at
least two nationally recognized statistical rating organizations ("NRSROs") or
by the only NRSRO that has rated the security. Securities which originally had
a maturity of over one year are subject to more complicated, but generally
similar rating requirements. A description of illustrative credit ratings is
set forth in Appendix A to the Fund's Prospectus. The Portfolio may also
purchase unrated securities that are of comparable quality to the rated
securities described above as determined by the Board of Directors.
Additionally, if the issuer of a particular security has issued other
securities of comparable priority and security and which have been rated in
accordance with (ii) above, that security will be deemed to have the same
rating as such other rated securities.
In addition, the Board of Directors of the Fund has adopted procedures which
(i) require the Fund's Directors to approve or ratify purchases by the
Portfolio of securities (other than U.S. Government securities) that are rated
by only one NRSRO or that are unrated; (ii) require the Portfolio to maintain a
dollar-weighted
32
<PAGE>
average portfolio maturity of not more than 90 days and to invest only in
securities with a remaining maturity of not more than 13 months; and (iii)
require the Portfolio, in the event of certain downgrading of or defaults on
portfolio holdings, to dispose of the holdings, subject in certain
circumstances to a finding by the Fund's Directors that disposing of the
holding would not be in the Portfolio's best interest.
/diamond/ BANK AND THRIFT OBLIGATIONS
Bank and thrift obligations in which a Portfolio may invest are limited to
dollar-denominated certificates of deposit, time deposits and bankers'
acceptances issued by bank or thrift institutions. Certificates of deposit are
short-term, unsecured, negotiable obligations of commercial banks and thrift
institutions. Time deposits are non-negotiable deposits maintained in bank or
thrift institutions for specified periods of time at stated interest rates.
Bankers' acceptances are negotiable time drafts drawn on commercial banks
usually in connection with international transactions.
Bank and thrift obligations in which the Portfolio invests may be, but are not
required to be, issued by institutions that are insured by the Federal Deposit
Insurance Corporation (the "FDIC"). Bank and thrift institutions organized
under Federal law are supervised and examined by Federal authorities and are
required to be insured by the FDIC. Institutions organized under state law are
supervised and examined by state banking authorities but are insured by the
FDIC only if they so elect. State institutions insured by the FDIC are subject
to Federal examination and to a substantial body of Federal law regulation. As
a result of Federal and state laws and regulations, Federally insured bank and
thrift institutions are, among other things, generally required to maintain
specified levels of reserves and are subject to other supervision and
regulation designed to promote financial soundness.
Obligations of foreign branches of domestic banks and of United Kingdom
branches of foreign banks may be general obligations of the parent bank in
addition to the issuing branch, or may be limited by the terms of a specific
obligation and governmental regulation. Such obligations are subject to
different risks than are those of domestic banks or domestic branches of
foreign banks. These risks include foreign economic and political developments,
foreign governmental restrictions that may adversely affect payment of
principal and interest on the obligations, foreign exchange controls and
foreign withholding and other taxes on interest income. Foreign branches of
domestic banks and United Kingdom branches of foreign banks are not necessarily
subject to the same or similar regulatory requirements that apply to domestic
banks, such as mandatory reserve requirements, loan limitations and accounting,
auditing and financial recordkeeping requirements. In addition, less
information may be publicly available about a foreign branch of a domestic bank
or about a foreign bank than about a domestic bank. Certificates of deposit
issued by wholly-owned Canadian subsidiaries of domestic banks are guaranteed
as to repayment of principal and interest (but not as to sovereign risk) by the
domestic parent bank.
Obligations of domestic branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by governmental regulation as well as
governmental action in the country in which the foreign bank has its head
office. A domestic branch of a foreign bank with assets in excess of $1 billion
may or may not be subject to reserve requirements imposed by the Federal
Reserve System or by the state in which the branch is located if the branch is
licensed by that state. In addition, branches licensed by the Comptroller of
the Currency and branches licensed by certain states ("State Branches") may or
may not be required to: (i) pledge to the regulator, by depositing assets with
a designated bank within the state, an amount of its assets equal to 5% of its
total liabilities; and (ii) maintain assets within the state in an amount equal
to a specified percentage of the aggregate amount of liabilities of the foreign
bank payable at or through all of its agencies or branches within the state.
The deposits of State Branches may not necessarily be insured by the FDIC.
A Portfolio may purchase obligations, or all or a portion of a package of
obligations, of smaller institutions that are Federally insured, provided the
obligation of any single institution does not exceed the Federal insurance
coverage of the obligation, presently $100,000.
33
<PAGE>
MANAGEMENT OF THE FUND
/diamond/ DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below:
PETER R. BROWN, DIRECTOR (DOB 5/10/28), 1475 South Belcher Road, Largo, Florida
33771. Chairman of the Board, Peter Brown Construction Company,
(construction contractors and engineers), Largo, Florida (1963 - present);
Trustee of IDEX Series Fund, former Trustee of IDEX Fund, IDEX II Series
Fund and IDEX Fund 3; Rear Admiral (Ret.) U.S. Navy Reserve, Civil Engineer
Corps.
CHARLES C. HARRIS, DIRECTOR (DOB 7/15/30), 35 Winston Drive, Clearwater,
Florida 34616. Retired (1988 - present); Senior Vice President, Treasurer
(1966 - 1988), Western Reserve Life Assurance Co. of Ohio; Vice President,
Treasurer (1968 - 1988), Director (1968 - 1987), Pioneer Western
Corporation; Vice President of the Fund (1986 - December, 1990); Trustee of
IDEX Series Fund, former Trustee of IDEX Fund, IDEX II Series Fund and IDEX
Fund 3.
RUSSELL A. KIMBALL, JR., DIRECTOR (DOB 8/17/44), 1160 Gulf Boulevard,
Clearwater Beach, Florida 34630. General Manager, Sheraton Sand Key Resort
(resort hotel), Clearwater, Florida (1975 - present).
JOHN R. KENNEY (1, 2) CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT (DOB
2/8/38). Chairman of the Board of Directors (1982 - present), Chief
Executive Officer (1982 - present), President (1978 - 1987 and December,
1992 - present), Director (1978 - present), Western Reserve Life Assurance
Co. of Ohio; Chairman of the Board of Directors (September, 1996 -
present), President (September, 1997 - present) WRL Investment Management,
Inc. (investment adviser), Largo, Florida; Chairman of the Board of
Directors (September, 1996 - present), WRL Investment Services, Inc.,
Largo, Florida; Chairman of the Board of Directors (February, 1997 -
present) AEGON Asset Management Services, Inc., Largo, Florida; Chairman of
the Board of Directors and Chief Executive Officer (1988 - February, 1991),
President (1988 - 1989), Director (1976 - February, 1991), Executive Vice
President (1972 - 1988), Pioneer Western Corporation (financial services),
Largo, Florida; President and Director (1985 - 1990) and Director
(December, 1990 - present); Idex Management, Inc. (investment adviser),
Largo, Florida; Trustee (1987 - September, 1996), Chairman (December, 1989
- September, 1990 and November, 1990 - September, 1996) and President and
Chief Executive Officer (November, 1986 - September, 1990), IDEX Fund, IDEX
II Series Fund and IDEX Fund 3; Trustee and Chairman (September, 1996 -
present) of IDEX Series Fund (investment companies) all of Largo, Florida.
G. JOHN HURLEY (1, 2) DIRECTOR AND EXECUTIVE VICE PRESIDENT (DOB 9/12/48).
Executive Vice President (June, 1993 - present), Chief Operating Officer
(March, 1994 - January, 1997), Western Reserve Life Assurance Co. of Ohio;
Director (September, 1996 - present), WRL Investment Management, Inc.
(investment adviser), Largo, Florida; Director (September, 1996 - present),
WRL Investment Services, Inc., Largo, Florida; Director, President and
Chief Executive Officer (February, 1997 - present) AEGON Asset Management
Services, Inc., Largo, Florida; President and Chief Executive Officer
(September, 1990 - September, 1996), Trustee (June, 1990 - September, 1996)
and Executive Vice President (June, 1988 - September, 1990) of IDEX Fund,
IDEX II Series Fund and IDEX Fund 3 (investment companies); Trustee,
President and Chief Financial Officer (September, 1996 - present) of IDEX
Series Fund; President, Chief Executive Officer and Director of
InterSecurities, Inc. (May, 1988 - present); Assistant Vice President of
AEGON USA Managed Portfolios, Inc. (September, 1991 - August, 1992); Vice
President of Pioneer Western Corporation (May, 1988 - February, 1991)
(financial services), Largo, Florida.
ALLAN HAMILTON (1, 2) TREASURER, PRINCIPAL FINANCIAL OFFICER (DOB 11/26/56).
Vice President and Controller (1987 - present), Treasurer (February, 1997 -
present), Assistant Vice President and Assistant Controller (1983 - 1987),
Western Reserve Life Assurance Co. of Ohio; Vice President and Controller
(1988 to February, 1991), Pioneer Western Corporation (financial services),
Largo, Florida.
THOMAS E. PIERPAN (1, 2) SECRETARY, VICE PRESIDENT AND ASSOCIATE GENERAL
COUNSEL (DOB 10/18/43). Assistant Secretary (March, 1995 - December, 1997)
of WRL Series Fund, Inc.; Vice President, Counsel and Secretary (December,
1997 - present) of IDEX Series Fund (mutual fund); Assistant Vice
President, Counsel and Assistant Secretary (November, 1997 - present) of
InterSecurities, Inc. (broker-dealer); Vice President (November, 1993 -
present), Associate General Counsel (February, 1995 - present), Assistant
Secretary (February, 1995 - present), Assistant Vice President (November,
1992 - November, 1993) of Western Reserve Life Assurance Co. of Ohio (life
insurance company).
ALAN M. YAEGER (1, 2) EXECUTIVE VICE PRESIDENT (DOB 10/21/46). Executive Vice
President (June, 1993
34
<PAGE>
- present), Chief Financial Officer (December, 1995 - present), Senior Vice
President (1981 - June, 1993) and Actuary (1972 - present), Western Reserve
Life Assurance Co. of Ohio; Director (September, 1996 - present), WRL
Investment Management, Inc. (investment adviser) Largo, Florida; Director
(September, 1996 - present), WRL Investment Services, Inc., Largo, Florida.
- ------------------------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of
Investment Adviser.
The Fund pays no salaries or compensation to any of its officers, all of whom
are employees of WRL. The Fund pays an annual fee of $6,000 to each Director
who is not affiliated with the Investment Adviser or the Sub-Advisers
("disinterested Director"). Each disinterested Director also receives $500,
plus expenses, per each regular and special Board meeting attended. The table
below shows each Portfolio's allocation of Directors' fees and expenses paid
for the year ended December 31, 1997. The compensation table provides
compensation amounts paid to disinterested Directors of the Fund for the fiscal
year ended December 31, 1997.
DIRECTOR'S FEES PAID - YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PORTFOLIO AMOUNT PAID
- --------------------------- ------------
<S> <C>
Aggressive Growth $
Emerging Growth
International Equity
Global
Growth
Third Avenue Value(1)
C.A.S.E. Growth
U.S. Equity
Value Equity
Global Sector
Tactical Asset Allocation
Strategic Total Return
Real Estate Securities(1) N/A
Growth & Income
Balanced
Bond
Money Market
<FN>
- ------------------------------
(1) Portfolio had not commenced operations as of December 31, 1997.
</FN>
</TABLE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
Pension Or
Retirement
Benefits Total Compensation
Aggregate Accrued As Paid to Directors From
Compensation From Part of WRL Series Fund, Inc. and
Name of Person, Position WRL Series Fund, Inc. Fund Expenses* IDEX Series Fund, Inc.
- ----------------------------------- ----------------------- ---------------- --------------------------
<S> <C> <C> <C>
Peter R. Brown, Director $ 0 $
Charles C. Harris, Director 0
Russell A. Kimball, Jr., Director 0
</TABLE>
- ------------------------------
* The Plan became effective January 1, 1996.
Commencing on January 1, 1996, a non-qualified deferred compensation plan (the
"Plan") became available to directors who are not interested persons of the
Fund. Under the Plan, compensation may be deferred that would otherwise be
payable by the Fund, or IDEX Series Fund to a disinterested Director or Trustee
on a
35
<PAGE>
current basis for services rendered as director. Deferred compensation amounts
will accumulate based on the value of Class A shares of a portfolio of IDEX
Series Fund (without imposition of sales charge), as elected by the Director.
It is not anticipated that the Plan will have any impact on the Fund. As of
April 1, 1998, the Directors and officers of the Fund beneficially owned in the
aggregate less than 1% of the Fund's shares through ownership of Policies and
Annuity Contracts indirectly invested in the Fund. The Board of Directors has
established an Audit Committee consisting of Messrs. Brown, Harris and Kimball.
/diamond/ THE INVESTMENT ADVISER
The information that follows supplements the information provided about the
Investment Adviser under the caption "Management of the Fund - Investment
Adviser" in the Prospectus.
WRL Investment Management, Inc. ("WRL Management") serves as the investment
adviser to each Portfolio of the Fund pursuant to an Investment Advisory
Agreement dated January 1, 1997 with the Fund. The Investment Adviser is a
direct, wholly-owned subsidiary of WRL, which is wholly-owned by First AUSA
Life Insurance Company ("First AUSA"), a stock life insurance company, which is
wholly-owned by AEGON USA, Inc. ("AEGON USA"). AEGON USA is a financial
services holding company whose primary emphasis is on life and health insurance
and annuity and investment products. AEGON USA is a wholly-owned indirect
subsidiary of AEGON nv, a Netherlands corporation, which is a publicly traded
international insurance group.
The Investment Advisory Agreement was approved by the Fund's Board of
Directors, including a majority of the Directors who are not "interested
persons" of the Fund (as defined in the 1940 Act) on October 3, 1996 and by the
shareholders of each Portfolio of the Fund on December 16, 1996. The Investment
Advisory Agreement provides that it will continue in effect for an initial term
ending January 1, 1999, and from year to year thereafter, if approved annually
(a) by the Board of Directors of the Fund or by a majority of the outstanding
shares of each Portfolio, and (b) by a majority of the Directors who are not
parties to such contract or "interested persons" of any such party. The
Investment Advisory Agreement may be terminated without penalty on 60 days'
written notice at the option of either party or by the vote of the shareholders
of each Portfolio and terminates automatically in the event of its assignment
(within the meaning of the 1940 Act).
While the Investment Adviser is at all times subject to the direction of the
Board of Directors of the Fund, the Investment Advisory Agreement provides that
the Investment Adviser, subject to review by the Board of Directors, is
responsible for the actual management of the Fund and has responsibility for
making decisions to buy, sell or hold any particular security. The Investment
Adviser also is obligated to provide all the office space, facilities,
equipment and personnel necessary to perform its duties under the Investment
Advisory Agreement. For further information about the management of each
Portfolio of the Fund, see "The Sub-Advisers", on pages 43-46.
ADVISORY FEE. The method of computing the investment advisory fee is fully
described in the Fund's Prospectus. For the years ended December 31, 1997, 1996
and 1995, the Investment Adviser was paid fees for its services to each
Portfolio in the following amounts (no information is included for the Third
Avenue Value and Real Estate Securities Portfolios as these Portfolios had not
yet commenced operations as of December 31, 1997):
36
<PAGE>
ADVISORY FEES
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------------------
Portfolio 1997 1996 1995
- ------------------------------ -------- ------------------------------ --------------------------
<S> <C> <C> <C>
Aggressive Growth $ $ 1,529,679 $ 849,097
Emerging Growth 2,985,089 1,838,573
International Equity(6) N/A N/A
Global Sector(4)(5) 26,485 N/A
Global 3,468,535 2,075,054
Growth 11,137,321 7,847,750
C.A.S.E. Growth(2) 83,931 5,519
U.S. Equity (6) N/A N/A
Value Equity(4) 111,557 N/A
Tactical Asset Allocation(3) 1,308,435 433,844
Strategic Total Return 2,462,304 1,746,022
Growth & Income 231,441 128,859
Balanced 315,419 195,339
Bond(6) 474,926 409,862
Money Market 436,658 422,357
----------- -----------
TOTAL $24,571,780 $15,952,276
=========== ===========
<FN>
- ------------------------------
(1) Portfolio commenced operations May 1, 1995.
(2) Portfolio commenced operations January 3, 1995.
(3) Portfolio commenced operations May 1, 1996.
(4) Effective June 16, 1997, Meridian began receiving monthly compensation from
the Investment Adviser at the annual rate of 0.40% of average daily net
assets of the Portfolio. Prior to March 1, 1997, INVESCO Global Asset
Management Limited served as a co-sub-adviser to the Global Sector
Portfolio; for periods prior to that date, INVESCO received monthly
compensation from the Investment Adviser at the annual rate of 0.40% of
the first $100 million average daily net assets of the Portfolio and 0.35%
of assets in excess of $100 million; and Meridian received monthly
compensation from the Investment Adviser at the annual rate of 0.30% of
the first $100 million of average daily net assets of the Portfolio and
0.35% of assets in excess of $100 million.
(5) Prior to January 1, 1998, Janus Capital Corporation served as Sub-Adviser
to the Bond Portfolio and received monthly compensation from the
Investment Adviser at the annual rate of 0.25% of average daily net assets
of the Portfolio. Effective January 1, 1998, AEGON USA Investment
Management, Inc. serves as the Sub-Adviser to the Bond Portfolio and
receives monthly compensation from the Investment Adviser at the rate of
0.20% of average daily net assets of the Portfolio.
(6) Portfolio commenced operations January 2, 1997.
</FN>
</TABLE>
PAYMENT OF EXPENSES. Under the terms of the Investment Advisory Agreement, the
Investment Adviser is responsible for providing investment advisory services
and furnishing office space for officers and employees of the Investment
Adviser connected with investment management of the Portfolios. Each Portfolio
pays: all expenses incurred in connection with the formation and organization
of a Portfolio, including the preparation (and filing, when necessary) of the
Portfolio's contracts, plans, and documents, conducting meetings of organizers,
directors and shareholders; preparing and filing the post-effective amendment
to the Fund's registration statement effecting registration of a Portfolio and
its shares under the 1940 Act and the 1933 Act and all other matters relating
to the information and organization of a Portfolio and the preparation for
offering its shares; expenses in connection with ongoing registration or
qualification requirements under Federal and state securities laws; investment
advisory fees; pricing costs (including the daily calculations of net asset
value); brokerage commissions and all other expenses in connection with
execution of portfolio transactions, including interest; all Federal, state and
local taxes (including stamp, excise, income and franchise taxes) and the
preparation and filing of all returns and reports in connection therewith; any
compensation, fees, or reimbursements which the Fund pays to its Directors who
are not "interested persons," as that phrase is defined in the 1940 Act, of the
Fund or WRL Management; compensation of the Fund's custodian, administrative
and transfer agent, registrar and dividend disbursing agent; legal, accounting
and printing expenses; other administrative, clerical, recordkeeping and
bookkeeping expenses; auditing fees; certain insurance premiums; services for
shareholders (including allocable telephone and personnel expenses); costs of
certificates and the expenses of delivering such certificates to the purchaser
of shares relating thereto; expenses of local representation in Maryland; fees
and/or expenses payable pursuant to any plan of distribution adopted with
respect to the Fund in accordance with Rule 12b-1 under the 1940 Act; expenses
of shareholders' meetings and of preparing, printing, and distributing notices,
proxy statements and reports to shareholders; expenses of preparing and filing
reports with Federal and state regulatory authorities; all costs and expenses,
including fees and disbursements, of counsel and auditors, filing and renewal
fees and printing costs in connection with the filing of any required
37
<PAGE>
amendments, supplements or renewals of registration statement, qualifications
or prospectuses under the 1933 Act and the securities laws of any states or
territories, subsequent to the effectiveness of the initial registration
statement under the 1933 Act; all costs involved in preparing and printing
prospectuses of the Fund; extraordinary expenses; and all other expenses
properly payable by the Fund or the Portfolios.
The Investment Adviser has voluntarily undertaken, until at least April 30,
1999, to pay expenses on behalf of the Portfolios (except the Global Sector
Portfolio) to the extent normal operating expenses (including investment
advisory fees but excluding interest, taxes, brokerage fees, commissions and
extraordinary charges) exceed, as a percentage of each Portfolio's average
daily net assets, 1.00% (0.70% for the Bond and Money Market Portfolios, 1.50%
for the International Equity Portfolio and 1.30% for the U.S. Equity
Portfolio). The following expenses were paid by the previous investment
adviser, WRL, for the fiscal years ended December 31, 1997, 1996, and 1995
(there are no expenses included for the Third Avenue Value Portfolio or the
Real Estate Securities Portfolio because these Portfolios had not yet commenced
operations as of December 31, 1997):
PORTFOLIO EXPENSES PAID BY INVESTMENT ADVISER
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------
Portfolio 1997 1996 1995
- ------------------------------ ------ ---------------------------- -----------------------
<S> <C> <C> <C>
Aggressive Growth $ -0- $ -0-
Emerging Growth -0- -0-
International Equity (1) N/A N/A
Global(3) -0- -0-
Growth -0- -0-
C.A.S.E. Growth(3) 73,269 23,832
U.S. Equity(1) N/A N/A
Value Equity(2) 13,672 N/A
Global Sector(2) -0- N/A
Tactical Asset Allocation(4) -0- -0-
Strategic Total Return -0- -0-
Growth & Income -0- 14,417
Balanced -0- -0-
Bond(5) -0- -0-
Money Market -0- -0-
<FN>
- ------------------------------
(1) Portfolio commenced operations on January 2, 1997.
(2) Portfolio commenced operations on May 1, 1996.
(3) Portfolio commenced operations on May 1, 1995.
(4) Portfolio commenced operations on January 3, 1995.
(5) Prior to January 1, 1998, Janus Capital Corporation served as the
Sub-Adviser for the Bond Portfolio.
</FN>
</TABLE>
SERVICE AGREEMENT. Effective January 1, 1997, the Fund entered into an
Administrative Services and Transfer Agency Agreement ("Services Agreement")
with WRL Investment Services, Inc. ("WRL Services"), an affiliate of WRL
Management and WRL, to furnish the Fund with administrative services to assist
the Fund in carrying out certain of its functions and operations. The Service
Agreement was approved by the Fund's Board of Directors, including a majority
of Directors who are not "interested persons" of the Fund (as defined in the
1940 Act) on October 3, 1996. Under this Agreement, WRL Services shall furnish
to each Portfolio, subject to the overall supervision of the Fund's Board,
supervisory, administrative, and transfer agency services, including
recordkeeping and reporting. WRL Services is reimbursed by the Fund monthly on
a cost incurred basis.
DISTRIBUTION AGREEMENT. Effective January 1, 1997, the Fund adopted a
distribution plan ("Distribution Plan") pursuant to Rule 12b-1 under the 1940
Act, as amended. Pursuant to the Distribution Plan, the Fund entered into a
Distribution Agreement with InterSecurities, Inc. ("ISI"), whose principal
office is located at 201 Highland Avenue, Largo, Florida 33770. The
Distribution Plan and related Agreement were approved by the Fund's Board of
Directors, including a majority of Directors who are not "interested persons"
of
38
<PAGE>
the Fund (as defined in the 1940 Act) on October 3, 1996, and the Distribution
Plan was approved by the shareholders of each Portfolio of the Fund on December
16, 1996. ISI is an affiliate of the Investment Adviser.
Under the Distribution Plan and Distribution Agreement, the Fund, on behalf of
the Portfolios, will reimburse ISI after each calendar month for certain Fund
distribution expenses incurred or paid by ISI, provided that these expenses in
the aggregate do not exceed 0.15%, on an annual basis, of the average daily net
asset value of shares of each Portfolio.
Distribution expenses for which ISI may be reimbursed under the Distribution
Plan and Distribution Agreement include, but are not limited to, expenses of
printing and distributing the Fund's prospectus and statement of additional
information to potential investors; developing and preparing Fund
advertisements; sales literature and other promotional materials; holding
seminars and sales meetings designed to promote distribution of Fund shares;
the development of consumer-oriented sales materials describing and/or relating
to the Fund; and expenses attributable to "distribution-related services"
provided to the Fund, which include such things as salaries and benefits,
office expenses, equipment expenses, training costs, travel costs, printing
costs, supply expenses, computer programming time, and data center expenses,
each as they relate to the promotion of the sale of Fund shares.
ISI submits to the Directors of the Fund for approval annual distribution
budgets and quarterly reports of distribution expenses with respect to each
Portfolio. ISI allocates to each Portfolio distribution expenses specifically
attributable to the distribution of shares of such Portfolio. Distribution
expenses not specifically attributable to the distribution of shares of a
particular Portfolio are allocated among the Portfolios, based upon the ratio
of net asset value of each Portfolio to the net asset value of all Portfolios,
or such other factors as ISI deems fair and are approved by the Fund's Board of
Directors. ISI has determined that it will not seek payment by the Fund of
distribution expenses incurred with respect to any Portfolio during the fiscal
year ending December 31, 1998. Prior to ISI seeking reimbursement of future
expenses, Policyowners will be notified in advance.
It is anticipated that benefits provided by the Distribution Plan may include
lower fixed costs as a percentage of assets as Fund assets increase through the
growth of the Fund due to enhanced marketing efforts.
/diamond/ THE SUB-ADVISERS
This discussion supplements the information provided about each Portfolio's
Sub-Adviser under the caption "Management of the Fund - The Sub-Advisers" in
the Prospectus.
Each Sub-Adviser serves, pursuant to each Sub-Advisory Agreement dated January
1, 1997 (June 16, 1997 with respect to the Global Sector Portfolio; January 1,
1998 with respect to the Third Avenue Value Portfolio and the Bond Portfolio;
and May 1, 1998 with respect to the Real Estate Securities Portfolio) between
WRL Management and the respective Sub-Adviser, on behalf of each Portfolio. The
Sub-Advisory Agreements were approved by the Board of Directors of the Fund,
including a majority of the Directors who are not "interested persons" of the
Fund (as defined in the 1940 Act) on October 3, 1996 and by the shareholders of
each Portfolio of the Fund on December 16, 1996, (June 16, 1997 with respect to
the Global Sector Portfolio, and December 9, 1997 with respect to the Bond
Portfolio). The Sub-Advisory Agreements provide that they will continue in
effect for an initial term ending January 1, 1999 (except the Bond Portfolio
and Third Avenue Value Portfolio, which will continue in effect for an initial
term ending January 1, 2000 and the Real Estate Securities Portfolio, which
will continue in effect for an initial term ending April 30, 2000), and from
year to year thereafter, if approved annually (a) by the Board of Directors of
the Fund or by a majority of the outstanding shares of each Portfolio and (b)
by a majority of the Directors who are not parties to such Agreements or
"interested persons" (as defined in the 1940 Act) of any such party. The
Sub-Advisory Agreements may be terminated without penalty on 60 days' written
notice at the option of either party or by the vote of the shareholders of each
Portfolio and terminate automatically in the event of their assignment (within
the meaning of the 1940 Act) or termination of the Investment Advisory
Agreement.
Pursuant to the Sub-Advisory Agreements, each Sub-Adviser provides investment
advisory assistance and portfolio management advice to the Investment Adviser
for their respective Portfolio(s). Subject to review by the Investment Adviser
and the Board of Directors of the Fund, the Sub-Advisers are responsible for
the actual management of their respective Portfolio(s) and for making decisions
to buy, sell or hold a particular security.
39
<PAGE>
Each Sub-Adviser bears all of its expenses in connection with the performance
of its services under their Sub-Advisory Agreement such as compensating and
furnishing office space for their officers and employees connected with
investment and economic research, trading and investment management of the
respective Portfolio(s).
Each Sub-Adviser is a registered investment adviser under the Investment
Advisers Act of 1940, as amended. The Sub-Advisers for the Portfolios of the
Fund are:
FRED ALGER MANAGEMENT, INC. ("Alger Management") serves as Sub-Adviser to the
Aggressive Growth Portfolio.
Alger Management, located at 75 Maiden Lane, New York, New York 10038, is a
wholly-owned subsidiary of Fred Alger & Company, Incorporated, which, in turn,
is a wholly-owned subsidiary of Alger Associates, Inc., a financial services
holding company. Alger Management is generally engaged in the business of
rendering investment advisory services to institutions and, to a lesser extent,
individuals. Alger Management has been engaged in the business of rendering
investment advisory services since 1964 and, as of January 31, 1998, has
approximately $ billion under management.
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC. ("Van Kampen") serves as
Sub-Adviser to the Emerging Growth Portfolio.
Van Kampen, located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181, is
an indirect wholly-owned subsidiary of VK/AC Holding, Inc. ("VK/AC Holding").
VK/AC Holding is a wholly-owned subsidiary of MSAM Holdings II, Inc., which, in
turn, is a wholly-owned subsidiary of Morgan Stanley Group, Inc. On June ,
1997, Morgan Stanley Group Inc. merged with Dean Witter, Discover & Co., a
financial services company.
MERIDIAN INVESTMENT MANAGEMENT CORPORATION ("MERIDIAN") serves as Sub-Adviser
to the Global Sector Portfolio.
Meridian is located at 12835 East Arapahoe Road, Tower II, Penthouse,
Englewood, Colorado 80112. Meridian is a wholly-owned subsidiary of Meridian
Management & Research Corporation ("MM&R"). Meridian provides investment
management and related services to other mutual fund portfolios and individual,
corporate, charitable and retired accounts.
JANUS CAPITAL CORPORATION ("Janus") serves as the Sub-Adviser to the Growth
Portfolio and the Global Portfolio.
Janus, located at 100 Fillmore Street, Denver, Colorado 80206, has been engaged
in the management of the Janus funds since 1969. Janus also serves as
investment adviser or sub-adviser to other mutual funds, and for individual,
corporate, charitable and retirement accounts. The aggregate market value of
the assets managed by Janus was over $ billion as of January 31, 1998. Kansas
City Southern Industries, Inc. ("KCSI") owns 83% of Janus. KCSI, whose address
is 114 West 11th Street, Kansas City, Missouri 64105-1804, is a publicly-traded
holding company whose largest subsidiary, the Kansas City Southern Railway
Company, is primarily engaged in the transportation industry. Other KCSI
subsidiaries are engaged in financial services and real estate.
EQSF ADVISERS, INC. ("EQSF") serves as Sub-Adviser to the Third Avenue Value
Portfolio.
EQSF, located at 767 Third Avenue, New York, New York 10017-2023, is controlled
by Martin J. Whitman. His control is based upon an irrevocable proxy signed by
his children, who own in the aggregate 75% of the outstanding common stock of
EQSF.
C.A.S.E. MANAGEMENT, INC. ("C.A.S.E. Management") serves as Sub-Adviser to the
C.A.S.E. Growth Portfolio.
C.A.S.E. Management, located at 5355 Town Center Road, Suite 702, Boca Raton,
Florida 33486, is a wholly-owned subsidiary of C.A.S.E., Inc. C.A.S.E.
Management provides investment management services to financial institutions,
high net worth individuals, and other professional money managers.
NWQ INVESTMENT MANAGEMENT COMPANY, INC. ("NWQ") serves as the Sub-Adviser to
the Value Equity Portfolio.
NWQ, located at 2049 Century Park East, 4th Floor, Los Angeles, California
90067, is a wholly-owned subsidiary of United Asset Management Corporation and
provides investment management services to institutions and high net worth
individuals. NWQ had approximately $ billion in assets under management as of
January 31, 1998.
DEAN INVESTMENT ASSOCIATES ("Dean Investment") serves as Sub-Adviser to the
Tactical Asset Allocation Portfolio.
Dean Investment, located at 2480 Kettering Tower, Dayton, Ohio 45423-2480, is
wholly-owned by C.H. Dean and Associates, Inc. Founded in 1972, Dean Investment
manages portfolios for individuals and institutional clients worldwide. Dean
Investment provides a full range of investment advisory services and currently
has $ billion of assets under management.
LUTHER KING CAPITAL MANAGEMENT CORPORATION ("Luther King") serves as
Sub-Adviser to the Strategic Total Return Portfolio.
40
<PAGE>
Luther King is located at 301 Commerce Street, Suite 1600, Fort Worth, Texas
76102. Ultimate control of Luther King is exercised by J. Luther King, Jr.
Luther King provides investment management services to accounts of individual
investors, mutual funds, and other institutional investors. Luther King has
served as an investment adviser for approximately 17 years; as of January 31,
1998, the total assets managed by Luther King was approximately $ billion.
FEDERATED INVESTMENT COUNSELING ("Federated") serves as the Sub-Adviser to the
Growth & Income Portfolio.
Federated, located at Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779, is a wholly-owned subsidiary of Federated Investors. All of the
voting securities of Federated Investors are owned by a trust, the trustees of
which are John F. Donahue, his wife, Rhodora Donahue, and his son, J.
Christopher Donahue.
AEGON USA INVESTMENT MANAGEMENT, INC. ("AIMI") serves as Sub-Adviser to the
Bond Portfolio and the Balanced Portfolio.
AIMI, located at 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499, is a
wholly-owned subsidiary of AEGON USA and thus is an affiliate of the Investment
Adviser. AIMI also serves as sub-adviser to the two bond portfolios of IDEX
Series Fund. AIMI also manages the general account investment portfolios of the
life insurance subsidiaries of AEGON USA and had in excess of $ billion under
management as of January 1, 1998.
J.P. MORGAN INVESTMENT MANAGEMENT INC. ("J.P. Morgan") serves as Sub-Adviser to
the Money Market Portfolio and the Real Estate Securities Portfolio.
J.P. Morgan, located at 522 Fifth Avenue, New York, New York 10036, is a
wholly-owned subsidiary of J.P. Morgan & Co., Incorporated. J.P. Morgan
provides investment management and related services for corporate, public, and
union employee benefit funds, foundations, endowments, insurance companies and
government agencies.
SCOTTISH EQUITABLE INVESTMENT MANAGEMENT LIMITED ("Scottish Equitable") serves
as a Co-Sub-Adviser to the International Equity Portfolio.
Scottish Equitable is located at Edinburgh Park, Edinburgh EH12 9SE. Scottish
Equitable is a wholly-owned subsidiary of Scottish Equitable plc, successor to
Scottish Equitable Life Assurance Society. Scottish Equitable is also an
indirect wholly-owned subsidiary of AEGON nv. As of January 31, 1998 Scottish
Equitable plc had approximately $ billion in assets under management. The
Co-Sub-Adviser provides investment advisory and management services to certain
of its affiliates and to external organizations.
GE INVESTMENT MANAGEMENT INCORPORATED ("GEIM") serves as a Co-Sub-Adviser to
the International Equity Portfolio and as Sub-Adviser to the U.S. Equity
Portfolio.
GEIM is located at 3003 Summer Street, Stamford, Connecticut 06905. GEIM, which
was formed under the laws of Delaware in 1988, is a wholly-owned subsidiary of
General Electric Company ("GE"). GEIM's principal officers and directors serve
in similar capacities with respect to General Electric Investment Corporation
("GEIC", and, together with GEIM, collectively referred to as "GE
Investments"), which like GEIM is a wholly-owned subsidiary of GE. As of
December 31, 1997, GEIM and GEIC together managed assets in excess of $
billion. GE Investments provides investment management services to external
organizations and to certain of its affiliates.
41
<PAGE>
The method of computing each Sub-Adviser's fees is set forth in the Fund's
Prospectus. For the years ended December 31, 1997, 1996 and 1995 each
Sub-Adviser was paid fees for their services in the following amounts (no fees
are included for Third Avenue Value Portfolio or the Real Estate Securities
Portfolio as these Portfolios had not yet commenced operations as of December
31, 1997):
SUB-ADVISORY FEES
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------------------
Sub-Adviser Portfolio 1997 1996 1995
- --------------------- ------------------------------ ------- --------------------------- ---------------------
<S> <C> <C> <C> <C>
Alger Management Aggressive Growth $ $ 764,840 $ 424,549
Van Kampen Emerging Growth 1,492,545 919,287
Janus Bond(7) 237,463 204,931
Growth 5,568,661 3,923,875
Global 1,734,268 1,037,527
C.A.S.E. Management C.A.S.E. Growth(2) 41,966 2,759
NWQ Value Equity(4) 48,943 N/A
Meridian Global Sector(4)
Meridian(5) 7,223 N/A
INVESCO(5) 9,631 N/A
Dean Investment Tactical Asset Allocation(1) 654,218 216,922
Luther King Strategic Total Return 1,231,152 873,011
Federated Growth & Income 150,006 85,906
AIMI Balanced 157,709 94,669
J.P. Morgan Money Market
JP Morgan(6) 111,216 N/A
Janus(6) 70,041 211,178(4)
GEIM U.S. Equity(6) N.A N/A
International Equity(8)(9) N/A N/A
Scottish Equitable International Equity(8)(9) N/A N/A
<FN>
- ------------------------------
(1) Portfolio commenced operations January 3, 1995.
(2) Portfolio commenced operations May 1, 1995.
(3) Fees paid to Janus, the Portfolio's previous Sub-Adviser.
(4) Portfolio commenced operations May 1, 1996.
(5) Prior to March 1, 1997, INVESCO Global Asset Management Limited served as a
co-sub-adviser to the Global Sector Portfolio; for periods prior to that
date, INVESCO received monthly compensation from the Investment Adviser at
the annual rate of 0.40% of first $100 million average daily net assets of
the Portfolio and 0.35% of assets in excess of $100 million; and Meridian
Investment Management Corporation received monthly compensation from the
Investment Adviser at the annual rate of 0.30% of first $100 million of
average daily net assets of the Portfolio and 0.35% of assets in excess of
$100 million. Effective June 16, 1997, Meridian began receiving monthly
compensation from the Investment Adviser at the annual rate of 0.40% of
average daily net assets.
(6) JP Morgan became Sub-Adviser to the Money Market Portfolio on May 1, 1996;
prior to this date, Janus Capital Corporation served as Sub-Adviser to the
Portfolio.
(7) Prior to January 1, 1998, Janus served as Sub-Adviser to the Bond Portfolio
and received monthly compensation from the Investment Adviser at the
annual rate of 0.25% of average daily net assets of the Portfolio.
Effective January 1, 1998, AIMI serves as Investment Adviser to the Bond
Portfolio and will receive monthly compensation from the Investment
Adviser at the rate of 0.20% of average daily net assets of the Portfolio.
(8) Portfolio commenced operations January 2, 1997.
(9) GEIM and Scottish Equitable serve as co-subadvisers for the International
Equity Portfolio.
</FN>
</TABLE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
/diamond/ PORTFOLIO TURNOVER
The information that follows supplements the information provided about
portfolio turnover under the caption "Other Investment Policies and
Restrictions - Portfolio Turnover" in the Prospectus. In computing the
portfolio turnover rate for a Portfolio, securities whose maturities or
expiration dates at the time of acquisition are one year or less are excluded.
Subject to this exclusion, the turnover rate for a Portfolio is calculated by
dividing (a) the lesser of purchases or sales of portfolio securities for the
fiscal year by (b) the monthly average of portfolio securities owned by the
Portfolio during the fiscal year.
The following table provides the Portfolios' turnover rates for the fiscal
years ended December 31, 1997, 1996 and 1995 (no information is included for
the Third Avenue Value Portfolio or the Real Estate Securities Portfolio as
these Portfolios had not yet commenced operations as of December 31, 1997):
42
<PAGE>
PORTFOLIO TURNOVER RATES
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------------
Portfolio 1997 1996 1995
- ------------------------------ ------ ------------------------ -------------------
<S> <C> <C> <C>
Aggressive Growth 101.28% 108.04%
Emerging Growth 80.02% 124.13%
International Equity(5) N/A N/A
Global 88.31% 130.60%
Growth 45.21% 130.48%
C.A.S.E. Growth(2) 160.27% 121.62%
U.S. Equity(5) N/A N/A
Value Equity(4) 7.93% N/A
Global Sector(4) 27.58% N/A
Tactical Asset Allocation(1) 98.97% 38.68%
Strategic Total Return(2) 49.32% 52.59%
Growth & Income 68.53% 78.34%
Balanced 76.90% 98.55%
Bond 187.72% 120.54%
Money Market(3) N/A N/A
<FN>
- ------------------------------
(1) Portfolio commenced operations January 3, 1995.
(2) Portfolio commenced operations May 1, 1995.
(3) Money Market does not have a stated portfolio turnover rate, as securities
of the type in which it invests are excluded in the usual calculation of
that rate.
(4) Portfolio commenced operations May 1, 1996.
(5) Portfolio commenced operations January 2, 1997.
</FN>
</TABLE>
There was a significant increase in the turnover rate for the year ended
December 31, 1996 for the Bond Portfolio because Janus, the Portfolio's
Sub-Adviser prior to January 1, 1998, determined that the direction of interest
rates was becoming increasingly unclear; so the Portfolio was positioned more
conservatively. Specifically, the Portfolio's average maturity was reduced to
more closely resemble that of the Lehman Brothers Government/ Corporate Bond
Index.
The future annual turnover rates cannot be precisely predicted, although an
annual turnover rate in excess of 100% is not presently anticipated for the
Aggressive Growth, Tactical Asset Allocation, Growth & Income and Balanced
Portfolios; 50% for the Value Equity Portfolio and Third Avenue Value
Portfolio; 150% for the Growth Portfolio; and 200% for the Global Portfolio.
There are no fixed limitations regarding the portfolio turnover rates of the
Portfolios. Portfolio turnover rates are expected to fluctuate under constantly
changing economic conditions and market circumstances. Higher turnover rates
tend to result in higher brokerage fees. Securities initially satisfying the
basic policies and objective of each Portfolio may be disposed of when they are
no longer deemed suitable.
/diamond/ PLACEMENT OF PORTFOLIO
BROKERAGE
Subject to policies established by the Board of Directors of the Fund, each
Portfolio's Sub-Adviser is primarily responsible for placement of a Portfolio's
securities transactions. In placing orders, it is the policy of a Portfolio to
obtain the most favorable net results, taking into account various factors,
including price, dealer spread or commissions, if any, size of the transaction
and difficulty of execution. While each Sub-Adviser generally will seek
reasonably competitive spreads or commissions, a Portfolio will not necessarily
be paying the lowest spread or commission available. A Portfolio does not have
any obligation to deal with any broker, dealer or group of brokers or dealers
in the execution of transactions in portfolio securities.
Decisions as to the assignment of portfolio brokerage business for a Portfolio
and negotiation of its commission rates are made by the Sub-Adviser, whose
policy is to obtain "best execution" (prompt and reliable execution at the most
favorable security price) of all portfolio transactions. In placing portfolio
transactions, the Sub-Adviser
43
<PAGE>
may give consideration to brokers who provide supplemental investment research,
in addition to such research obtained for a flat fee, to the Sub-Adviser, and
pay spreads or commissions to such brokers or dealers furnishing such services
which are in excess of spreads or commissions which another broker or dealer
may charge for the same transaction.
In selecting brokers and in negotiating commissions, the Sub-Adviser considers
such factors as: the broker's reliability; the quality of its execution
services on a continuing basis; the financial condition of the firm; and
research products and services provided, which include: (i) furnishing advice,
either directly or through publications or writings, as to the value of
securities, the advisability of purchasing or selling specific securities and
the availability of securities or purchasers or sellers of securities and (ii)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends and portfolio strategy and products and other
services (such as third party publications, reports and analyses, and computer
and electronic access, equipment, software, information and accessories) that
assist each Sub-Adviser in carrying out its responsibilities.
Supplemental research obtained through brokers or dealers will be in addition
to, and not in lieu of, the services required to be performed by a Sub-Adviser.
The expenses of a Sub-Adviser will not necessarily be reduced as a result of
the receipt of such supplemental information. A Sub-Adviser may use such
research products and services in servicing other accounts in addition to the
respective Portfolio. If a Sub-Adviser determines that any research product or
service has a mixed use, such that it also serves functions that do not assist
in the investment decision-making process, the Sub-Adviser will allocate the
costs of such service or product accordingly. The portion of the product or
service that a Sub-Adviser determines will assist it in the investment
decision-making process may be paid for in brokerage commission dollars. Such
allocation may create a conflict of interest for the Sub-Adviser. Conversely,
such supplemental information obtained by the placement of business for a
Sub-Adviser will be considered by and may be useful to the Sub-Adviser in
carrying out its obligations to a Portfolio.
When a Portfolio purchases or sells a security in the OTC market, the
transaction takes place directly with a principal market-maker, without the use
of a broker, except in those circumstances where, in the opinion of the
Sub-Adviser, better prices and executions are likely to be achieved through the
use of a broker.
Securities held by a Portfolio may also be held by other separate accounts,
mutual funds or other accounts for which the Investment Adviser or Sub-Adviser
serves as an adviser, or held by the Investment Adviser or Sub-Adviser for
their own accounts. Because of different investment objectives or other
factors, a particular security may be bought by the Investment Adviser or Sub-
Adviser for one or more clients when one or more clients are selling the same
security. If purchases or sales of securities for a Portfolio or other entities
for which they act as investment adviser or for their advisory clients arise
for consideration at or about the same time, transactions in such securities
will be made, insofar as feasible, for the respective entities and clients in a
manner deemed equitable to all. To the extent that transactions on behalf of
more than one client of the Investment Adviser or Sub-Adviser during the same
period may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
On occasions when the Investment Adviser or a Sub-Adviser deems the purchase or
sale of a security to be in the best interests of a Portfolio as well as other
accounts or companies, it may to the extent permitted by applicable laws and
regulations, but will not be obligated to, aggregate the securities to be sold
or purchased for the Portfolio with those to be sold or purchased for such
other accounts or companies in order to obtain favorable execution and lower
brokerage commissions. In that event, allocation of the securities purchased or
sold, as well as the expenses incurred in the transaction, will be made by the
Sub-Adviser in the manner it considers to be most equitable and consistent with
its fiduciary obligations to the Portfolio and to such other accounts or
companies. In some cases this procedure may adversely affect the size of the
position obtainable for a Portfolio.
The Board of Directors of the Fund periodically reviews the brokerage placement
practices of each Sub-Adviser on behalf of the Portfolios, and reviews the
prices and commissions, if any, paid by the Portfolios to determine if they
were reasonable.
The Board of Directors of the Fund has authorized the Sub-Advisers to consider
sales of the Policies and Annuity Contracts by a broker-dealer as a factor in
the selection of broker-dealers to execute Portfolio transactions. In addition,
the Sub-Advisers may occasionally place portfolio business with affiliated
brokers of the Investment Adviser or a Sub-Adviser, including: InterSecurities,
Inc., P.O. Box 5068, Clearwater, Florida 33758; Fred Alger & Company, Inc., 75
Maiden Lane, New York, New York 10038; M. J. Whitman, Inc.; M. J. Whitman
Senior Debt Corp.; and AEGON USA Securities, Inc., P.O. Box 1449, Cedar Rapids,
Iowa 52499. As stated above, any such placement of Portfolio business will be
subject to the ability of the broker-dealer to provide best execution and to
the Conduct Rules of the National Association of Securities Dealers, Inc.
44
<PAGE>
COMMISSIONS PAID BY THE PORTFOLIOS
<TABLE>
<CAPTION>
Aggregate Commissions
Year Ended December 31
----------------------------
Portfolio 1997 1996
- ------------------------- -------- -------------------
<S> <C> <C>
Aggressive Growth $ $ 337,449
Emerging Growth 415,717
Global 1,269,275
Growth 720,978
C.A.S.E. Growth(2) 97,761
Tactical Asset
Allocation(3) 344,847
Strategic
Total Return 398,594
Growth &
Income 58,921
Balanced 80,218
Global Sector (5) 17,933
Value Equity (5) 63,204
International Equity(6) N/A
U.S. Equity(6) N/A
<CAPTION>
Affiliated Brokerage Commissions
Year Ended December 31
-------------------------------------------------------------------------------------------
Portfolio 1995 1997 % 1996 % 1995 %
- ------------------------- ----------------- ------- ---- ---------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Aggressive Growth $ 240,067 $ $329,194 97.55%(1) $240,067 100%(1)
Emerging Growth 542,420 N/A N/A N/A N/A
Global 712,827(3) N/A N/A N/A N/A
Growth 1,577,115 N/A N/A N/A greater than 1%
C.A.S.E. Growth(2) 8,662 N/A N/A N/A N/A
Tactical Asset
Allocation(3) 208,950 N/A N/A N/A N/A
Strategic
Total Return 316,489 N/A N/A N/A N/A
Growth &
Income 52,921 N/A N/A N/A N/A
Balanced 90,724 N/A N/A 1,040 1.15%(4)
Global Sector (5) N/A N/A N/A N/A N/A
Value Equity (5) N/A N/A N/A N/A N/A
International Equity(6) N/A
U.S. Equity(6) N/A
<FN>
- ------------------------------
(1) The percentage of the Portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through Alger, Inc. for the
fiscal year ended December 31, 1997, 1996 and 1995 was %, % and %,
respectively.
(2) Portfolio commenced operations May 1, 1995.
(3) Portfolio commenced operations January 3, 1995.
(4) The percentage of the Portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through AEGON USA
Securities, Inc. for the fiscal years ended December 31, 1995 was 1.15%
and %, respectively.
(5) Portfolio commenced operations May 1, 1996.
(6) Portfolio commenced operations January 2, 1997.
</FN>
</TABLE>
The Aggressive Growth Portfolio paid all of its affiliated brokerage
commissions to Alger, Inc., the Growth Portfolio paid all of its affiliated
brokerage commissions to DST Securities, Inc. and the Balanced Portfolio paid
all of its affiliated brokerage commissions to AEGON USA Securities, Inc.
The Bond Portfolio and the Money Market Portfolio did not pay any brokerage
commissions for the years ended December 31, 1997, 1996, and 1995.
No information is included for the Third Avenue Value and the Real Estate
Securities Portfolios as they had not commenced operations as of December 31,
1997.
PURCHASE AND REDEMPTION OF SHARES
/diamond/ DETERMINATION OF OFFERING PRICE
Shares of the Portfolios are currently sold only to the Separate Accounts to
fund the benefits under the Policies and the Annuity Contracts. The Portfolios
may, in the future, offer their shares to other insurance company separate
accounts. The Separate Accounts invest in shares of a Portfolio in accordance
with the allocation instructions received from holders of the Policies and the
Annuity Contracts. Such allocation rights are further described in the
prospectuses and disclosure documents for the Policies and the Annuity
Contracts. Shares of the Portfolios are sold and redeemed at their respective
net asset values as described in the Prospectus.
/diamond/ NET ASSET VALUATION
As stated in the Prospectus, the net asset value of the Portfolios' shares is
ordinarily determined, once daily, as of the close of the regular session of
business on the New York Stock Exchange ("Exchange") (usually 4:00 p.m.,
Eastern Time) on each day the Exchange is open. (Currently the Exchange is
closed on New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) The per share
net asset value of a Portfolio is determined by dividing the total value of the
securities and other assets, less liabilities, by the total number of
45
<PAGE>
shares outstanding. In determining net asset value, securities listed on the
national securities exchanges and traded on the NASDAQ National Market are
valued at the closing prices on such markets, or if such a price is lacking for
the trading period immediately preceding the time of determination, such
securities are valued at their current bid price. Foreign securities and
currencies are converted to U.S. dollars using the exchange rate in effect at
the close of the Exchange. Other securities for which quotations are not
readily available are valued at fair values as determined in good faith by a
Portfolio's Investment Adviser under the supervision of the Fund's Board of
Directors. Money market instruments maturing in 60 days or less are valued on
the amortized cost basis. Values of gold bullion held by a Portfolio are based
upon daily quotes provided by banks or brokers dealing in such commodities.
CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief description of how performance is calculated.
The following sections describe how performance data is calculated in greater
detail.
/diamond/ TOTAL RETURN
Total return quotations for each of the Portfolios are computed by finding the
average annual compounded rates of return over the relevant periods that would
equate the initial amount invested to the ending redeemable value, according to
the following equation:
P (1+T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value (at the end
of the applicable period of a hypotheti-
cal $1,000 payment made at the begin-
ning of the applicable period)
</TABLE>
The total return quotation calculations for a Portfolio reflect the deduction
of a proportionate share of the Portfolio's investment advisory fee and
Portfolio expenses and assume that all dividends and capital gains during the
period are reinvested in the Portfolio when made. The calculations also assume
a complete redemption as of the end of the particular period.
Total return quotation calculations do not reflect charges or deductions
against the Series Life Account or the Series Annuity Account or charges and
deductions against the Policies or the Annuity Contracts. Accordingly, these
rates of return do not illustrate how actual investment performance will affect
benefits under the Policies or the Annuity Contracts. Where relevant, the
prospectuses for the Policies and the Annuity Contracts contain performance
information about these products. Moreover, these rates of return are not an
estimate, projection or guarantee of future performance. Additional information
regarding the investment performance of the Portfolios appears in the
Prospectus.
/diamond/ YIELD QUOTATIONS
The yield quotations for a Portfolio (for Money Market Portfolio yield, see
"Yield Quotations - Money Market Portfolio", below) are based on a specific
thirty-day period and are computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last date of the period, according to the following formula:
<TABLE>
<S> <C> <C>
a-b
YIELD = 2 [ ( ------ + 1)6 - 1]
cd
</TABLE>
<TABLE>
<S> <C> <C>
Where: a = dividends and interest earned dur-
ing the period by the Portfolio
b = expenses accrued for the period
(net of reimbursement)
c = the average daily number of shares
outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per
share on the last day of the period
</TABLE>
The yield of the Bond Portfolio as computed above for the thirty day period
ended December 31, 1997 was %.
/diamond/ YIELD QUOTATIONS - MONEY
MARKET PORTFOLIO
From time to time the Money Market Portfolio may quote its yield in reports or
other communications to policyholders or in advertising material. Yield
quotations are expressed in annualized terms and reflect dividends of a
Portfolio declared and reinvested daily based upon the net investment income
earned by a Portfolio each day. The Portfolio's yields fluctuate and the yield
on any day for any past period is not an indication as to future yields on any
investment in the Portfolio's shares. Future yields are not guaranteed.
Yield is computed in accordance with a standardized method required by the SEC.
The yields for the Money
46
<PAGE>
Market Portfolio for the seven-day period ended December 31, 1997, was % and
was equivalent to a compound effective yield of %. The current yield for the
Money Market Portfolio is an annualization, without compounding, of the
portfolio rate of return, and is computed by determining the net change in the
value of a hypothetical pre-existing account in the Portfolio having a balance
of one share at the beginning of a seven calendar day period for which yield is
to be quoted, dividing the net change by the value of the account at the
beginning of the period to obtain the base period return, and annualizing the
results (I.E., multiplying the base period return by 365/7). The net change in
the value of the account reflects the value of additional shares purchased with
dividends declared on the original shares and any such additional shares, but
does not include realized gains and losses or unrealized appreciation and
depreciation. The Money Market Portfolio may also calculate the compound
effective annualized yields by adding 1 to the base period return (calculated
as described above), raising that sum to a power equal to 365/7, and
subtracting 1. The yield quotations for the Money Market Portfolio do not take
into consideration any deductions imposed by the Series Life Account or the
Series Annuity Account.
Yield information is useful in reviewing the Money Market Portfolio's
performance in seeking to meet its investment objective, but, because yields
fluctuate, such information cannot necessarily be used to compare an investment
in shares of the Portfolio with bank deposits, savings accounts and similar
investment alternatives, which often provide an agreed or guaranteed fixed
yield for a stated period of time. Also, the Portfolio's yields cannot always
be compared with yields determined by different methods used by other funds. It
should be emphasized that yield is a function of the kind and quality of the
instruments in the Money Market Portfolio, portfolio maturity and operating
expenses.
TAXES
Shares of the Portfolios are offered only to the Separate Accounts that fund
the Policies and Annuity Contracts. See the respective prospectuses for the
Policies and Annuity Contracts for a discussion of the special taxation of
insurance companies with respect to the Separate Accounts and of the Policies,
the Annuity Contracts and the holders thereof.
Each Portfolio has qualified (except the Third Avenue Value Portfolio and the
Real Estate Securities Portfolio which intends to qualify), and expects to
continue to qualify, for treatment as a regulated investment company ("RIC")
under the Internal Revenue Code of 1986, as amended (the "Code"). In order to
qualify for that treatment, a Portfolio must distribute to its Policyowners for
each taxable year at least 90% of its investment company taxable income
(consisting generally of net investment income, net short-term capital gain,
and net gains from certain foreign currency transactions) ("Distribution
Requirement") and must meet several additional requirements. These requirements
include the following: (1) the Portfolio must derive at least 90% of its gross
income each taxable year from dividends, interest, payments with respect to
securities loans, and gains from the sale or other disposition of securities or
foreign currencies, or other income (including gains from options, futures or
forward contracts) derived with respect to its business of investing in
securities or those currencies ("Income Requirement"); (2) prior to January 1,
1998, the Portfolio must have derived less than 30% of its gross income each
taxable year from the sale or other disposition of securities, or any of the
following, that were held for less than three months - options, futures or
forward contracts (other than those on foreign currencies), or foreign
currencies (or options, futures or forward contracts thereon) that are not
directly related to the Portfolio's principal business of investing in
securities (or options and futures with respect thereto) (this "Short-Short
Limitation" is repealed effective for tax years beginning after August 5,
1997); (3) at the close of each quarter of the Portfolio's taxable year, at
least 50% of the value of its total assets must be represented by cash and cash
items, U.S. Government securities, securities of other RICs, and other
securities that, with respect to any one issuer, do not exceed 5% of the value
of the Portfolio's total assets and that do not represent more than 10% of the
outstanding voting securities of the issuer; and (4) at the close of each
quarter of the Portfolio's taxable year, not more than 25% of the value of its
total assets may be invested in securities (other than U.S. Government
securities or the securities of other RICs) of any one issuer.
As noted in the Prospectus, each Portfolio must, and intends to, comply with
the diversification requirements imposed by section 817(h) of the Code and the
regulations thereunder. These requirements, which are in addition to the
diversification requirements mentioned above, place certain limitations on the
proportion of each Portfolio's assets that may be represented by any single
investment (which includes all securities of the same issuer). For purposes of
section 817(h), all securities of the same issuer, all interests in the same
real property project, and all interest in the same commodity are treated as a
single investment. In addition, each U.S.
47
<PAGE>
Government agency or instrumentality is treated as a separate issuer, while the
securities of a particular foreign government and its agencies,
instrumentalities and political subdivisions all will be considered securities
issued by the same issuer. For information concerning the consequences of
failure to meet the requirements of section 817(h), see the respective
prospectuses for the Policies or the Annuity Contracts.
A Portfolio will not be subject to the 4% Federal excise tax imposed on RICs
that do not distribute substantially all their income and gains each calendar
year because that tax does not apply to a RIC whose only shareholders are
segregated asset accounts of life insurance companies held in connection with
variable annuity contracts and/or variable life insurance policies.
The use of hedging strategies, such as writing (selling) and purchasing options
and futures contracts and entering into forward contracts, involves complex
rules that will determine for income tax purposes the character and timing of
recognition of the income received in connection therewith by the Portfolios.
Income from the disposition of foreign currencies (except certain gains
therefrom that may be excluded by future regulations), and income from
transactions in options, futures, and forward contracts derived by a Portfolio
with respect to its business of investing in securities or foreign currencies,
will qualify as permissible income under the Income Requirement.
However, prior to January 1, 1998, income from the disposition of options and
futures contracts (other than those on foreign currencies) would have been
subject to the Short-Short Limitation if they were held for less than three
months. Income from the disposition of foreign currencies, and options,
futures, and forward contracts on foreign currencies, that are not directly
related to a Portfolio's principal business of investing in securities (or
options and futures with respect to securities) were also subject to the
Short-Short Limitation if they were held for less than three months.
If a Portfolio satisfied certain requirements, any increase in value on a
position that was part of a "designated hedge" would have been offset by any
decrease in value (whether realized or not) of the offsetting hedging position
during the period of the hedge for purposes of determining whether the
Portfolio satisfied the Short-Short Limitation. Thus, only the net gain (if
any) from the designated hedge would have been included in gross income for
purposes of that Limitation. A Portfolio will consider whether it should seek
to qualify for this treatment for its hedging transactions. To the extent a
Portfolio did not qualify for this treatment, it may have been forced to defer
the closing out of certain options and futures contracts beyond the time when
it otherwise would have been advantageous to do so, in order for the Portfolio
to qualify as a RIC.
Dividends and interest received by each Portfolio may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and foreign countries generally do not impose taxes on capital gains
in respect of investments by foreign investors.
A Portfolio may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation that, in general, meets either of
the following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, a Portfolio will be subject to
Federal income tax on a portion of any "excess distribution" received on the
stock of a PFIC or of any gain on disposition of that stock (collectively "PFIC
income"), plus interest thereon, even if the Portfolio distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC
income will be included in a Portfolio's investment company taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders. If a Portfolio invests in a PFIC and elects to treat the
PFIC as a "qualified electing fund," then in lieu of the foregoing tax and
interest obligations, the Portfolio will be required to include in income each
year its pro rata share of the qualified electing fund's annual net ordinary
earnings and net capital gain (the excess of net long-term capital gain over
net short-term capital loss), even if they are not distributed to the
Portfolio; those amounts would be subject to the Distribution Requirement. In
most instances it will be very difficult, if not impossible, to make this
election because of certain requirements thereof.
The foregoing is only a general summary of some of the important Federal income
tax considerations generally affecting the Portfolios and their shareholders.
No attempt is made to present a complete explanation of the Federal tax
treatment of the Portfolios' activities, and this discussion and the discussion
in the prospectuses and/or statements of additional information for the
Policies and Annuity Contracts are not intended as a substitute for careful tax
planning. Accordingly, potential investors are urged to consult their own tax
advisors for more detailed information and for information regarding any state,
local, or foreign taxes applicable to the Policies, Annuity Contracts and the
holders thereof.
48
<PAGE>
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each Portfolio. The Fund is currently comprised of the following
Portfolios: International Equity Portfolio; Aggressive Growth Portfolio;
Emerging Growth Portfolio; Global Sector Portfolio; Global Portfolio; Growth
Portfolio; Third Avenue Value Portfolio; C.A.S.E. Growth Portfolio; Value
Equity Portfolio; Tactical Asset Allocation Portfolio; Strategic Total Return
Portfolio; Real Estate Securities Portfolio; Growth & Income Portfolio;
Balanced Portfolio; Bond Portfolio; Money Market Portfolio; Janus Balanced
Portfolio; and U.S. Equity Portfolio.
REGISTRATION STATEMENT
There has been filed with the Securities and Exchange Commission, Washington,
D.C. a Registration Statement under the Securities Act of 1933, as amended,
with respect to the securities to which this Statement of Additional
Information relates. If further information is desired with respect to the
Portfolios or such securities, reference is made to the Registration Statement
and the exhibits filed as part thereof.
FINANCIAL STATEMENTS
The audited financial statements for each Portfolio (except the Third Avenue
Value Portfolio, which commenced operations on January 2, 1998 and the Real
Estate Securities Portfolio, which commenced operations on May 1, 1998) of the
Fund for the year ended December 31, 1997, and the report of the Fund's
independent accountants are included in the 1997 Annual Report, and are
incorporated herein by reference to such report.
OTHER INFORMATION
/diamond/ INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, located at 1055 Broadway, 10th Floor, Kansas City,
Missouri 64105, serves as the Fund's independent accountants. The Fund has
engaged Price Waterhouse LLP to examine, in accordance with generally accepted
auditing standards, its annual report. In addition, Price Waterhouse LLP signs
the tax returns for each of the Portfolios of the Fund.
/diamond/ CUSTODIAN
Investors Bank & Trust Company ("IBT"), located at 200 Clarendon Street, 16th
Floor, Boston, Massachusetts 02116, serves as the Fund's Custodian and Dividend
Disbursing Agent. IBT provides comprehensive asset administrative services to
the Fund and other members of the financial industry which include:
multi-currency accounting; institutional transfer agency services; domestic and
global custody; performance measures; foreign exchange; and securities lending
and mutual fund administrative services.
49
<PAGE>
APPENDIX A
DESCRIPTION OF PORTFOLIO SECURITIES
The following is intended only as a supplement to the information
contained in the Prospectus and should be read only in conjunction with the
Prospectus. Terms defined in the Prospectus and not defined herein have the
same meanings as those in the Prospectus.
1. CERTIFICATE OF DEPOSIT.* A certificate of deposit generally is a
short-term, interest bearing negotiable certificate issue by a commercial bank
or savings and loan association against funds deposited in the issuing
institution.
2. EURODOLLAR CERTIFICATE OF DEPOSIT.* A Eurodollar certificate of
deposit is a short-term obligation of a foreign subsidiary of a U.S. bank
payable in U.S. dollars.
3. FLOATING RATE NOTE.* A floating rate note is debt issued by a
corporation or commercial bank that is typically several years in term but
whose interest rate is reset every one to six months.
4. INVERSE FLOATING RATE SECURITIES.* Inverse floating rate securities
are similar to floating rate securities except that their coupon payments vary
inversely with an underlying index by use of a formula. Inverse floating rate
securities tend to exhibit greater price volatility than other floating rate
securities.
5. FLOATING RATE OBLIGATIONS.* Floating rate obligations generally
exhibit a low price volatility for a given stated maturity or average life
because their coupons adjust with changes in interest rates.
6. TIME DEPOSIT.* A time deposit is a deposit in a commercial bank for a
specified period of time at a fixed interest rate for which a negotiable
certificate is not received.
7. BANKERS' ACCEPTANCE.* A bankers' acceptance is a time draft drawn on
a commercial bank by a borrower, usually in connection with international
commercial transactions (to finance the import, export, transfer or storage of
goods). The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity.
8. VARIABLE AMOUNT MASTER DEMAND NOTE.* A variable amount master demand
note is a note which fixes a minimum and maximum amount of credit and provides
for lending and repayment within those limits at the discretion of the lender.
Before investing in any variable amount master demand notes, a Portfolio will
consider the liquidity of the issuer through periodic credit analysis based
upon publicly available information.
9. PREFERRED STOCKS. Preferred stocks are securities which represent an
ownership interest in a corporation and which give the owner a prior claim over
common stock on the corporation's earnings and assets. Preferred stock
generally pays quarterly dividends. Preferred stocks may differ in many of
their provisions. Among the features that differentiate preferred stock from
one another are the dividend rights, which may be cumulative or non-cumulative
and participating or non-participating, redemption provisions, and voting
rights. Such features will establish the income return and may affect the
prospects for capital appreciation or risks of capital loss.
10. CONVERTIBLE SECURITIES. A Portfolio may invest in debt securities
convertible into or exchangeable for equity securities, or debt securities that
carry with them the right to acquire equity securities, as evidenced by
warrants attached to such securities or acquired as part of units of the
securities. Such securities normally pay less current income than securities
into which they are convertible, and the concomitant risk of loss from declines
in those values.
11. COMMERCIAL PAPER.* Commercial paper is a short-term promissory note
issued by a corporation primarily to finance short-term credit needs.
12. REPURCHASE AGREEMENT.* A repurchase agreement is an instrument under
which a Portfolio acquires ownership of a debt security and the seller agrees
to repurchase the obligation at a mutually agreed upon time and price. The
total amount received on repurchase is calculated to exceed the price paid by
the Portfolio, reflecting an agreed upon market rate of interest for the period
from the time of a Portfolio's purchase of the security to the settlement date
(i.e., the time of repurchase), and would not necessarily relate to the
interest rate on the underlying securities. A Portfolio will only enter into
repurchase agreements with underlying securities consisting of U.S. Government
or government agency securities,
- --------------
* Short-term Securities.
A-1
<PAGE>
certificates of deposit, commercial paper or bankers' acceptances, and will be
entered only with primary dealers. While a Portfolio may invest in repurchase
agreements for periods up to 30 days, it is expected that typically such
periods will be for a week or less. The staff of the SEC has taken the position
that repurchase agreements of greater than seven days together with other
illiquid investments should be limited to an amount not in excess of 15% of a
Portfolio's net assets.
Although repurchase transactions usually do not impose market risks on the
purchaser, a Portfolio would be subject to the risk of loss if the seller fails
to repurchase the securities for any reason and the value of the securities is
less than the agreed upon repurchase price. In addition, if the seller
defaults, a Portfolio may incur disposition costs in connection with
liquidating the securities. Moreover, if the seller is insolvent and bankruptcy
proceedings are commenced, under current law, a Portfolio could be ordered by a
court not to liquidate the securities for an indeterminate period of time and
the amount realized by a Portfolio upon liquidation of the securities may be
limited.
13. REVERSE REPURCHASE AGREEMENT. A reverse repurchase agreement involves
the sale of securities held by a Portfolio, with an agreement to repurchase the
securities at an agreed upon price, date and interest payment. A Portfolio will
use the proceeds of the reverse repurchase agreements to purchase other money
market securities maturing, or under an agreement to resell, at a date
simultaneous with or prior to the expiration of the reverse repurchase
agreement. A Portfolio will utilize reverse repurchase agreements when the
interest income to be earned from the investment of the proceeds from the
transaction is greater than the interest expense of the reverse repurchase
transactions.
14. ASSET-BACKED SECURITIES. A Portfolio may invest in securities backed
by automobile receivables and credit card receivables and other securities
backed by other types of receivables or other assets. Credit support for
asset-backed securities may be based on the underlying assets and/or provided
through credit enhancements by a third party. Credit enhancement techniques
include letters of credit, insurance bonds, limited guarantees (which are
generally provided by the issuer), senior-subordinated structures and
over-collateralization. A Portfolio will only purchase an asset-backed security
if it is rated at least "A" by S&P or Moody's.
15. MORTGAGE-BACKED SECURITIES. A Portfolio may purchase mortgage-backed
securities issued by government and non-government entities such as banks,
mortgage lenders, or other financial institutions. Mortgage-backed securities
include mortgage pass-through securities, mortgage-backed bonds, and mortgage
pay-through securities. A mortgage pass-through security is a pro-rata interest
in a pool of mortgages where the cash flow generated from the mortgage
collateral is passed through to the security holder. Mortgage-backed bonds are
general obligations of their issuers, payable out of the issuers' general funds
and additionally secured by a first lien on a pool of mortgages. Mortgage
pay-through securities exhibit characteristics of both pass-through and
mortgage-backed bonds. Mortgage-backed securities also include other debt
obligations secured by mortgages on commercial real estate or residential
properties. Other types of mortgage-backed securities will likely be developed
in the future, and a Portfolio may invest in them if it is determined they are
consistent with the Portfolio's investment objective and policies.
16. COLLATERALIZED MORTGAGE OBLIGATIONS. (CMOs) are pay-through
securities collateralized by mortgages or mortgage-backed securities. CMOs are
issued in classes and series that have different maturities and interest rates.
17. STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed
securities are created when the principal and interest payments of a
mortgage-backed security are separated by a U.S. Government agency or a
financial institution. The holder of the "principal-only" security receives the
principal payments made by the underlying mortgage-backed security, while the
holder of the "interest-only" security receives interest payments from the same
underlying security.
The value of mortgage-backed securities may change due to changes in the
market's perception of issuers. In addition, the mortgage securities market in
general may be adversely affected by regulatory or tax changes. Non-governmental
mortgage-backed securities may offer a higher yield than those issued by
government entities but also may be subject to greater price change than
government securities.
Like most mortgage securities, mortgage-backed securities are subject to
prepayment risk. When prepayment occurs, unscheduled or early payments are made
on the underlying mortgages, which may shorten the effective maturities of
those securities an may lower their total return. Furthermore, the prices of
stripped mortgage-backed securities can be significantly affected by changes in
interest rates as well. As interest rates fall, prepayment rates tend to
increase, which in turn tends to reduce prices of "interest-only" securities
and increase prices of "principal-only" securities. Rising interest rates can
have the opposite effect.
18. FINANCING CORPORATION SECURITIES. (FICOs) are debt obligations issued
by the Financing Corporation. The Financing Corporation was originally created
to recapitalize the Federal Savings and Loan Insurance Corporation (FSLIC) and
now functions as a financing vehicle for the FSLIC Resolution Fund, which
received substantially all of FSLIC's assets and liabilities.
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19. U.S. GOVERNMENT SECURITIES. U.S. Government securities are securities
issued by or guaranteed by the U.S. Government or its agencies or
instrumentalities. U.S. Government securities have varying degrees of
government backing. They may be backed by the credit of the U.S. Government as
a whole or only by the issuing agency or instrumentality. For example,
securities issued by the Financing Corporation are supported only by the credit
of the Financing Corporation, and not by the U.S. Government. Securities issued
by the Federal Home Loan Banks and the Federal National Mortgage Association
(FNMA) are supported by the agency's right to borrow money from the U.S.
Treasury under certain circumstances. U.S. Treasury bonds, notes, and bills,
and some agency securities, such as those issued by the Government National
Mortgage Association (GNMA), are backed by the full faith and credit of the
U.S. Government as to payment of principal and interest and are the highest
quality U.S. Government securities. Each Portfolio, and its share price and
yield, are not guaranteed by the U.S. Government.
20. ZERO COUPON BONDS. Zero coupon bonds are created three ways:
1) U.S. TREASURY STRIPS (Separate Trading of Registered Interest and
Principal of Securities) are created when the coupon payments and the
principal payment are stripped from an outstanding Treasury bond by the
Federal Reserve Bank. Bonds issued by the Resolution Funding Corporation
(REFCORP) and the Financial Corporation (FICO) also can be stripped in
this fashion.
2) STRIPS are created when a dealer deposits a Treasury Security or a
Federal agency security with a custodian for safe keeping and then sells
the coupon payments and principal payment that will be generated by this
security separately. Proprietary receipts, such as Certificates of
Accrual on Treasury Securities (CATS), Treasury Investment Growth
Receipts (TIGRS), and generic Treasury Receipts (TRs), are stripped U.S.
Treasury securities separated into their component parts through
custodial arrangements established by their broker sponsors. FICO bonds
have been stripped in this fashion. The Portfolios have been advised
that the staff of the Division of Investment Management of the
Securities and Exchange Commission does not consider such privately
stripped obligations to be U.S. Government securities, as defined by the
1940 Act. Therefore, the Portfolios will not treat such obligations as
U.S. Government securities for purposes of the 65% portfolio composition
ratio.
3) ZERO COUPON BONDS can be issued directly by Federal agencies and
instrumentalities, or by corporations. Such issues of zero coupon bonds
are originated in the form of a zero coupon bond and are not created by
stripping an outstanding bond.
Zero coupon bonds do not make regular interest payments. Instead they are
sold at a deep discount from their face value. Because a zero coupon bond does
not pay current income, its price can be very volatile when interest rates
change. In calculating its dividends, the fund takes into account as income a
portion of the difference between zero coupon bond's purchase price and its
face value.
21. BOND WARRANTS. A warrant is a type of security that entitles the
holder to buy a proportionate amount of a bond at a specified price, usually
higher than the market price at the time of issuance, for a period of years or
to perpetuity. Warrants generally trade in the open market and may be sold
rather than exercised.
22. OBLIGATIONS OF SUPRANATIONAL ENTITIES. Obligations of supranational
entities include those of international organizations designated or supported
by governmental entities to promote economic reconstruction or development and
of international banking institutions and related government agencies. Examples
include the International Bank for Reconstruction and Development (the World
Bank), the European Coal and Steel Community, the Asian Development Bank and
the Inter-American Development Bank. The governmental members, or
"stockholders," usually make initial capital contributions to the supranational
entity and in many cases are committed to make additional capital contributions
if the supranational entity is unable to repay its borrowings. Each
supranational entity's lending activities are limited to a percentage of its
total capital (including "callable capital" contributed by members at the
entity's call), reserves and net income. There is no assurance that foreign
governments will be able or willing to honor their commitments.
23. EQUIPMENT LEASE AND TRUST CERTIFICATES. A Portfolio may invest in
equipment lease and trust certificates, which are debt securities that are
secured by direct or indirect interest in specified equipment or equipment
leases (including, but not limited to, railroad rolling stock, planes, trucking
or shipping fleets, or other personal property).
24. TRADE CLAIMS. Trade claims are interests in amounts owed to suppliers
of goods or services and are purchased from creditors of companies in financial
difficulty.
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PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements.
1. The audited Financial Statements of the Fund in the Fund's 1997
Annual Report are incorporated by reference into the Statement of
Additional Information for the Growth, Bond, Money Market,
Global, Balanced, Emerging Growth, Strategic Total Return, Growth
& Income, Aggressive Growth, Value Equity, Tactical Asset
Allocation, C.A.S.E. Growth, Global Sector, International Equity
and U.S. Equity Portfolios (filed 2/__ /98 with the SEC pursuant
to Rule 30b2-1 - Accession Number_____________). (Part B)
2. The unaudited Financial Statements of the Third Avenue Value and
Real Estate Securities Portfolios will be included in a future
amendment.
3. Audited Per Share Income and Capital Changes are included in the
Prospectus for the Portfolios (except the Third Avenue Value
Portfolio and the Real Estate Securities Portfolio). (Part A)
4. Unaudited Per Share Income and Capital Changes for the Third
Avenue Value Portfolio and the Real Estate Securities Portfolio
will be included in a future amendment.
(b) Exhibits
1. (A) Articles of Incorporation of WRL Series Fund, Inc. (3)
(B) Articles Supplementary to Articles of Incorporation of WRL
Series Fund, Inc. (3)
(C) Articles Supplementary to Articles of Incorporation of WRL
Series Fund, Inc. (3)
(D) Articles Supplementary to Articles of Incorporation of WRL
Series Fund, Inc. (3)
(E) Articles Supplementary to Articles of Incorporation of WRL
Series Fund, Inc. (3)
(F) Articles Supplementary to Articles of Incorporation of WRL
Series Fund, Inc. (3)
(G) Articles Supplementary to Articles of Incorporation of WRL
Series Fund, Inc. (3)
(H) Articles Supplementary to Articles of Incorporation of WRL
Series Fund, Inc. (4)
(I) Articles Supplementary to Articles of Incorporation of WRL
Series Fund, Inc. (4)
(J) Articles Supplementary to Articles of Incorporation of WRL
Series Fund, Inc. (5)
(K) Articles Supplementary to Articles of Incorporation of WRL
Series Fund, Inc. (8)
(L) Articles Supplementary to Articles of Incorporation of WRL
Series Fund, Inc. (9)
2. Bylaws of WRL Series Fund, Inc. (3)
3. Not applicable.
4. Not applicable.
5. (i) Investment Advisory Agreement on behalf of the Portfolios
of the WRL Series Fund, Inc. with WRL Investment
Management, Inc. (7)
(ii) Sub-Advisory Agreement on behalf of the Growth and Global
Portfolios of the Fund. (8)
(iii) Form of Sub-Advisory Agreement on behalf of the Money
Market Portfolio of the Fund. (3)
(iv) Form of Sub-Advisory Agreement on behalf of the Emerging
Growth Portfolio of the Fund. (3)
(v) Form of Sub-Advisory Agreement on behalf of the Strategic
Total Return Portfolio of the Fund. (3)
(vi) Form of Sub-Advisory Agreement on behalf of the Growth &
Income Portfolio of the Fund. (3)
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(vii) Form of Sub-Advisory Agreement on behalf of the Aggressive
Growth Portfolio of the Fund. (3)
(viii) Form of Sub-Advisory Agreement on behalf of the Tactical
Asset Allocation Portfolio of the Fund. (3)
(ix) Form of Sub-Advisory Agreement on behalf of the C.A.S.E.
Growth Portfolio of the Fund. (3)
(x) Form of Co-Sub-Advisory Agreements on behalf of the
International Equity Portfolio of the Fund. (3)
(xi) Form of Sub-Advisory Agreement on behalf of the Global
Sector Portfolio of the Fund. (6)
(xii) Form of Sub-Advisory Agreement on behalf of the Value
Equity Portfolio of the Fund. (3)
(xiii) Form of Sub-Advisory Agreement on behalf of the U.S.
Equity Portfolio. (3)
(xiv) Form of Sub-Advisory Agreement on behalf of the Third
Avenue Value Portfolio.(8)
(xv) Form of Sub-Advisory Agreement on behalf of the Balanced
Portfolio and the Short-to-Intermediate Government
Portfolio of the Fund. (3)
(xvi) Form of Sub-Advisory Agreement on behalf of the Bond
Portfolio.(8)
(xvii) Form of Sub-Advisory Agreement on behalf of the Real
Estate Securities Portfolio. (9)
6. Distribution Agreement. (4)
7. Director's Deferred Compensation Plan. (2)
8. Form of Custodian Agreement. (4)
9. Administrative Services and Transfer Agency Agreement. (4)
10. Opinion and consent of Thomas E. Pierpan, Esq. as to legality of
the securities being registered. (1)
11. Consent of Price Waterhouse LLP. (9)
12. Not applicable.
13. Not applicable.
14. Not applicable.
15. Plan of Distribution. (6)
16. Schedules for Computations of Performance Quotations. (5)
17. Financial Data Schedules.(9)
18. Not Applicable.
19. Powers of Attorney (5)
- ---------------------
(1) Previously filed with Post-Effective Amendment No. 19 to Form N-1A dated
April 21, 1995 and incorporated herein by reference.
(2) Previously filed with Post-Effective Amendment No. 23 to Form N-1A dated
April 19, 1996 and incorporated herein by reference.
(3) Previously filed with Post-Effective Amendment No. 25 to Form N-1A dated
October 17, 1996, and incorporated herein by reference.
(4) Previously filed with Post-Effective Amendment No. 26 to Form N-1A dated
December 26, 1996 and incorporated herein by reference.
(5) Previously filed with Post-Effective Amendment No. 28 to Form N-1A dated
April 24, 1997, and incorporated herein by reference.
(6) Previously filed with Post-Effective Amendment No. 29 to Form N-1A dated
June 30, 1997, and incorporated herein by reference.
(7) Previously filed with Post-Effective Amendment No. 30 to Form N-1A dated
August 4, 1997, and incorporated herein by reference.
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(8) Previously filed with Post-Effective Amendment No. 31 to Form N-1A dated
October 16, 1997, and incorporated herein by reference.
(9) To be filed by Amendment.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Shares of the Registrant are sold and owned by the WRL Series Life Account
and WRL Series Annuity Account established by Western Reserve Life Assurance Co.
of Ohio ("Western Reserve") to fund benefits under certain flexible premium
variable life insurance policies and variable annuity contracts issued by it. In
addition, shares of the Growth Portfolio Common Stock of the Registrant are also
sold to the PFL Endeavor Variable Annuity Account and the Mutual Fund Account,
established by PFL Life Insurance Company, and AUSA Endeavor Variable Annuity
Account, established by AUSA Life Insurance Company, Inc., both affiliates of
Western Reserve. Shares of the Emerging Growth and Global Portfolios Common
Stock are also sold to the Mutual Fund Account, established by PFL Life
Insurance Company. Shares of the Growth, Bond, Money Market, Global, Strategic
Total Return, Balanced, Aggressive Growth, Emerging Growth, Growth & Income,
International Equity, Third Avenue Value, Value Equity, U.S. Equity and Tactical
Asset Allocation Portfolio Common Stock are sold to Pooled Account No. 27
established by AUSA Life Insurance Company, Inc.
Item 26. NUMBER OF HOLDERS OF SECURITIES.
(2)
(1) NUMBER OF RECORD HOLDERS
TITLE OF CLASS AS OF JANUARY 31, 1998
-------------- ------------------------
Growth Portfolio
Common Stock ($.01 par value) 6
Bond Portfolio
Common Stock ($.01 par value) 3
Money Market Portfolio
Common Stock ($.01 par value) 3
Global Portfolio
Common Stock ($.01 par value) 4
Emerging Growth Portfolio
Common Stock ($.01 par value) 4
Strategic Total Return Portfolio
Common Stock ($.01 par value) 3
Balanced Portfolio
Common Stock ($.01 par value) 3
Growth & Income Portfolio
Common Stock ($.01 par value) 3
Aggressive Growth Portfolio
Common Stock ($.01 par value) 3
Tactical Asset Allocation Portfolio
Common Stock ($.01 par value) 3
C.A.S.E. Growth Portfolio
Common Stock ($.01 par value) 2
International Equity Portfolio
Common Stock ($.01 par value) 3
Global Sector Portfolio
Common Stock ($.01 par value) 1
Value Equity Portfolio
Common Stock ($.01 par value) 3
U.S. Equity Portfolio
Common Stock ($.01 par value) 3
Third Avenue Value Portfolio
Common Stock ($.01 par value) 3
Real Estate Securities Portfolio
Common Stock ($.01 par value) 0
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Item 27. INDEMNIFICATION.
Article VI of the By-Laws of WRL Series Fund, Inc. provides in its entirety as
follows:
Each director, officer, or employee (and his heirs, executors and
administrators) shall be indemnified by the Corporation against all
liability and expense incurred by reason of the fact that he is or was a
director, officer or employee of the corporation, to the full extent and in
any manner permitted by Maryland law, as in effect at any time, provided
that nothing herein shall be construed to protect any director, officer or
employee against any liability to the corporation or to its security
holders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office ("disabling conduct"). No
indemnification of a director, officer or employee shall be made pursuant
to the preceding sentence unless there has been (a) a final decision on the
merits by a court or other body before whom the proceeding was brought that
the person to be indemnified ("indemnity") was not liable by reason of
disabling conduct or (b) in the absence of such a decision, a reasonable
determination, based upon a review of the facts, that the indemnity was not
liable by reason of disabling conduct by (i) the vote of a majority of a
quorum of directors who are neither "interested persons" of the
corporation, as defined in Section 2(a)(19) of the Investment Company Act
of 1940, nor parties to the proceeding ("non-interested, non-party
directors"), or (ii) an independent legal counsel in a written opinion.
Reasonable expenses incurred by each such director, officer or employee may
be paid by the corporation in advance of the final disposition of any
proceeding to which such person is a party, to the full extent and under
the circumstances permitted by Maryland law, provided that such person
undertakes to repay the advance unless it is ultimately determined that he
is entitled to indemnification and either (i) he provides security for his
undertaking, (ii) the corporation is insured against losses by reason of
any lawful advances or (iii) a majority of a quorum of the non-interested,
non-party directors, or an independent legal counsel in a written opinion,
determines, based on a review of readily available facts, and there is
reason to believe that such person ultimately will be found entitled to
indemnification. The corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer or employee of the
corporation against any liability asserted against and incurred by such
person in any such capacity or arising out of such person's position,
whether or not the corporation would have the power to indemnify against
such liability under the provisions of this Article VI.
RULE 484 UNDERTAKING
Insofar as indemnification for liability arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
A. WRL INVESTMENT MANAGEMENT, INC.
WRL Investment Management, Inc. ("WRL Management") is principally
engaged in offering investment advisory services.
The only business, professions, vocations or employments of a
substantial nature of Messrs. Kenney, Hurley and Yaeger, directors of
WRL Management, are described in the Statement of Additional
Information under the section entitled "Management of the Fund."
Additionally, the following describes the principal occupations of
other persons who serve as executive officers of WRL Management: Kim D.
Day, Vice President and Treasurer, is Vice President and Principal
Accounting Officer of the WRL Series Fund, Inc., Assistant Vice
President and Assistant Treasurer of Western Reserve Life Assurance Co.
of Ohio ("Western Reserve") and Vice President and Treasurer of WRL
Investment Services, Inc.; William H. Geiger, Esq., Secretary, is
Assistant Secretary of the WRL Series Fund, Inc.,
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Senior Vice President, Secretary, General Counsel and Group Vice
President - Compliance of Western Reserve, and Secretary of WRL
Investment Services, Inc.; and Thomas E. Pierpan, Esq., Vice President,
Assistant Secretary and General Counsel, is Vice President, Secretary
and Counsel of the WRL Series Fund, Inc. and Vice President, Associate
General Counsel and Assistant Secretary of Western Reserve, and Vice
President, Assistant Secretary and General Counsel of WRL Investment
Services, Inc.
B. GROWTH AND GLOBAL PORTFOLIOS: SUB-ADVISER - JANUS CAPITAL CORPORATION
Janus Capital Corporation, the Sub-Adviser to the Growth and Global
Portfolios of the WRL Series Fund, Inc. is majority-owned by Kansas
City Southern Industries, Inc.
Janus Capital Corporation also serves as sub-adviser to certain of the
mutual funds within the IDEX Group and as investment adviser or
sub-adviser to other mutual funds, and for private and retirement
accounts. Thomas H. Bailey, Trustee, Chairman and President of Janus
Investment Fund and Janus Aspen Series, Chairman, Director and
President of the Sub-Adviser and Chairman and Director of IDEX
Management, Inc., has no business, profession, vocation or employment
of a substantial nature other than his positions with IDEX Management,
Inc. and Janus Capital Corporation. James P. Craig, Executive Vice
President and Trustee of Janus Investment Fund and Janus Aspen Series,
Director, Vice President and Chief Investment Officer of Janus Capital
Corporation, has no substantial business, profession, vocation or
employment other than his positions with Janus Capital Corporation
and/or IDEX Management, Inc. David C. Tucker, Vice President, Secretary
and General Counsel of Janus Capital Corporation, Vice President,
General Counsel and Director of Janus Service Corporation and Janus
Distributors, Inc., Vice President Secretary, and Director of Janus
Capital International Ltd. and Vice President and General Counsel of
Janus Investment Fund and Janus Aspen Series. Michael N. Stolper, a
Director of Janus Capital Corporation, is President of Stolper &
Company, 525 "B" Street, Suite 1080, San Diego, CA 92101, an investment
performance consultant and is President of Seaport Venture, Inc.,
(Venture Capital). Michael E. Herman, a Director of Janus Capital
Corporation, is Chairman of the Finance Committee of Ewing Marion
Kauffman Foundation, 9900 Oak, Kansas City, MO 64113 and President of
Kansas City Royals Baseball Team. Thomas A. McDonnell, a Director of
Janus Capital Corporation, is President, Director and Treasurer of DST
Systems, Inc., 1055 Broadway, 9th Floor, Kansas City, MO 64105, a
provider of data processing and recordkeeping services for various
mutual funds and Executive Vice President and Director of Kansas City
Southern Industries, Inc., 114 West 11th Street, Kansas City, MO 64105,
a publicly traded holding company whose primary subsidiaries are
engaged in transportation, information processing and financial
services and Director of First Michigan Capital Corp., 100 Renaissance
Center, Detroit, MI, a broker-dealer and investment adviser. Landon H.
Rowland, a Director of Janus Capital, President and Chief Executive
Officer of Kansas City Southern Industries, Inc. Steven R. Goodbarn is
Vice President, Chief Financial Officer and Treasurer of Janus
Investment Fund and Janus Aspen Series, Vice President of Finance,
Treasurer and Chief Financial officer of Janus Capital Corporation,
Janus Service Corporation and Janus Distributors, Inc., Director of
Janus Distributors, Inc. and IDEX Management, Inc. and Vice President
of Finance, Treasurer, Chief Financial Officer and Director of Janus
Capital International Ltd. Sandy R. Rufenacht, Executive Vice President
of Janus Investment Fund and Aspen Series, and Assistant Vice President
of Janus Capital. Helen Young Hayes, Scott W. Schoelzel, and Ronald V.
Speaker are each a Vice President of Janus Capital Corporation and an
Executive Vice President of Janus Investment Fund and Janus Aspen
Series.
C. MONEY MARKET AND REAL ESTATE SECURITIES PORTFOLIOS: SUB-ADVISER - J.P.
MORGAN INVESTMENT MANAGEMENT INC.
J.P. Morgan Investment Management Inc., the Sub-Adviser to the Money
Market and Real Estate Securities Portfolios is a wholly-owned
subsidiary of J.P. Morgan & Co. Incorporated. J.P. Morgan Investment
Management Inc. provides investment management and related services for
corporate, public and union employee benefit funds, foundations,
endowments, insurance companies and government agencies.
The directors and principal officers of J.P. Morgan Investment
Management Inc. are listed below. Unless otherwise indicated, each
director and officer has a principal business address of 522 Fifth
Avenue, New York, NY 10036: Kenneth W. Anderson, Director and Managing
Director (J.P. Morgan
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Investment Management Inc., 28 King Street, London SW1Y 6XA, United
Kingdom); Robert A. Anselmi, Director, Managing Director, General
Counsel and Secretary; Jean L.P. Brunel, Director; William L. Cobb,
Jr., Vice Chairman, Director and Managing Director; Michael R. Granito,
Director; Thomas M. Luddy, Director and Managing Director; Michael E.
Patterson, Director (J.P. Morgan & Co. Incorporated, 60 Wall Street,
New York, NY 10260-0060); C. Nicholas Potter, Chairman of the Board
(J.P. Morgan & Co. Incorporated, 60 Wall Street, New York, NY
10260-0060); Keith M. Schappert, President, Director, and Managing
Director; John R. Thomas, Director (J.P. Morgan Investment Management
Inc., 101 California Street, San Francisco, California 94111)
D. BOND AND BALANCED PORTFOLIOS: SUB-ADVISER - AEGON USA INVESTMENT
MANAGEMENT, INC.
AEGON USA Investment Management, Inc. ("AIMI"), the Sub-Adviser to the
Bond and Balanced Portfolios, is an Iowa corporation which was
incorporated on April 12, 1989. AIMI became a registered investment
adviser on March 16, 1992 and has assumed all of the investment
advisory functions of AEGON USA Securities, Inc. ("AEGON Securities").
AIMI and AEGON Securities are wholly-owned subsidiaries of First AUSA
Holding Company which is a wholly-owned subsidiary of AEGON USA, Inc.
AIMI also serves as sub-adviser to IDEX Series Fund High Yield
Portfolio and Tax-Exempt Portfolio. Patrick E. Falconio is President
and Director of AIMI and AEGON USA Charitable Foundation, Inc.,
Chairman of the Board and Director of AEGON USA Managed Portfolios,
Inc., Cedar Income Fund, Ltd., Realty Information Systems, Inc., and
USP Real Estate Investment Trust, Director, Chief Investment Officer
and Senior Vice President of Bankers United Life Assurance Company
("Bankers United"), First AUSA Life Insurance Company ("First AUSA"),
Life Investors Insurance Company of America ("LIICA"), Monumental
General Casualty Company ("Monumental General"), Monumental Life
Insurance Company ("Monumental Life") and PFL Life Insurance Company
("PFL Life"), Director and Senior Vice President of AUSA Holding
Company, Director of AEGON USA Realty Advisors Inc., AEGON USA
Securities, Inc., AUSA Financial Markets, Inc., AUSA Institutional
Marketing Group, Inc., Cadet Holding Corp., Creditor Resources, Inc.,
Executive Management & Consultant Services, Inc., Investors Warranty of
America, Inc., Monumental General Administrators, Inc., Monumental
General Insurance Group, Inc., Monumental General Mass Marketing, Inc.,
Supplemental Insurance Division, Inc., The Whitestone Corporation,
United Financial Services, Inc. and Zahorik Company, Inc., Chief
Investment Officer and Executive Vice President of AEGON USA, Inc. and
Chief Investment Officer and Senior Vice President of AUSA Life
Insurance Company, Inc. ("AUSA Life") and Western Reserve Life
Assurance Co. of Ohio ("Western Reserve") and Senior Vice President and
Chief Financial Officer of Southwest Equity Life Insurance Company;
Brenda K. Clancy, Director of AIMI, Director, Treasurer and Vice
President of First AUSA, LIICA, and Monumental Life, Director, Cashier
and Treasurer of Massachusetts Fidelity Trust Company, and Director of
AEGON USA Securities Inc., Senior Vice President, Controller and
Treasurer of Cadet Holding Corp., Senior Vice President and Treasurer
of AEGON USA, Inc., Vice President, Treasurer and Chief Financial
Officer of Bankers United, PFL Life and Western Reserve and Director,
AEGON USA Realty Advisors, Inc., Treasurer AUSA Holding Company, AUSA
Life and Zahorik Company, Inc., Vice President, Treasurer, Investor
Warranty and Money Services and Vice President of Western Reserve,
Treasurer of Zahorik Company, Inc.; Craig D. Vermie, Director and
Secretary of AEGON Management Company, AEGON USA Charitable Foundation,
Inc., AUSA Holding Corp., Cadet Holding Corp., and Massachusetts
Fidelity Trust Company, Director, Secretary, Vice President and General
Counsel of Bankers United, LICA and PFL Life, Director, Secretary and
Vice President of Investors Warranty of America, Inc., Director, Vice
President, General Counsel and Assistant Secretary of Monumental Life,
Director, Vice President and Assistant Secretary of Monumental General
and Zahorik Company, Inc., Director and Vice President of The
Whitestone Corporation, Director and Assistant Secretary of Creditor
Resources, Inc., Monumental General Insurance Group, Inc. and
Monumental General Mass Marketing, Inc., Director of AIMI, AUSA
Financial Markets, Inc., AUSA Institutional Marketing Group, Inc.,
CORPA Reinsurance Company, Executive Management & Consultant Services,
Inc., Monumental General Administrators, Inc., Short Hills Management
Company, United Financial Services, Inc., Vice President and General
Counsel of AEGON USA, Inc., Vice President and Assistant Secretary of
Western Reserve, Secretary of AUSA Life, Money Services, Inc.
Supplemental Insurance Division, Inc. and United Financial Services,
Inc., Assistant Secretary of AEGON USA Realty Advisors Inc., Bankers
Financial Life Insurance Company and ZCI, Inc.; Donald E. Flynn is an
Executive Vice President of AIMI, and President of AEGON USA
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Managed Portfolios, Inc. and Vice President of AUSA Life, Bankers
United, First AUSA, LIICA, Money Services, Inc., Monumental General,
Monumental Life, PFL Life, and Western Reserve; James D. Ross is
Executive Vice President of AIMI, Vice President of LIICA, Monumental
Life, PFL Life, AUSA Life, Bankers United, First AUSA, Monumental
General and Western Reserve; Clifford A. Sheets is Executive Vice
President of AIMI, and Vice President of AUSA Life, First AUSA,
Monumental General, Western Reserve, Bankers United, LIICA, Monumental
Life and PFL Life; Ralph M. O'Brien is a Senior Vice President of AIMI,
Vice President of AEGON USA Managed Portfolios, Inc., AUSA Life,
Bankers United, First AUSA, LIICA, Monumental General, Monumental Life,
PFL Life, and Western Reserve, and Trust Officer of Massachusetts
Fidelity Trust Company; Michael Van Meter is a Senior Vice President of
AIMI; Steven P. Opp is a Senior Vice President of AIMI; David R.
Halfpap is Assistant Secretary and Vice President of AEGON USA Managed
Portfolios, Inc., and Senior Vice President of AIMI, AUSA Life, Bankers
United, First AUSA, LIICA, Monumental General, Monumental Life, PFL
Life, and Western Reserve; Gregory W. Theobald is Secretary and Vice
President of AIMI, Secretary of AEGON USA Managed Portfolios, Inc., and
Vice President and Assistant Secretary of AUSA Life, Bankers United,
First AUSA, LIICA, Monumental General, Monumental Life, PFL Life, and
Western Reserve, and Vice President of Money Services, Inc.; Lewis O.
Funkhouser is a Vice President of AIMI; Jon D. Kettering is Vice
President and Treasurer of AIMI and Vice President of AUSA Life,
Bankers United, First AUSA, LIICA, Monumental General, Monumental Life,
PFL Life, and Western Reserve; Michael N. Meese is a Vice President of
AIMI, and Portfolio Manager of AUSA Life; Robert L. Hansen is Vice
President of AIMI, AUSA Life, Bankers United, First AUSA, LIICA,
Monumental General, Monumental Life, PFL Life, and Western Reserve;
Frederick A. Sabetta is Vice President of , AUSA Life, Bankers United,
First AUSA, LIICA, Monumental General, Monumental Life, PFL Life, and
Western Reserve; Rachel A. Dennis, David M. Carney, Thomas A. Keel,
Daniel H. Thatcher, James E. Fine, Thomas E. Myers and Drew E. Washburn
are also Vice Presidents of AIMI; Bradley J. Beman and Mary T. Pech are
each an Assistant Vice President of AIMI; Robert S. Jeff is Assistant
Secretary of AIMI.
E. EMERGING GROWTH PORTFOLIO: SUB-ADVISER - VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
Van Kampen American Capital Asset Management, Inc., the Sub-Adviser to
the Emerging Growth Portfolio, is an indirect wholly-owned subsidiary
of VK/AC Holding, Inc. ("VK/AC Holding"). VK/AC Holding is a
wholly-owned subsidiary of MSAM Holdings II, Inc., which in turn, is a
wholly-owned subsidiary of Morgan Stanley Group, Inc. It is anticipated
that on or about June, 1997, Morgan Stanley Group Inc. will merge with
Dean Witter, Discover Co., a financial services company.
Don G. Powell, Chairman, CEO and Director of the Van Kampen American
Capital Asset Management, Inc. ("Sub-Adviser") and President, CEO and
Director of Van Kampen American Capital, Inc. ("VKAC"), has no
business, profession, vocation or employment of a substantial nature
other than his positions with the Sub-Adviser, its subsidiaries and
affiliates. Dennis J. McDonnel, Director, President, and Chief
Operating Officer of the Sub-Adviser , Chairman, COO and Director of
Van Kampen American Capital Investment Advisory Corp. ("VK Advisor")
and is Executive Vice President of VKAC; Ronald A. Nyberg, Director of
the Sub-Adviser, and Executive Vice President and General Counsel of
VKAC; William R. Rybak, Director of Sub-Adviser and Executive Vice
President and CFO of VKAC; Robert C. Peck, Jr., Director of Sub-Adviser
and Executive Vice President of Van Kampen; Alan R. Sachtleben,
Director of Sub-Adviser and Executive Vice President of Van Kampen; and
Peter W. Hegel, Director of Sub-Adviser and Executive Vice President of
VK Advisor.
F. STRATEGIC TOTAL RETURN PORTFOLIO: SUB-ADVISER - LUTHER KING CAPITAL
MANAGEMENT CORPORATION
Luther King Capital Management Corporation, the Sub-Adviser to the
Strategic Total Return Portfolio, is a registered investment adviser
providing investment management services.
Luther King Capital Management Corporation also provides investment
management services to individual and institutional investors on a
private basis. J. Luther King, Jr., President of the Sub-Adviser, Paul
W. Greenwell, Robert M. Holt, Jr., Scot C. Hollmann, David L. Dowler,
Donald R. Andrews, Joan M. Maynard, Steven R. Purvis, Timothy E.
Harris, and Barbara S. Garcia, officers of Luther King Capital
Management Corporation, have no substantial business, profession,
vocation or employment other than their positions with Luther King
Capital Management Corporation.
C-7
<PAGE>
G. GROWTH & INCOME PORTFOLIO: SUB-ADVISER - FEDERATED INVESTMENT
COUNSELING
Federated Investment Counseling, the Sub-Adviser to the Growth & Income
Portfolio, is a registered investment adviser under the Investment
Advisers Act of 1940. It is a subsidiary of Federated Investors.
The Sub-Adviser serves as investment adviser to a number of investment
companies and private accounts. Total assets under management or
administered by the Sub-Adviser and other subsidiaries of Federated
Investors is approximately $110 billion. The Trustees of the
Sub-Adviser, their position with the Sub-Adviser, and, in parenthesis,
their principal occupations are as follows: John F. Donahue, Trustee
(Chairman and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; Chairman and Director,
Federated Research Corp. and Federated Global Research Corp.;
President, Passport Research, Ltd.); J. Christopher Donahue, Trustee
(President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp. and Federated Global Research Corp.;
President, Passport Research, Ltd; Trustee, Federated Shareholder
Services Company and Federated Shareholder Services; Director,
Federated Services Company); John W. McGonigle, Trustee (Executive Vice
President, Secretary and Trustee, Federated Investors; Trustee,
Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services Company and Federated
Shareholder Services; Director, Federated Services Company; and
Director, Federated Securities Corp.); Mark D. Olson, Trustee (Trustee,
Federated Investors, Federated Advisers, Federated Research, Federated
Management, Federated Shareholder Services, and Federated Shareholder
Services Company; Partner, Wilson, Halbrook & Bayard, 107 W. Market
Street, Georgetown, Delaware 19947). The business address of the
Trustees, with the exception of Mark D. Olson, is Federated Investors
Tower, Pittsburgh, Pennsylvania 15222-3779.
The remaining Officers of the Sub-Adviser are: Robert J. Ostrowski, J.
Alan Minteer and Charles A. Ritter, Senior Vice Presidents; G. Michael
Cullen, Michael P. Donnelly, Donald T. Ellerberger, Edward C. Gonzales,
Stephen A. Keen, Robert K. Kinsey and Christopher J. Smith, Vice
Presidents; Stephen A. Keen, Secretary; and Thomas R. Donahue,
Treasurer. The business address of each of the Officers of the
Sub-Adviser is Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779. These individuals are also officers of some of the
investments advisers to other mutual funds.
H. AGGRESSIVE GROWTH PORTFOLIO: SUB-ADVISER - FRED ALGER MANAGEMENT, INC.
Fred Alger Management, Inc. ("Alger Management"), the Sub-Adviser to
the Aggressive Growth Portfolio, is a wholly-owned subsidiary of Fred
Alger & Company, Incorporated ("Alger, Inc.") which in turn is a
wholly-owned subsidiary of Alger Associates, Inc., a financial services
holding company. Alger Management is generally engaged in rendering
investment advisory services to mutual funds, institutions and, to a
lesser extent, individuals.
Fred M. Alger III, serves as Chairman of the Board, David D. Alger
serves as President and Director, Gregory S. Duch serves as Treasurer
and Mary Marsden-Cochran serves as Secretary of the following
companies: Alger Associates, Inc.; Alger Management; Alger, Inc.; Alger
Properties, Inc., Alger Shareholder Services, Inc.; Alger Life
Insurance Agency, Inc.; and Castle Convertible Fund, Inc. Fred M. Alger
also serves as Chairman of the Board of Analysts Resources, Inc.
("ARI") and Chairman of the Board and Trustee of The Alger Fund, The
Alger American Fund, Spectra Fund and The Alger Retirement Fund. David
D. Alger also serves as Executive Vice President and Director of ARI
and as President and Trustee of The Alger Fund, The Alger American
Fund, Spectra Fund and The Alger Retirement Fund. Gregory S. Duch also
serves as Treasurer of ARI, The Alger Fund, The Alger American Fund,
Spectra Fund and The Alger Retirement Fund. Mary Marsden-Cochran also
serves as Secretary of ARI, The Alger Fund, Spectra Fund, The Alger
American Fund and The Alger Retirement Fund. The principal business
address of each of the companies listed above, other than Alger, Inc.,
is 75 Maiden Lane, New York, NY 10038. The principal business address
of Alger, Inc. is 30 Montgomery Street, Jersey City, NJ 07302.
C-8
<PAGE>
I. TACTICAL ASSET ALLOCATION PORTFOLIO: SUB-ADVISER - DEAN INVESTMENT
ASSOCIATES
Dean Investment Associates ("Dean"), the Sub-Adviser to the Tactical
Asset Allocation Portfolio, is a division of C.H. Dean and Associates,
Inc. Dean is the money management division of C.H. Dean and Associates,
Inc. Dean became a registered investment adviser in October, 1972 and
will assume all of the investment advisory functions. C.H. Dean and
Associates is a Nevada corporation (6/30/95) which was an Ohio
corporation originally incorporated on March 28, 1975.
Chauncey H. Dean is the Chairman and Chief Executive Officer; Dennis D.
Dean is President; Frank H. Scott is Senior Vice President; John C.
Riazzi is Vice President and Director of Consulting Services; Robert D.
Dean is Vice President and Director of Research; Richard M. Luthman is
Senior Vice President; Darrell N. Fulton is Vice President of
Information Systems. The business address of each of the Officers of
the Sub-Adviser is 2480 Kettering Tower, Dayton, Ohio 45423-2480.
J. C.A.S.E. GROWTH PORTFOLIO (THE "PORTFOLIO"): SUB-ADVISER - C.A.S.E.
MANAGEMENT, INC.
C.A.S.E. Management, Inc. ("C.A.S.E."), the Sub-Adviser to the
Portfolio, is a registered investment advisory firm and a wholly-owned
subsidiary of C.A.S.E. Inc. C.A.S.E. Inc. is indirectly controlled by
William Edward Lange, President and Chief Executive Officer of C.A.S.E.
C.A.S.E. provides investment management services to financial
institutions, high net worth individuals, and other professional money
managers.
William E. Lange is the President, Chief Executive Officer and Founder;
Robert G. Errigo, Investment Committee Board Member; John Gordon,
Investment Committee Board Member; Bruce H. Jordan, Senior Vice
President and James M. LaBonte, Chief Operating Officer; William Fagon,
Senior Vice President Marketing; Richard Wells, Senior Vice President
Marketing; and Robert Hardy, Marketing Director. The business address
of each of the Officers of the Sub-Adviser is 5355 Town Center Road,
Suite 702, Boca Raton, Florida 33486.
K. INTERNATIONAL EQUITY PORTFOLIO: CO-SUB-ADVISERS - SCOTTISH EQUITABLE
INVESTMENT MANAGEMENT LIMITED AND GE INVESTMENT MANAGEMENT INCORPORATED
Scottish Equitable Investment Management Limited ("Scottish Equitable")
serves as a Co-Sub-Adviser to the International Equity Portfolio. See
"Management of the Fund - The Co-Sub-Advisers" in the Prospectus and
Statement of Additional Information regarding the business of Scottish
Equitable. Scottish Equitable is a wholly-owned subsidiary of Scottish
Equitable plc.
The Directors and Officers of Scottish Equitable are listed below.
Unless otherwise indicated, each Director and Officer has a principal
business address of Edinburgh Park, Edinburgh EH12 9SE: William W.
Stewart, Chairman of the Board and Executive Director, Strategy;
Russell Hogan, Investment Development Director; Roy Patrick, Director
and Company Secretary; Paul N. Ritchie, Director and Investment
Administration Manager; Otto Thoresen, Director, International
Business.
None of these Directors or Officers has any substantial business,
profession, vocation or employment other than their positions with
Scottish Equitable, Scottish Equitable plc and other group companies.
GE Investment Management Incorporated ("GEIM") also serves as a
Co-Sub-Adviser for the International Equity Portfolio. GEIM is a
wholly-owned subsidiary of General Electric Company ("GE"). GEIM's
principal officers and directors serve in similar capacities with
respect to General Electric Investment Corporation ("GEIC," and,
together with GEIM, collectively referred to as "GE Investments"),
which like GEIM is a wholly-owned subsidiary of GE. GEIC serves as
investment adviser to various GE pension and benefit plans and certain
employee mutual funds. The directors and executive officers of GEIC
are: John H. Myers, Chairman, Director and CEO; Michael J. Cosgrove,
Executive Vice President, Alan M. Lewis, Executive Vice President and
General Counsel; Robert A. MacDougall, Executive Vice President; Eugene
K. Bolton, Executive Vice President; Donald W. Torey, Executive Vice
President and Ralph R. Layman, Executive Vice President. All of these
officers and/or directors have no substantial business, profession,
vocation or employment other than their positions with GEIM and/or its
subsidiaries and affiliates.
C-9
<PAGE>
L. GLOBAL SECTOR PORTFOLIO: SUB-ADVISER - MERIDIAN INVESTMENT MANAGEMENT
CORPORATION
Meridian Investment Management Corporation ("Meridian") serves as
Sub-Adviser for the Global Sector Portfolio. Meridian is a wholly-owned
subsidiary of Meridian Management & Research Corporation and provides
investment management and related services to other mutual fund
portfolios and individual, corporate, charitable and retirement
accounts.
The directors and officers of Meridian are listed below. Unless
otherwise indicated, each director and officer has held the position
listed for at least the past two years and has a principal business
address of 12835 East Arapahoe Road, Tower II, Penthouse, Englewood, CO
80112: Michael J. Hart, President & Director, President of Meridian
Management & Research Corporation and President of Meridian Clearing
Corporation; and Dr. Craig T. Callahan, Secretary, Treasurer &
Director, Chief Investment Officer of Meridian Management & Research
Corporation and Vice President of Meridian Clearing Corporation.
M. VALUE EQUITY PORTFOLIO: SUB-ADVISER - NWQ INVESTMENT MANAGEMENT
COMPANY, INC.
NWQ Investment Management Company, Inc. ("NWQ") serves as Sub-Adviser
for the Value Equity Portfolio. NWQ is a Massachusetts corporation and
is a wholly-owned subsidiary of United Asset Management Corporation.
NWQ provides investment advice to individuals, pension funds, profit
sharing funds, charitable institutions, educational institutions, trust
accounts, corporations, insurance companies, municipalities and
governmental agencies.
The directors and officers of NWQ are listed below. Unless otherwise
indicated, each director and officer has held the positions listed for
at least the past two years and is located at NWQ's principal business
address of 2049 Century Park East, 4th Floor, Los Angeles, CA 90067:
David A. Polak, President, Chief Investment Officer; Edward C. Friedel,
Jr., Managing Director; Jon D. Bosse, Managing Director/Director Equity
Research; James H. Galbreath (Denver), Managing Director; Mary-Gene
Slaven, Secretary/Treasurer & Managing Director; James P. Owen,
Managing Director; Michael C. Mendez (Scottsdale, AZ), Managing
Director; Phyllis G. Thomas, Managing Director; Louis T. Chambers, Vice
President, Justin T. Clifford, Managing Director; Jeffrey M. Cohen,
Vice President; Ronald R. Halverson (Minneapolis, MN), Vice President;
Thomas J. Laird, Managing Director, Karen S. McCue, Vice President;
Martin Pollack, Vice President; and Ronald R. Sternal (Minneapolis,
MN), Vice President.
N. U.S. EQUITY PORTFOLIO: SUB-ADVISER - GE INVESTMENT MANAGEMENT
INCORPORATED
GE Investment Management Incorporated ("GEIM") serves as the
Sub-Adviser for the U.S. Equity Portfolio. GEIM is a wholly-owned
subsidiary of General Electric Company ("GE"). GEIM's principal
officers and directors serve in similar capacities with respect to
General Electric Investment Corporation ("GEIC," and, together with
GEIM, collectively referred to as "GE Investments") which like GEIM is
a wholly-owned subsidiary of GE. GEIC serves as investment adviser to
various GE pension and benefit plans and certain employee mutual funds.
The directors and executive officers of GEIC are: John H. Myers,
Chairman, Director and CEO; Michael J. Cosgrove, Executive Vice
President, Alan M. Lewis, Executive Vice President and General Counsel;
Robert A. MacDougall, Executive Vice President; Eugene K. Bolton,
Executive Vice President; Donald W. Torey, Executive Vice President and
Ralph R. Layman, Executive Vice President. All of these officers and/or
directors have no substantial business, profession, vocation or
employment other than their positions with GEIM and/or its subsidiaries
and affiliates.
O. THIRD AVENUE VALUE PORTFOLIO: SUB-ADVISER - EQSF ADVISERS, INC.
EQSF Advisers, Inc. ("EQSF") serves as Sub-Adviser for the Third Avenue
Value Portfolio. EQSF is a New York corporation and is controlled by
Martin J. Whitman.
The directors and officers of EQSF are listed below. Unless otherwise
indicated, each director and officer has held the positions listed for
at least the past two years and is located at EQSF's business address
of 767 Third Avenue, New York, New York, 10017-2023: Martin J. Whitman,
Chairman, Chief
C-10
<PAGE>
Executive Officer and President, is Chairman, Chief Executive Officer
and President of Third Avenue Trust, Chairman, Chief Investment Officer
and Chief Executive Officer of M.J. Whitman Advisers, Inc., Chairman
and Chief Executive Officer of M.J. Whitman, Inc. and Danielson Holding
Corporation, Director of Nabors Industries, Inc., and President and
Chief Executive Officer of Martin J. Whitman & Co., Inc.; David M.
Barse, Director and Executive Vice President, is Executive Vice
President of Third Avenue Trust, Director, President and Chief
Operating Officer of M.J. Whitman Holding Corp., M.J. Whitman, Inc.,
M.J. Whitman Advisers, Inc. and Danielson Holding Corporation; Michael
Carney, Treasurer and Chief Financial Officer, is Director, Treasurer
and Chief Financial Officer of M.J. Whitman, Inc., M.J. Whitman Holding
Corp. and M.J. Whitman Advisers, Inc. and Chief Financial Officer of
Danielson Holding Corporation and Third Avenue Trust; Kerri Weltz,
Controller, is Assistant Treasurer and Controller of Third Avenue
Trust, Controller of Danielson Holding Corp., Whitman Heffernan & Rhein
Workout Fund II, L.P., Whitman Heffernan & Rhein Workout Fund II-A and
WHR Management Corporation; Ian M. Kirschner, General Counsel and
Secretary, is General Counsel and Secretary of Third Avenue Trust,
Danielson Holding Corporation, M.J. Whitman Holding Corp., M.J.
Whitman, Inc. and M.J. Whitman Advisers, Inc.
Item 29. PRINCIPAL UNDERWRITERS.
(a) The Registrant has entered into a Distribution Agreement with
InterSecurities, Inc. ("ISI"), whose address is P.O. Box 9053,
Clearwater, FL 33758-9053, to act as the principal underwriter of Fund
Shares. ISI also serves as an investment adviser and principal
underwriter to the IDEX Series Fund and as principal underwriter to the
WRL Series Life Account and the WRL Series Annuity Account.
(b) Directors and Officers of Principal Underwriter:
<TABLE>
<CAPTION>
(1) (2) (3)
NAME AND PRINCIPAL BUSINESS POSITIONS AND OFFICES WITH POSITIONS AND OFFICES WITH
ADDRESS UNDERWRITER REGISTRANT
--------------------------- -------------------------- --------------------------
<S> <C> <C>
John R. Kenney* Chairman and Director Chairman and President
G. John Hurley* Director, President and CEO Director and Executive
Vice President
Thomas E. Pierpan* Assistant Vice President, Secretary, Vice President
Counsel and Assistant and Counsel
Secretary
William H. Geiger* Director and Secretary Vice President and
Assistant Secretary
Thomas R. Moriarty* Senior Vice President N/A
Christopher G. Roetzer* Assistant Vice President N/A
Duncan Cameron* Assistant Vice President N/A
Cynthia L. Remley* Vice President, and N/A
Associate Counsel
Terry L. Garvin* Vice President N/A
Mike Williams* Vice President N/A
Stanley R. Orr* Vice President N/A
William G. Cummings* Vice President and Treasurer N/A
Kristy L. Dowd* Vice President - Project N/A
Development
C-11
<PAGE>
(1) (2) (3)
NAME AND PRINCIPAL BUSINESS POSITIONS AND OFFICES WITH POSITIONS AND OFFICES WITH
ADDRESS UNDERWRITER REGISTRANT
--------------------------- --------------------------- ---------------------------
Rod Tidwell Assistant Vice President N/A
Diane Rogers* Assistant Vice President N/A
Ronald T. Klimas* Assistant Vice President N/A
Russell W. Crooks* Assistant Vice President N/A
Margaret Cullem-Fiore Assistant Vice President and N/A
Associate Counsel
Gregory Limardi* Assistant Vice President N/A
Stuart Walsky* Assistant Vice President N/A
Ronald L. Hall* Sr. Vice President, Sales and N/A
Marketing
Christine M. Goodwin* Assistant Vice President N/A
Stephen R. Breininger* Assistant Vice President N/A
Donna Craft Assistant Vice President N/A
James Kiely* Assistant Secretary N/A
Laura (Schneider) Hunt* Assistant Secretary N/A
</TABLE>
- ---------------
*201 Highland Avenue, Largo, Florida 33770
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of
1940, as amended, and rules promulgated thereunder are in the
possession of WRL Investment Management, Inc. and WRL Investment
Services, Inc. at their offices at 201 Highland Avenue, Largo, Florida
33770, or at the offices of the Fund's custodian, Investors Bank &
Trust Company, 200 Clarendon Street, 16th Floor, Boston, MA 02111.
Item 31. MANAGEMENT SERVICES.
Not applicable
Item 32. UNDERTAKINGS.
The Registrant undertakes to file a post-effective amendment including
the financial statements of the Third Avenue Value Portfolio and the
Real Estate Securities Portfolio of the WRL Series Fund, Inc., which
need not be certified, within four to six months of commencement of
operations.
The Registrant undertakes to furnish to each person to whom a
prospectus is delivered with a copy of the Registrant's latest Annual
Report and Semi-Annual Report to shareholders, Policyowners or Contract
Owners upon request and without charge.
C-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
WRL Series Fund, Inc., has duly caused this Post-Effective Amendment No. 33 to
its Registration Statement to be signed on its behalf by the undersigned,
thereunder duly authorized, in the City of Largo, State of Florida, on this 11th
day of February, 1998.
WRL SERIES FUND, INC.
(Registrant)
By: /s/ JOHN R. KENNEY
------------------------------
John R. Kenney
Chairman of the Board and
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 33 to its Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated:
SIGNATURE AND TITLE DATE
- ------------------- ----
/s/ JOHN R. KENNEY February 11, 1998
- -----------------------------------
Chairman of the Board and President
John R. Kenney
/s/ G. JOHN HURLEY February 11, 1998
- -----------------------------------
Executive Vice President and Director
G. John Hurley
/s/ PETER R. BROWN February 11, 1998
- -----------------------------------
Director - Peter R. Brown *
/s/ CHARLES C. HARRIS February 11, 1998
- ------------------------------------
Director - Charles C. Harris*
/s/ RUSSELL A. KIMBALL, JR. February 11, 1998
- ------------------------------------
Director - Russell A. Kimball, Jr. *
<PAGE>
/s/ ALLAN J. HAMILTON February 11, 1998
- -------------------------------------
Treasurer and Principal Financial Officer
Allan J. Hamilton
/s/ KIM D. DAY February 11, 1998
- -------------------------------------
Vice President and
Principal Accounting Officer
Kim D. Day
/s/ THOMAS E. PIERPAN
- --------------------------------------
* Signed by Thomas E. Pierpan
as Attorney-in-fact
