As filed electronically with the Securities and Exchange Commission
on April 28, 2000
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Registration No. 33-507
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Pre-Effective Amendment No.
Post-Effective Amendment No. 38
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
1940 Act File No. 811-4419
Amendment No. 39
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(Check appropriate box or boxes.)
WRL SERIES FUND, INC.
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(Exact Name of Registrant as Specified in Charter)
570 Carillon Parkway, St. Petersburg, Florida 33716
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (727) 299-1800
John K. Carter, Esq. 570 Carillon Parkway St. Petersburg, Florida 33716
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(Name and Address of Agent for Service)
Approximate date of proposed public offering:
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b)
|X| on May 1, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a) (1)
[ ] on (date) pursuant to paragraph (a) (1)
[ ] 75 days after filing pursuant to paragraph (a) (2)
[ ] on (date) pursuant to paragraph (a) (2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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WRL SERIES FUND, INC.
AGGRESSIVE EQUITY PORTFOLIOS
o WRL VKAM EMERGING GROWTH
o WRL T. ROWE PRICE SMALL CAP
o WRL GOLDMAN SACHS SMALL CAP
o WRL PILGRIM BAXTER MID CAP GROWTH
o WRL ALGER AGGRESSIVE GROWTH
o WRL THIRD AVENUE VALUE
o WRL VALUE LINE AGGRESSIVE GROWTH
FOREIGN EQUITY PORTFOLIOS
o WRL GE INTERNATIONAL EQUITY
o WRL JANUS GLOBAL
GROWTH EQUITY PORTFOLIOS
o WRL GREAT COMPANIES -- TECHNOLOGY(SM)
o WRL JANUS GROWTH
o WRL GOLDMAN SACHS GROWTH
o WRL GE U.S. EQUITY
o WRL GREAT COMPANIES -- AMERICA(SM)
o WRL SALOMON ALL CAP
o WRL C.A.S.E. GROWTH
o WRL DREYFUS MID CAP
o WRL NWQ VALUE EQUITY
BALANCED PORTFOLIOS
o WRL T. ROWE PRICE DIVIDEND GROWTH
o WRL DEAN ASSET ALLOCATION
o WRL LKCM STRATEGIC TOTAL RETURN
o WRL J.P. MORGAN REAL ESTATE SECURITIES
o WRL FEDERATED GROWTH & INCOME
o WRL AEGON BALANCED
FIXED-INCOME PORTFOLIOS
o WRL AEGON BOND
CAPITAL PRESERVATION PORTFOLIOS
o WRL J.P. MORGAN MONEY MARKET
PROSPECTUS
The Securities and Exchange Commission
has not approved or disapproved these
securities or passed upon
the adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
May 1, 2000
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TABLE OF CONTENTS
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INVESTOR INFORMATION ...................................................... 1
ALL ABOUT THE FUND
AGGRESSIVE EQUITY PORTFOLIOS
WRL VKAM Emerging Growth ............................................... 2
WRL T. Rowe Price Small Cap ............................................ 3
WRL Goldman Sachs Small Cap ............................................ 4
WRL Pilgrim Baxter Mid Cap Growth ...................................... 4
WRL Alger Aggressive Growth ............................................ 5
WRL Third Avenue Value ................................................ 5
WRL Value Line Aggressive Growth ....................................... 6
FOREIGN EQUITY PORTFOLIOS
WRL GE International Equity ............................................ 12
WRL Janus Global ....................................................... 13
GROWTH EQUITY PORTFOLIOS
WRL Great Companies -- Technology(SM) .................................. 18
WRL Janus Growth ....................................................... 18
WRL Goldman Sachs Growth ............................................... 19
WRL GE U.S. Equity ..................................................... 19
WRL Great Companies -- America(SM) ..................................... 20
WRL Salomon All Cap .................................................... 20
WRL C.A.S.E. Growth .................................................... 21
WRL Dreyfus Mid Cap .................................................... 22
WRL NWQ Value Equity ................................................... 22
BALANCED PORTFOLIOS
WRL T. Rowe Price Dividend Growth ...................................... 29
WRL Dean Asset Allocation .............................................. 29
WRL LKCM Strategic Total Return ........................................ 30
WRL J.P. Morgan Real Estate Securities ................................ 30
WRL Federated Growth & Income .......................................... 31
WRL AEGON Balanced ..................................................... 31
FIXED-INCOME PORTFOLIOS
WRL AEGON Bond ......................................................... 38
CAPITAL PRESERVATION PORTFOLIOS
WRL J.P. Morgan Money Market .......................................... 41
RISK/REWARD INFORMATION ................................................... 44
EXPLANATION OF STRATEGIES AND RISKS ....................................... 45
HOW THE FUND IS MANAGED AND ORGANIZED ..................................... 50
PERFORMANCE INFORMATION ................................................... 55
OTHER INFORMATION ......................................................... 58
FINANCIAL HIGHLIGHTS ...................................................... 60
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WRL Series Fund, Inc. (Fund) currently offers twenty-six separate series
or investment portfolios. The Fund is an open-end management investment
company, more commonly known as a mutual fund.
Shares of these portfolios are currently only sold to separate accounts of
Western Reserve Life Assurance Co. of Ohio, PFL Life Insurance Company,
AUSA Life Insurance Company, Peoples Benefit Life Insurance Company and
Transamerica Occidental Life Insurance Company to fund the benefits under
certain individual flexible premium variable life insurance policies and
individual and group variable annuity contracts.
A particular portfolio of the Fund may not be available under the policy
or annuity contract you have chosen. The prospectus or disclosure document
for your policy or annuity contract shows the portfolios available to you.
Please read this prospectus carefully before selecting a portfolio. It
provides information to assist you in your decision. If you would like
additional information about a portfolio, please request a copy of the
Statement of Additional Information (SAI) (see back cover). The SAI is
incorporated by reference into this prospectus.
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Prospectus
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INVESTOR INFORMATION
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TO HELP YOU UNDERSTAND . . .
In this prospectus, you will see the symbols below.
These are "icons" which serve as tools to direct you to the type of information
that is included in the accompanying paragraphs.
The icons are for your convenience and to assist you as you read this
prospectus.
/target/ The target directs you to a portfolio's goal or objective.
/chess piece/ The chess piece indicates discussion about a portfolio's
strategies.
/warning sign/ The warning sign indicates the risks of investing in a portfolio.
/graph/ The graph indicates investment performance.
/question mark/ The question mark provides additional information about the Fund
or may direct you on how to obtain further information.
SHARES OF A PORTFOLIO ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY
BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT.
Prospectus 1
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AGGRESSIVE EQUITY PORTFOLIOS
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WRL VKAM EMERGING GROWTH
WRL T. ROWE PRICE SMALL CAP
WRL GOLDMAN SACHS SMALL CAP
WRL PILGRIM BAXTER MID CAP GROWTH
WRL ALGER AGGRESSIVE GROWTH
WRL THIRD AVENUE VALUE
WRL VALUE LINE AGGRESSIVE GROWTH
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES EACH AGGRESSIVE EQUITY PORTFOLIO OF
THE FUND AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIOS. FOR FURTHER
INFORMATION ON THESE PORTFOLIOS, PLEASE READ THE SECTION ENTITLED "EXPLANATION
OF STRATEGIES AND RISKS," BEGINNING ON PAGE 45, AND THE FUND'S SAI.
/target/ OBJECTIVES
WRL VKAM EMERGING GROWTH
This portfolio seeks capital appreciation by investing primarily in common
stocks of small and medium-sized companies.
WRL T. ROWE PRICE SMALL CAP
This portfolio seeks long-term growth of capital by investing primarily in
common stocks of small growth companies.
WRL GOLDMAN SACHS SMALL CAP
This portfolio seeks long-term growth of capital.
WRL PILGRIM BAXTER MID CAP GROWTH
This portfolio seeks capital appreciation.
WRL ALGER AGGRESSIVE GROWTH
This portfolio seeks long-term capital appreciation.
WRL THIRD AVENUE VALUE
This portfolio seeks long-term capital appreciation.
WRL VALUE LINE AGGRESSIVE GROWTH
This portfolio seeks to realize capital growth.
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WHAT IS AN AGGRESSIVE EQUITY PORTFOLIO?
Aggressive Equity Portfolios are those that seek maximum capital
appreciation (a rise in the share price/value). Current income is not a
significant factor. Some portfolios that are included in this category may
invest in out-of-the main-stream stocks, such as those of fledging or
struggling companies, or those in new or currently out-of-favor industries.
Some portfolios in this category may also use specialized investment
techniques such as options or short-term investing. For these reasons,
these portfolios usually entail greater risk than the overall equity
portfolio category.
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/chess piece/ POLICIES AND STRATEGIES
WRL VKAM EMERGING GROWTH
The portfolio's sub-adviser, Van Kampen Asset Management Inc. (VKAM), seeks to
achieve the portfolio's objective by investing:
o At least 65% of the portfolio's total assets in common stocks of emerging
growth companies. Emerging growth companies are those companies in the early
stages of their life cycles that the portfolio's sub-adviser believes have
the potential to become major enterprises.
o Options
o Futures
Prospectus 2
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AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
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VKAM invests at least 65% of the portfolio's assets (under normal market
conditions) in common stocks of companies that are in the early stages of their
life cycle, and are believed by VKAM to have the potential to become major
enterprises. Some securities may have above average price volatility. VKAM
attempts to reduce overall exposure to risk from declines in the security
prices by spreading the portfolio's investments over many different companies
in a variety of industries.
VKAM will utilize options on securities, futures contracts and options thereon
in several different ways, depending upon the status of the portfolio's
investment portfolio and its expectations concerning the securities market.
VKAM will invest up to 20% of the portfolio's total assets in securities of
foreign issuers.
In times of stable or rising stock prices, the portfolio generally seeks to be
fully invested. Even when the portfolio is fully invested, VKAM believes that
at least a small portfolio of assets will be held as cash or cash equivalents
to honor redemption requests and for other short-term needs.
The amount of portfolio assets 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 seek to "equalize" the cash portion of its assets
and obtain performance that is equivalent to investing 100% in equity
securities.
The portfolio may take a temporary defensive position when the securities
trading markets or the economy are experiencing volatility or a prolonged
general decline, or other adverse conditions exist. This may be inconsistent
with the portfolio's principal investment strategies. Under these conditions,
the portfolio will be unable to achieve its investment objective.
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WHAT IS A TOP-DOWN APPROACH?
When using a "top-down" approach, the portfolio manager looks first at
broad market factors, and on the basis of those market factors, chooses
certain sectors, or industries within the overall market. The manager then
looks at individual companies within those sectors or industries.
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WRL T. ROWE PRICE SMALL CAP
The portfolio's sub-adviser, T. Rowe Price Associates, Inc. (T. Rowe Price),
seeks to achieve the portfolio's objective by investing principally in:
o Common stocks of small-cap growth companies
This portfolio will invest at least 65% of the fund's total assets in small-cap
growth companies. These companies are defined as companies whose market
capitalization falls within the range of or smaller than the bottom 100
companies in the Standard & Poor's 500 Stock Index (S&P 500), which was
approximately $3.3 billion and below as of December 31, 1999, but the upper
size limit will vary with market fluctuations. The S&P 500 measures the
performance of the common stocks of 500 large U.S. companies in the
manufacturing, utilities, transportation, and financial industries. It also
tracks the performance of common stocks issued by foreign and smaller U.S.
companies in similar industries. (A company's market "cap" is found by
multiplying its shares outstanding by its stock price.) Companies whose
capitalization increases above this range after the portfolio's initial
purchase continue to be considered small companies for purposes of this policy.
To help manage cash flows efficiently, T. Rowe Price may also buy and sell
stock index futures. The portfolio intends to be invested in a large number of
holdings. T. Rowe Price believes this diversification should minimize the
effects of individual security selection on portfolio performance.
Quantitative models are furnished by a sub-adviser to assist the sub-adviser in
evaluating a potential security. Characteristics are included in the model that
the sub-adviser deems advantageous in a security. Based on these models, stocks
are selected in a "top-down" manner so that the portfolio's portfolio as a whole
reflects characteristics T. Rowe Price considers important, such as valuations
(price/earnings or price/ book value ratios, for example) and projected earnings
growth.
While the portfolio invests principally in common stocks, and, to a lesser
extent in stock index futures, it may also purchase other securities, in
keeping with its objective.
Prospectus 3
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AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
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The portfolio may sell securities for a variety of reasons, such as to secure
gains, limit losses, or redeploy assets into more promising opportunities.
The portfolio may take a temporary defensive position when the securities
trading markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist. This may be
inconsistent with the portfolio's principal investment strategies. Under these
circumstances, the portfolio may be unable to achieve its investment objective.
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WHAT IS A QUANTITATIVE MODEL?
A quantitative model is fashioned by a portfolio's sub-adviser to assist
the sub-adviser in evaluating a potential security. The sub-adviser creates
a model that is designed using characteristics that the sub-adviser deems
advantageous in a security. The sub-adviser then compares a potential
security's characteristics against those of the model, and makes a
determination of whether or not to purchase the security based on the
results of that comparison.
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WRL GOLDMAN SACHS SMALL CAP
The portfolio's sub-adviser, Goldman Sachs Asset Management (GSAM), seeks to
achieve the portfolio's objective by investing principally in:
o Equity securities of U.S. issuers, and certain foreign issuers that are
traded in the U.S.
The portfolio will invest at least 90% of its assets in equity securities of
companies with public stock market capitalizations within the range of the
market capitalization of companies constituting the Russell 2000 (a widely
recognized unmanaged index of market performance which measures the performance
of the 2000 smallest companies in the Russell 3000 Index) at the time of
investment (currently $3.1 million to $12.3 billion). The equity securities
include those of U.S. issuers, and certain foreign issuers traded in the U.S.
The portfolio's fixed-income securities are limited to securities that are
considered cash equivalents.
The portfolio may also purchase Standard & Poor's Depositary Receipts ("SPDRs").
SPDRs are American Stock Exchange-traded securities that represent ownership in
the SPDR Trust, a trust which has been established to accumulate and hold a
portfolio of common stocks that is intended to track the price performance and
dividend yield of the S&P 500. SPDRs are included in the portfolio's 10%
limitation on investments in investment companies.
GSAM uses the CORE investment process. CORE is an acronym for
"Computer-Optimized, Research-Enhanced." GSAM selects the portfolio's
investments using both a variety of quantitative techniques and fundamental
research while seeking to maximize the portfolio's expected return, while
maintaining risk, style, capitalization and industry characteristics similar to
the Russell 2000 Index.
GSAM may take a temporary defensive position when the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist. This may be inconsistent
with the portfolio's principal investment strategies. Under these
circumstances, the portfolio may be unable to pursue its investment objective.
WRL PILGRIM BAXTER MID CAP GROWTH
The portfolio's sub-adviser, Pilgrim Baxter & Associates, Ltd. (Pilgrim Baxter),
seeks to achieve the portfolio's objective by investing principally in:
o Common stocks
o Convertible securities
In seeking capital appreciation, Pilgrim Baxter normally invests at least 65%
of the portfolio's total assets in growth securities, such as common stocks,
issued by companies with market capitalizations or annual revenues between $500
million and $10 billion. The portfolio invests primarily in companies that
Pilgrim Baxter believes have strong business momentum, earnings growth and
capital-appreciation potential. The portfolio may also invest in foreign
securities, warrants and rights.
Prospectus 4
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AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
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Pilgrim Baxter uses its own fundamental research, computer models and
proprietary measures of growth and business momentum in managing this
portfolio.
Pilgrim Baxter's decision to sell a stock depends on many factors. Generally
speaking, Pilgrim Baxter considers selling a security when its anticipated
appreciation is no longer probable, alternate investments offer more superior
appreciation prospects, or the risk of a decline in its market price is too
great.
Pilgrim Baxter may take a temporary defensive position when the securities
trading markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist. Under these
circumstances, the portfolio may be unable to achieve its investment objective.
While the fund invests principally in common stocks of medium-sized companies,
Pilgrim Baxter may, to a lesser extent, elect to invest in options and futures
contracts for hedging and risk management, or in other securities and
investment strategies in pursuit of its investment objective, which are
explained beginning on page 45 and in the SAI.
WRL ALGER AGGRESSIVE GROWTH
The portfolio's sub-adviser, Fred Alger Management, Inc. (Alger), seeks to
achieve the portfolio's objective by investing principally in:
o Equity securities such as common or preferred stocks
o Convertible securities (convertible securities are securities which can be
exchanged or converted into common stock of such companies)
To a lesser extent, the sub-adviser may invest portfolio assets in:
o U.S. dollar denominated securities of foreign issuers (American Depositary
Receipts (ADRs))
o Money market instruments
o Repurchase agreements
Under normal market conditions, the portfolio invests at least 85% of its
assets in common stocks, which may include stocks of developing companies, of
older companies that are entering a new stage of growth, and of companies whose
products or services have a high unit volume growth rate.
The portfolio may also use leveraging, a technique that involves borrowing
money to invest in an effort to enhance shareholder returns.
The portfolio's manager may take a temporary defensive position when the
securities trading markets or the economy are experiencing excessive volatility
or a prolonged general decline, or other adverse conditions exist. This may be
inconsistent with the portfolio's principal investment strategies. During this
time, the portfolio may invest up to 100% of its assets in money market
instruments and cash equivalents. Under these circumstances, the portfolio will
be unable to pursue its investment objective.
WRL THIRD AVENUE VALUE
The portfolio's sub-adviser, EQSF Advisers, Inc. (EQSF), seeks to achieve the
portfolio's investment objective by investing principally in:
o Common stocks
o Debt securities
o High-yield/high-risk fixed-income securities
o Foreign securities
The portfolio invests to a lesser extent, in trade claims and engages in
foreign currency transactions for hedging purposes. (Trade claims are interests
in amounts owed to suppliers or services and are purchased from creditors of
companies in financial difficulty.)
EQSF seeks to achieve the portfolio's objective by seeking to acquire common
stocks of well-financed companies at a substantial discount for what EQSF
believes is their value as a private business or as a take over candidate. It
also seeks to acquire senior securities, such as preferred stock and debt
instruments, that have strong covenant protections and above-average yields.
EQSF seeks portfolio securities whose prices are low enough at the time of
acquisition so both the risk is lowered and appreciation potential is enhanced.
EQSF believes that value is created more by past corporate prosperity than by
bear markets.
To choose such securities, EQSF uses a "bottom-up" approach. EQSF believes the
knowledge it obtains
Prospectus 5
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AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
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through extensive research of individual companies reduces risk more than does
diversification so the portfolio is non-diversified.
The portfolio's classification as "non-diversified" under the Investment
Company Act of 1940 (1940 Act) means that the portfolio has the ability to take
larger positions in a smaller number of issuers.
However, to meet federal tax requirements, at the close of each quarter the
portfolio may not have more than 25% of its total assets invested in any one
issuer and, with respect to 50% of its total assets, not more than 5% of its
total assets invested in any one issuer.
The portfolio may take a temporary defensive position when the securities
trading markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist. This may be
inconsistent with the portfolio's principal investment strategies. Under these
conditions, the portfolio may be unable to achieve its investment objective.
WRL VALUE LINE AGGRESSIVE GROWTH
The portfolio's sub-adviser, Value Line, Inc. (Value Line), seeks to achieve
the portfolio's objective by investing principally in:
o Common stocks
o Securities convertible into common stock
Value Line seeks to invest substantially all of the portfolio's net assets in
common stock or securities convertible into common stock.
In selecting securities for purchase or sale, Value Line relies on the "Value
Line Timeliness Ranking System" and the "Value Line Performance Ranking
System." These Ranking Systems compare Value Line's estimate of the probable
market performance of each stock during the next six to twelve months relative
to all of the stocks under review. The portfolio will usually invest in common
stocks ranked 1 or 2 by either Ranking System, but it may also invest in common
stocks ranked as low as 3. Each Ranking System ranks stocks on a scale of 1
(highest) to 5 (lowest). Although the portfolio may invest in companies of any
size, it generally invests in U.S. securities issued by larger, more
established companies.
Reliance upon the rankings, whenever feasible, is a fundamental policy of the
portfolio which may not be changed without policyholder approval. For a
complete discussion of these ranking systems, please see "Explanation of
Strategies and Risks" beginning on page 45.
The portfolio may also use leveraging, a technique that involves borrowing
money to invest in an effort to enhance shareholder or policyholder returns.
From time to time in response to adverse market, economic, political or other
conditions, the portfolio may invest a portion of its net assets in cash or
cash equivalents, debt securities, bonds or preferred stocks for temporary
defensive purposes. This could help the portfolio to avoid losses, but it may
result in lost opportunities. If this becomes necessary, the portfolio may not
meet its investment objective.
The portfolio may also engage in active and frequent trading of portfolio
securities in order to take advantage of better investment opportunities to
achieve its investment objective.
/warning sign/ RISKS OF INVESTING IN AGGRESSIVE EQUITY PORTFOLIOS
The principal risks of investing in Aggressive Equity Portfolios that may
adversely affect your investment are described below. (Not all of these risks
apply to each Aggressive Equity Portfolio. See the chart below for the
principal risks of your portfolio.) Please note that there are many other
circumstances which could adversely affect your investment and prevent a
portfolio from achieving its objective, which are not described here. Please
refer to the section entitled "Explanation of Strategies and Risks" beginning
on page 45 and the Fund's SAI for more information about the risks of investing
in the Aggressive Equity Portfolios.
Prospectus 6
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AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
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PRINCIPAL RISKS
AGGRESSIVE EQUITY PORTFOLIOS
<TABLE>
<CAPTION>
PORTFOLIO
---------
WRL WRL WRL WRL WRL WRL WRL
VKAM EMERGING T. ROWE PRICE GOLDMAN PILGRIM BAXTER ALGER AGGRESSIVE THIRD AVENUE VALUE LINE
RISKS GROWTH SMALL CAP SACHS SMALL CAP MID CAP GROWTH GROWTH VALUE AGGRESSIVE GROWTH
- - -----
<S> <C> <C> <C> <C> <C> <C> <C>
STOCKS X X X X X X X
INVESTING
AGGRESSIVELY X X X X X X X
SMALL-CAP AND
GROWTH COMPANIES X X X
QUANTITATIVE MODELS X X
NON-DIVERSIFICATION X
FUTURES & OPTIONS X X X
FOREIGN SECURITIES X X X X
DEPOSITARY RECEIPTS X X
CONVERTIBLES X X X
LEVERAGING X X
VALUE INVESTING X X
VALUE LINE RANKING
SYSTEMS X
</TABLE>
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the short term. These
price movements may result from factors affecting individual companies, certain
industries or the securities market as a whole.
Because the stocks a portfolio holds fluctuate in price, the value of your
investment in the portfolio will go up and down.
o INVESTING AGGRESSIVELY
o The value of developing-company stocks may be very volatile, and can drop
significantly in a short period of time
o Rights, options and futures contracts may not be exercised and may expire
worthless
o Warrants and rights may be less liquid than stocks
o Use of futures and other derivatives may make the portfolio more volatile
o SMALL-CAP AND GROWTH COMPANIES
Investing in small companies involves greater risk than is customarily
associated with more established companies. Stocks of small companies may be
subject to more abrupt or erratic price movements than larger company
securities. Small companies often have limited product lines, markets, or
financial resources, and their management may lack depth and experience.
Securities of such issuers may lack sufficient market liquidity to enable a
portfolio to effect sales at an advantageous time or without a substantial drop
in price.
Also, growth stocks can experience steep price declines if the company's
earnings disappoint investors. Since many of the Aggressive Equity Portfolios
will typically be fully invested in this market sector, investors are fully
exposed to its volatility.
o QUANTITATIVE MODELS
Stocks selected using quantitative models may not perform as well as these
models might otherwise suggest and may cause overall returns to be lower than
if other methods are used.
o NON-DIVERSIFICATION
To the extent a portfolio invests a greater proportion of its assets in the
securities of a smaller number of issuers, it may be more susceptible to any
single economic, political or regulatory occurrence than a more widely
diversified portfolio and may be subject to greater risk of loss with respect
to its portfolio securities.
Prospectus 7
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AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
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o FUTURES AND OPTIONS
Futures and options involve additional investment risks and transactional
costs, and draw upon skills and experience which are different than those
needed to pick other securities. Special risks include:
o Inaccurate market predictions
o Imperfect correlation
o Illiquidity
o Tax considerations
The portfolios are not required to hedge their investments.
o FOREIGN SECURITIES
Investments in foreign securities involve risks relating to political, social
and economic developments abroad as well as risks resulting from differences in
regulations to which U.S. and foreign issuers and markets are subject. To the
extent a portfolio invests in emerging markets, these risks would be greater.
These risks include:
o Changes in currency values
o Currency speculation
o Currency trading costs
o Different accounting and reporting practices
o Less information available to the public
o Less (or different) regulation of securities markets
o More complex business negotiations
o Less liquidity
o More fluctuations in market prices
o Delays in settling foreign securities transactions
o Higher transaction costs
o Higher costs for holding foreign securities (custodial fees)
o Vulnerability to seizure and taxes
o Political instability and small markets
o Different market trading days
o ADRS
Many securities of foreign issuers are represented by American Depositary
Receipts (ADRs). While ADRs principally are traded on domestic securities
exchanges, investing in ADRs involves many of the same risks associated with
foreign securities in general. These risks include:
o Changes in currency value
o Currency speculation
o Currency trading costs
o More fluctuations in market prices
o Less information available
o CONVERTIBLES
As with all debt securities, the market value of convertibles tends to decline
as interest rates increase and, conversely, to increase as interest rates
decline.
o VALUE INVESTING RISK
Undervalued stocks may not realize their perceived value for extended periods
of time. Value stocks may respond differently to market and other developments
than other types of stocks. Value oriented funds will typically underperform
when growth investing is in favor.
o LEVERAGING
Leveraging by a portfolio involves special risks:
o Leveraging practices may make a portfolio more volatile
o Leveraging may exaggerate the effect on net asset value of any increase or
decrease in the market value of the portfolio's securities
o Money borrowed for leveraging is subject to interest costs
o Minimum average balances may need to be maintained or a line of credit in
connection with borrowing may be necessary resulting in an increase in the
cost of borrowing over the stated interest rate.
o VALUE LINE RANKING SYSTEMS (WRL VALUE LINE AGGRESSIVE GROWTH)
The use of the Value Line Ranking Systems (the "Systems") involves the risks
that stocks selected using the Systems may not perform as well as their ranking
within the Systems might otherwise suggest. As a result,
Prospectus 8
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
the overall returns of WRL Value Line Aggressive Growth may be lower than if
other selection methods were used.
The portfolio's use of the Systems also involves the risk that over certain
periods of time the price of securities not covered by the Systems, or lowered
ranked securities, may appreciate to a greater extent than those securities in
the portfolio's portfolio.
YOU MAY LOSE MONEY IF YOU INVEST IN ANY OF THE AGGRESSIVE EQUITY PORTFOLIOS.
/chess piece/ INVESTOR PROFILES
WRL VKAM EMERGING GROWTH
May be appropriate for the investor who seeks capital appreciation over the
long term; is willing to take on the increased risks of investing in smaller
and medium-sized, less established companies in exchange for potentially higher
capital appreciation; can withstand substantial volatility in the value of
their shares of the portfolio; and wish to add to their personal holdings a
portfolio that invests primarily in common stocks of emerging growth companies.
WRL T. ROWE PRICE SMALL CAP
For the investor who wants an aggressive, long-term approach to building
capital and who is comfortable with significant fluctuations inherent in
small-cap stock investing.
WRL GOLDMAN SACHS SMALL CAP
For the investor who seeks long-term growth of capital, who can tolerate the
fluctuations inherent in small-cap investing and is willing to accept the
special risks involved in quantitative stock selection techniques.
WRL PILGRIM BAXTER MID CAP GROWTH
For the investor who wants long-term growth of capital and who can tolerate the
fluctuations inherent in stock investing.
WRL ALGER AGGRESSIVE GROWTH
For the investor who seeks capital growth aggressively, and can tolerate wide
swings in the value of their investment.
WRL THIRD AVENUE VALUE
For the investor who is willing to hold shares through periods of market
fluctuations and the accompanying changes in share prices.
WRL VALUE LINE AGGRESSIVE GROWTH
For the investor who seeks capital growth and who can tolerate fluctuations
inherent in stock investing and is willing to accept the special risks
associated with the novel investment strategy of the portfolio.
Prospectus 9
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
/graph/ PORTFOLIO PERFORMANCE
The bar charts and tables below give an indication of the portfolios' risks and
performance. The charts show changes in a portfolio's performance from year to
year. The performance calculations do not reflect charges or deductions under
the policies or the annuity contracts. These fees and expenses would lower
investment performance. The tables show how a portfolio's average annual
returns for the periods indicated compare to those of a broad measure of market
performance.
Because the WRL T. Rowe Price Small Cap, WRL Goldman Sachs Small Cap and WRL
Pilgrim Baxter Mid Cap Growth portfolios commenced operations in 1999, and the
WRL Value Line Aggressive Growth portfolio commenced operations in 2000, their
performance history is not included.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL VKAM EMERGING GROWTH
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
(7.36)% 46.79% 18.88% 21.45% 37.33% 105.16%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1994-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 62.73 % 12/31/99
Lowest (12.53)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (MARCH 1, 1993)
WRL VKAM
Emerging Growth 105.16% 42.96% 32.64%
S&P 500 Index 21.04% 28.56% 21.70%
- - --------------------------------------------------------------------------------
WRL ALGER AGGRESSIVE GROWTH
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
38.02% 10.45% 24.25% 48.69% 69.02%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1995-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 44.67 % 12/31/99
Lowest (9.72)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (MARCH 1, 1993)
WRL Alger
Aggressive Growth 69.02% 36.62% 30.35%
S&P 500 Index 21.04% 28.56% 24.15%
- - --------------------------------------------------------------------------------
Prospectus 10
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL THIRD AVENUE VALUE
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1998 1999
---- ----
(6.84)% 15.72%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1998 - 1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 17.85 % 12/31/98
Lowest (17.57)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
ONE YEAR (JANUARY 2, 1998)
WRL Third Avenue Value 15.72% 3.84%
S&P 500 Index 21.04% 24.75%
- - --------------------------------------------------------------------------------
Prospectus 11
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIOS
- - --------------------------------------------------------------------------------
WRL GE INTERNATIONAL EQUITY (FORMERLY GE/SCOTTISH EQUITABLE INTERNATIONAL
EQUITY PORTFOLIO)
WRL JANUS GLOBAL
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES EACH FOREIGN EQUITY PORTFOLIO OF THE
FUND AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIOS. FOR FURTHER
INFORMATION ON THESE PORTFOLIOS, PLEASE READ THE SECTION ENTITLED "EXPLANATION
OF STRATEGIES AND RISKS," BEGINNING ON PAGE 45, AND THE FUND'S SAI.
/target/ OBJECTIVES
WRL GE INTERNATIONAL EQUITY
This portfolio seeks long-term growth of capital.
WRL JANUS GLOBAL
This portfolio seeks long-term growth of capital in a manner consistent with
the preservation of capital.
- - --------------------------------------------------------------------------------
WHAT IS A FOREIGN EQUITY PORTFOLIO?
This type of portfolio principally invests in equity securities of
companies located outside the U.S.
- - --------------------------------------------------------------------------------
/chess piece/ POLICIES AND STRATEGIES
WRL GE INTERNATIONAL EQUITY
(FORMERLY WRL GE/SCOTTISH EQUITABLE INTERNATIONAL EQUITY)
The portfolio's sub-adviser, GE Asset Management Incorporated (GEAM) seeks to
achieve the portfolio's investment objective by investing principally in:
o Common stocks of companies located in developed and developing countries
other than the United States
GEAM focuses on companies that it expects will grow faster than relevant
markets and whose security price does not, in GEAM's view, fully reflect their
potential for growth. Under normal circumstances, the portfolio's assets are
invested in foreign securities of companies representing at least three
different countries.
GEAM determines the country represented by an issuer by reference to the
country in which the issuer is organized; derives at least 50% of its revenues
or profits from goods produced or sold, investments made or services performed;
has at least 50% of its assets situated; or has the principal trading market
for its securities.
GEAM seeks to identify securities of growth companies with characteristics such
as:
o low prices relative to their long-term cash earnings potential
o potential for significant improvement in the company's business
o financial strength
o sufficient liquidity
The portfolio invests, not only in the larger markets of Europe and Japan, but
also may invest in the smaller markets of Asia, emerging Europe, Latin America,
and other emerging markets.
Overseas economies often do not move in the same direction and operate
differently. This creates situations the portfolio aims to take advantage of
through asset allocation among international markets.
The portfolio may, to a lesser extent, invest in equity securities other than
common stocks (including preferred securities, depositary receipts such as
ADRs, EDRs and GDRs, convertible securities, and rights and warrants),
securities of companies located in the United States, debt securities or other
securities.
The portfolio also may use various investment techniques to adjust the
portfolio's investment exposure, but there is no guarantee that these
techniques will work.
Prior to May 1, 2000, Scottish Equitable Investment Management Limited served
as co-manager of this portfolio, and was responsible for managing a discrete
portion of its assets.
Prospectus 12
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIOS
- - --------------------------------------------------------------------------------
WRL JANUS GLOBAL
The portfolio's sub-adviser, Janus Capital Corporation (Janus) seeks to achieve
the portfolio's investment objective by investing principally in:
o Common stocks of foreign and domestic issuers
o Depositary receipts including ADRs, GDRs and EDRs
The portfolio may also use forward foreign currency contracts for hedging.
Janus' main strategy is to use a "bottom up" approach to build the portfolio's
portfolio. They seek to identify individual companies with earnings growth
potential that may not be recognized by the market at large.
Foreign securities are generally selected on a stock-by-stock basis without
regard to defined allocation among countries or geographic regions.
When evaluating foreign investments, Janus (in addition to looking at
individual companies) considers such factors as:
o Expected levels of inflation in various countries
o Government policies that might affect business conditions
o The outlook for currency relationships
o Prospects for economic growth among countries, regions or geographic areas
- - --------------------------------------------------------------------------------
WHAT IS A "BOTTOM-UP" APPROACH?
When portfolio managers use a "bottom-up" approach, they look primarily at
individual companies against the context of broader market factors.
- - --------------------------------------------------------------------------------
/warning sign/ RISKS OF INVESTING IN FOREIGN EQUITY PORTFOLIOS
The principal risks of investing in Foreign Equity Portfolios that may
adversely affect your investment are described below. (Not all of these risks
apply to each Foreign Equity Portfolio. See the chart below for the principal
risks of your portfolio.) Please note that there are many other circumstances
which could adversely affect your investment and prevent a portfolio from
achieving its objective, which are not described here. Please refer to the
section entitled "Explanation of Strategies and Risks" beginning on page 45,
and the Fund's SAI for more information about the risks associated with
investing in the Foreign Equity Portfolios.
PRINCIPAL RISKS
FOREIGN EQUITY PORTFOLIOS
PORTFOLIO
------------------------
WRL
GE WRL
INTERNATIONAL JANUS
RISKS EQUITY GLOBAL
- - -----
STOCKS X X
FOREIGN SECURITIES X X
EMERGING MARKETS RISK X X
FORWARD FOREIGN CURRENCY
CONTRACTS X X
DEPOSITARY RECEIPTS X X
WARRANTS & RIGHTS X
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
certain industries or the securities market as a whole.
Because the stocks the portfolio holds fluctuate in price, the value of your
investment in the portfolio will go up and down.
o FOREIGN SECURITIES
Investments in foreign securities involve risks relating to political, social
and economic developments abroad as well as risks resulting from differences in
regulations to which U.S. and foreign issuers and markets are subject. To the
extent a portfolio invests in emerging markets, these risks would be greater.
These risks include:
o Changes in currency values
o Currency speculation
o Currency trading costs
o Different accounting and reporting practices
o Less information available to the public
o Less (or different) regulation of securities markets
Prospectus 13
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIOS
- - --------------------------------------------------------------------------------
o Greater complex business negotiations
o Less liquidity
o More fluctuations in prices
o Delays in settling foreign securities transactions
o Higher costs for holding shares (custodial fees)
o Higher transaction costs
o Vulnerability to seizure and taxes
o Political instability and small markets
o Different market trading days
o Forward foreign currency contracts for hedging
o EMERGING MARKETS RISK
Investing in the securities of issuers located in or principally doing business
in emerging markets bear foreign risks as discussed above. In addition, the
risks associated with investing in emerging markets are often greater than
investing in developed foreign markets. Specifically, the economic structures
in emerging markets countries are less diverse and mature than those in
developed countries, and their political systems are less stable. Investments
in emerging markets countries may be affected by national policies that
restrict foreign investments. Emerging market countries may have less developed
legal structures, and the small size of their securities markets and low
trading volumes can make investments illiquid and more volatile than
investments in developed countries. As a result, a portfolio investing in
emerging market countries may be required to establish special custody or other
arrangements before investing.
o FORWARD FOREIGN CURRENCY CONTRACTS
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of portfolio securities decline.
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 the portfolio's
limitation on investing in illiquid securities.
If the portfolio manager's judgment of markets proves incorrect or the strategy
does not correlate well with a portfolio's investment, the use of such hedging
transactions could result in a loss regardless of whether the intent was to
reduce risk or increase return and may increase a portfolio's volatility. In
addition, in the event that non-exchange traded forward currency contracts are
used, such transactions could result in a loss if the counterparty to the
transaction does not perform as promised.
o CONVERTIBLES
As with all debt securities, the market value of convertibles tends to decline
as interest rates increase and, conversely, to increase as the interest rates
decline.
o WARRANTS AND RIGHTS
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.
o DEPOSITARY RECEIPTS
Depositary receipts represent interests in an account at a bank or trust
company which holds equity securities. They are subject to some of the same
risks as direct investments in foreign securities, including currency risk. The
regulatory requirements with respect to depositary receipts that are issued in
sponsored and unsponsored programs are generally similar, but the issuers of
unsponsored depositary receipts 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 depositary receipts.
Prospectus 14
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIOS
- - --------------------------------------------------------------------------------
o GROWTH INVESTING RISK
Securities with different characteristics tend to shift in and out of favor
depending upon market and economic conditions as well as investor sentiment. A
portfolio may underperform other portfolios that employ a different style.
Growth stocks may be more volatile than other stocks because they are more
sensitive to investor perceptions of the issuing company's growth potential.
Growth-oriented funds typically will underperform when value investing is in
favor.
YOU MAY LOSE MONEY IF YOU INVEST IN EITHER OF THE FOREIGN EQUITY PORTFOLIOS.
/chess piece/ INVESTOR PROFILES
WRL GE INTERNATIONAL EQUITY
For the investor who seeks long-term capital growth through foreign
investments, and who is able to tolerate the significant risks in such
investments.
WRL JANUS GLOBAL
For the investor who seeks capital growth without being limited to investments
in U.S. securities, and who can tolerate the significant risks associated with
foreign investing.
Prospectus 15
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIOS
- - --------------------------------------------------------------------------------
/graph/ PORTFOLIO PERFORMANCE
The bar charts and tables below give an indication of the portfolios' risks and
performance. The charts show changes in a portfolio's performance from year to
year. The performance calculations do not reflect charges or deductions under
the policies or the annuity contracts. These fees and expenses would lower
investment performance. The tables show how a portfolio's average annual
returns for the periods indicated compare to those of a broad measure of market
performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL GE INTERNATIONAL EQUITY
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1997 1998 1999
---- ---- ----
7.50% 12.85% 24.95%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1997-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 22.87 % 12/31/99
Lowest (17.69)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR (JANUARY 2, 1997)
WRL GE International Equity 24.95% 14.90%
Morgan Stanley Capital
International-Europe,
Asia & Far East
(MSCI-EAFE) 28.24% 13.18%
- - --------------------------------------------------------------------------------
WRL JANUS GLOBAL
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ----
35.05% 0.25% 23.06% 27.74% 18.75% 30.01% 71.10%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1993-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 46.11 % 12/31/99
Lowest (16.52)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (DECEMBER 3, 1992)
WRL Janus Global 71.10% 32.94% 27.91%
Morgan Stanley
Capital
International
World Index 24.93% 20.08% 18.23%
- - --------------------------------------------------------------------------------
Prospectus 16
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS
- - --------------------------------------------------------------------------------
WRL GREAT COMPANIES - TECHNOLOGY(SM)
WRL JANUS GROWTH
WRL GOLDMAN SACHS GROWTH
WRL GE U.S. EQUITY
WRL GREAT COMPANIES - AMERICA(SM)
WRL SALOMON ALL CAP
WRL C.A.S.E. GROWTH
WRL DREYFUS MID CAP
WRL NWQ VALUE EQUITY
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES EACH GROWTH EQUITY PORTFOLIO OF THE
FUND AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIOS. FOR FURTHER
INFORMATION ON THESE PORTFOLIOS, PLEASE READ THE SECTION ENTITLED "EXPLANATION
OF STRATEGIES AND RISKS," BEGINNING ON PAGE 45, AND THE FUND'S SAI.
/target/ OBJECTIVES
WRL GREAT COMPANIES - TECHNOLOGY(SM)
This portfolio seeks long-term growth of capital.
WRL JANUS GROWTH
This portfolio seeks growth of capital.
WRL GOLDMAN SACHS GROWTH
This portfolio seeks long-term growth of capital.
WRL GE U.S. EQUITY
This portfolio seeks long-term growth of capital.
WRL GREAT COMPANIES - AMERICA(SM)
This portfolio seeks long-term growth of capital.
WRL SALOMON ALL CAP
This portfolio seeks capital appreciation.
WRL C.A.S.E. GROWTH
This portfolio 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.
WRL DREYFUS MID CAP
This portfolio seeks total investment returns (including capital appreciation
and income) which consistently outperform the S&P 400 Mid Cap Index.
WRL NWQ VALUE EQUITY
This portfolio seeks to achieve maximum, consistent total return with minimum
risk to principal.
- - --------------------------------------------------------------------------------
WHAT IS A GROWTH EQUITY PORTFOLIO?
Each growth equity portfolio invests in the common stock of companies that
offer potentially rising share prices. These portfolios primarily aim to
provide capital appreciation (a rise in share price) rather than steady
income.
- - --------------------------------------------------------------------------------
Prospectus 17
<PAGE>
GROWTH EQUITY PORTFOLIOS (CONTINUED)
/chess piece/ POLICIES AND STRATEGIES
WRL GREAT COMPANIES - TECHNOLOGY(SM)
The portfolio's sub-adviser, Great Companies LLC. (Great Companies), seeks to
achieve the portfolio's objective by investing principally in:
o Common stocks of companies that offer technology- or
communications-related products and services
The portfolio seeks to invest in stocks of large, established, United
States-based companies that rely extensively on technology or communication
advances in their product development or operations, and have benefited from
technological or communications in their operating history. Stocks for this
portfolio are selected by Great Companies from a group of companies that it has
identified, in its opinion, as being a "great company". To be considered a
"great company" candidate by the sub-adviser, a company must: have a market cap
in excess of $15 billion; be highly regarded by management experts; be
headquartered in the U.S.; be publicly traded; have been in business 15 years
or more; be engaged in what the sub-adviser considers to be "terrific
technology businesses"; have superior business franchises; consider employees
to be the company's most valuable asset; have, in the sub-adviser's opinion,
"world class management"; deliver outstanding returns to shareholders; be a
global company (30% of revenues from non-U.S. operations); and, in the
sub-adviser's opinion, be able to convert changes into opportunities. Its
common stock must have outperformed both the S&P 500 and the Dow Jones
Industrial Average over the ten year period ending December 31, 1998.
To determine a company in which the portfolio should invest, Great Companies
also uses Intrinsic Value investing. Intrinsic Value is the discounted value of
the cash that can be taken out of a business during its remaining life. It is
an estimate rather than a precise figure, and changes when interest rates move
or when forecasts of future cash flows are revised.
Great Companies monitors changes in each company's Intrinsic Value over a
twelve to eighteen month period. It then determines a company's Intrinsic Value
Momentum (IVM), which is a measurement of the rate at which a company is
increasing or decreasing its Intrinsic Value. Great Companies looks at the
trading price of the stock and compares it to its Intrinsic Value calculation.
If a stock appears to be significantly overvalued in the market and its IVM is
flat or declining when compared to the Intrinsic Value calculation, Great
Companies does not invest in the stock or, if the portfolio has already
invested in the company, may reduce its position in the stock. When a company's
stock share price drops well below the Intrinsic Value calculation and its IVM
is rising, Great Companies will normally invest in the company or, if the
portfolio has already invested in the company, attempt to buy more shares.
The companies chosen by Great Companies will vary over time and Great Companies
will add and subtract from its list of "great companies" based on its
evaluation process. It is the opinion of Great Companies that, over the
long-term, stocks selected through its evaluation process will continue to
outperform the various benchmarks.
Because stock selections are limited to the companies identified as being a
"great company" by Great Companies, the portfolio is non-diversified.
WRL JANUS GROWTH
The Portfolio's sub-adviser, Janus Capital Corporation (Janus), seeks to
achieve the portfolio's objective by investing principally in:
o Common stocks
The portfolio's strategy is to invest almost all of its assets in common stock
at times when Janus believes the market environment favors such investing.
Janus generally takes a "bottom-up" approach to building the stock portfolio.
In other words, Janus seeks to identify individual companies with earnings
growth potential that may not be recognized by the stock market at large.
Although themes may emerge in the portfolio, securities are generally selected
without regard to any defined industry sector or other similarly defined
selection procedure. Realization of income is not a significant investment
consideration for the portfolio
Prospectus 18
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
and any income realized on the portfolio's investments is incidental to its
objective.
Janus may take a temporary defensive position when the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse market conditions exist. This may be
inconsistent with the portfolio's principal investment strategies. Under these
circumstances, the portfolio may be unable to achieve its investment objective.
WRL GOLDMAN SACHS GROWTH
The portfolio's sub-adviser, Goldman Sachs Asset Management (GSAM), seeks to
achieve the portfolio's objective by investing principally in:
o Equity securities
The portfolio will invest at least 90% of total assets in a diversified
portfolio of equity securities that are considered by GSAM to have long-term
capital appreciation potential. Although the portfolio will invest primarily in
publicly traded U.S. securities, it may invest up to 10% of its total assets in
foreign securities, including securities of issuers in emerging (developing)
countries and securities quoted in foreign currencies.
Equity securities for this portfolio are selected based on their prospects for
above-average growth. GSAM will select securities of growth companies trading,
in GSAM's opinion, at a reasonable price relative to other industries,
competitors and historical price/earnings multiples.
In order to determine whether a security has favorable growth prospects, GSAM
ordinarily looks for one or more of the following characteristics in relation
to the security's prevailing price:
o prospects for above average sales and earnings growth per share
o high return on invested capital
o free cash flow generation
o sound balance sheet, financial and accounting policies, and overall
financial strength
o strong competitive advantages
o effective research, product development, and marketing
o pricing flexibility
o strength of management
o general operating characteristics that will enable the company to compete
successfully in its marketplace
The portfolio generally will invest in companies whose earnings are believed to
be in a relatively strong growth trend, or, to a lesser extent, in companies in
which significant further growth is not anticipated, but whose market value per
share is thought to be undervalued.
GSAM may take a temporary defensive position when the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist. This may be inconsistent
with the portfolio's principal investment strategies. Under these
circumstances, the portfolio may be unable to achieve its investment objective.
WRL GE U.S. EQUITY
The portfolio's sub-adviser, GE Asset Management Incorporated (GEAM), seeks to
meet the portfolio's investment objective by investing primarily in:
o Common stocks of U.S. companies
GEAM uses a Multi-Style/registered trademark/ investment strategy that combines
growth and value investment management styles. As a result, the portfolio has
characteristics similar to the Standard & Poor's 500 Composite Stock Index,
including capital appreciation and income potential. Stock selection is key to
the performance of the portfolio.
Through fundamental company research, the portfolio managers seek to identify
securities of large companies with characteristics such as: attractive
valuations, financial strength and high quality management focused on
generating shareholder value.
The portfolio may, to a lesser extent, invest in equity securities other than
common stocks (including preferred securities, depositary receipts such as
ADRs, EDRs and GDRs, convertible securities, and rights and warrants) foreign
securities, debt securities or other securities, and use various investment
techniques and investment strategies in pursuit of its investment objective.
Prospectus 19
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
WRL GREAT COMPANIES - AMERICA(SM)
The portfolio's sub-adviser, Great Companies LLC. (Great Companies), seeks to
achieve the portfolio's objective by investing principally in:
o LARGE-CAP STOCKS
The portfolio seeks to invest in common stocks of large, established, United
States-based companies. Stocks for this portfolio are selected by Great
Companies from a group of companies that it has identified, in its opinion, as
being a "great company." To be considered a "great company" candidate by the
sub-adviser, a company must: have a market cap in excess of $15 billion; be
highly regarded by management experts; be headquartered in the U.S.; be
publicly traded; be engaged in what the sub-adviser considers to be "terrific
businesses"; have superior business franchises; consider employees to be the
company's most valuable asset; have, in the sub-adviser's opinion, "world class
management"; deliver outstanding returns to shareholders; be a global company
(40% of revenues from non-U.S. operations); and, in the sub-adviser's opinion,
be able to convert changes into opportunities. Each company's common stock must
have consistently outperformed both the S&P 500 and the Dow Jones Industrial
Average over the twenty-year period ending December 31, 1998.
To determine which "great companies" in which the portfolio should invest,
Great Companies also uses Intrinsic Value investing. Intrinsic Value is the
discounted value of the cash that can be taken out of a business during its
remaining life. It is an estimate rather than a precise figure, and changes
when interest rates move or when forecasts of future cash flows are revised.
Great Companies monitors changes in each "great company's" Intrinsic Value over
a twelve to eighteen month period. It then determines a company's Intrinsic
Value Momentum (IVM), which is a measurement of the rate at which a company is
increasing or decreasing its Intrinsic Value. Great Companies looks at the
trading price of the stock and compares it to its Intrinsic Value calculation.
If a stock appears to be significantly overvalued and its IVM is flat or
declining in the market when compared to the Intrinsic Value calculation, Great
Companies does not invest in the stock or, if the portfolio has already
invested in the company, may reduce its position in the stock. When a company's
stock share price drops well below the Intrinsic Value calculation and its IVM
is rising, Great Companies will normally invest in the company, or, if the
portfolio has already invested in the company, attempt to buy more shares.
Because stock selections are limited to the companies identified as being a
"great company" by Great Companies, the portfolio is non-diversified.
WRL SALOMON ALL CAP
The portfolio's sub-adviser, Salomon Brothers Asset Management Inc (SBAM),
seeks to achieve the portfolio's investment objective by investing principally
in:
o Common stocks
o Convertible securities
To a lesser extent, the portfolio may invest in:
o Cash and cash equivalents
This portfolio is non-diversified. The portfolio will primarily invest in
common stocks, or securities convertible into or exchangeable for common
stocks, such as convertible preferred stocks or convertible debentures.
The portfolio's classification as "non-diversified" under the 1940 Act means
that the portfolio has the ability to take larger positions in a smaller number
of issuers. However, to meet federal tax requirements, at the close of each
quarter the portfolio may not have more than 25% of its total assets invested
in any one issuer and, with respect to 50% of its total assets, not more than
5% of its total assets invested in any one issuer.
In seeking capital appreciation, the portfolio may purchase securities of:
seasoned issuers; small companies; newer companies; and new issues. The
portfolio may be subject to wide fluctuations in market value. Portfolio
securities may have limited marketability or may be widely and publicly traded.
SBAM anticipates that the portfolio's investments generally will be in
securities of companies which it considers to reflect some or all of the
following characteristics:
Prospectus 20
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
o Undervalued share prices
o Special situations such as existing or possible changes in management or
management policies, corporate structure or control, capitalization,
regulatory environment, or other circumstances which could be expected to
favor earnings or market price of such company's shares
o Growth potential due to technological advances, new methods in marketing
or production, new or unique products or services, changes in demands for
products or services or other significant new developments
SBAM uses a "bottom-up," fundamental research process to select the portfolio's
securities. They seek to identify individual companies with earnings growth
potential that may not be recognized by the market.
SBAM may take a temporary defensive position when the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist. This may be inconsistent
with the portfolio's principal investment strategies. Under these
circumstances, the portfolio may be unable to pursue its investment objective.
WRL C.A.S.E. GROWTH
The portfolio's sub-adviser, C.A.S.E. Management, Inc. (C.A.S.E.), seeks to
achieve the portfolio's investment objective by investing principally in:
o Common stocks
o Preferred stocks
o Convertible stocks
Using proprietary forms of research, C.A.S.E. selects companies after
evaluating the current economic cycle, and identifying potentially attractive
sectors, industries and company-specific circumstances.
C.A.S.E. invests in common, preferred and convertible stocks of companies that
it believes show below-market risk, supported by below-market multiples, along
with above-average fundamentals. These fundamentals include return on equity,
price-to-earnings ratio and other balance sheet factors that contribute to
long-term capital growth.
The portfolio's assets are invested in companies whose stocks are traded on
national exchanges or over-the-counter markets. C.A.S.E. focuses on companies
that are fundamentally strong compared to other companies in the same industry,
the same sector and the broad market.
C.A.S.E. applies its proprietary forms of research to companies that exhibit
superior products and above-average growth rates along with sound management
and financials.
Each company selected for the portfolio is monitored against more than two
dozen measures of financial strength, including:
o insiders' activity
o market style leadership
o earnings surprise
o analysts' change in earnings projections
o return on equity
o 5-year earnings-per-share growth rate
o price-earnings ratio
o price-to-book ratio
o price-to-cash flow
o institutional activity and holdings
o relative strength price change
o price-to-200-day moving average
o price-to-historical rising inflation
o price-to-declining U.S. dollar
o earnings projected change
o quarterly earnings per-share growth rate
Stocks are sold when C.A.S.E. views them as overvalued, or when C.A.S.E. feels
the stocks have lost their strong fundamentals.
In seeking to achieve the investment objective of the portfolio, C.A.S.E. will
make investment decisions without giving consideration to the turnover rate of
the portfolio. As a result, the turnover rate of the portfolio may be higher
than other comparable portfolios. Consequently, the portfolio may incur higher
transaction related expenses than portfolios that do not engage in frequent
trading.
Prospectus 21
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
WRL DREYFUS MID CAP
The portfolio's sub-adviser, The Dreyfus Corporation (Dreyfus), seeks to
achieve the portfolio's investment objective by investing principally in:
o Common stocks of medium capitalization companies
To a lesser extent, Dreyfus may invest portfolio assets in:
o Common stocks of large and small capitalization companies, including emerging
(developing) and cyclical growth companies
Dreyfus seeks to have a diversified portfolio of the common stocks of
mid-capitalization companies which offer above-average potential for
appreciation based on its multi-factor evaluation approach. The multi-factor
evaluation approach centers around the ability to identify and dynamically
weigh the fundamental characteristics driving current market returns, and to
construct portfolios by actively selecting stocks possessing positive exposure
to these preferred characteristics.
Generally, the factors which drive the investment process can be classified
into three categories:
o Earnings momentum indicators
o Company financial attributes
o Relative value measures
WRL NWQ VALUE EQUITY
The portfolio's sub-adviser, NWQ Investment Management Company, Inc. (NWQ),
seeks to achieve its objective by investing principally in:
o Common stocks
To a lesser extent, NWQ may invest portfolio assets in:
o Money market and short-term instruments (Treasury Bills)
o ADRs and exchange listed foreign stocks
NWQ employs a value-oriented approach to investing, combining top-down and
bottom-up disciplines.
NWQ will use statistical measures to look for above-average stock valuations,
screening for below-average price-to-earnings and price-to-book ratios,
above-average dividend yields and strong financial stability.
NWQ also identifies those market sectors believed to benefit from long-term
positive fundamentals, and focuses on the companies within these sectors which
represent above-average statistical value and are undervalued when purchased.
The portfolio consists primarily of mid-capitalization to large capitalization
companies. NWQ considers the following when making a security selection:
o below-average price-to-earnings ratios
o below-average price-to-book
o strong financial stability
o industries/sectors with strong long-term fundamentals
o leading/strong market positions
o uses earnings averaged over both strong and weak periods in evaluating
cyclical companies
/warning sign/ RISKS
The principal risks of investing in Growth Equity Portfolios that may adversely
affect your investment are described below. (Not all of these risks apply to
each Growth Equity Portfolio. See the chart below for the principal risks of
your portfolio.) Please note that there are many other circumstances which
could adversely affect your investment and prevent a portfolio from achieving
its objective, which are not described here. Please refer to the section
entitled "Explanation of Strategies and Risks," beginning on page 45, and the
Fund's SAI for more information about the risks associated with investing in
the Growth Equity Portfolios.
Prospectus 22
<PAGE>
GROWTH EQUITY PORTFOLIOS (CONTINUED)
PRINCIPAL RISKS
GROWTH EQUITY PORTFOLIOS
<TABLE>
<CAPTION>
PORTFOLIO
---------
WRL WRL WRL WRL
GREAT WRL GOLDMAN WRL GREAT WRL WRL WRL NWQ
COMPANIES JANUS SACHS GE U.S. COMPANIES SALOMON C.A.S.E. DREYFUS VALUE
RISKS TECHNOLOGY(SM) GROWTH GROWTH EQUITY AMERICA(SM) ALL CAP GROWTH MID CAP EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NON-DIVERSIFICATION X X X
STOCKS X X X X X X X X X
MEDIUM SIZED COMPANIES X X
FOREIGN SECURITIES X X X X X
EMERGING MARKETS RISK X X
CONVERTIBLES X X X X X
PROPRIETARY RESEARCH X X X
STYLE RISK X X X X X X X X X
FUTURES AND OPTIONS X X X
DEPOSITARY RECEIPTS X X X
WARRANTS & RIGHTS X X
</TABLE>
o NON-DIVERSIFICATION
To the extent a portfolio invests a greater proportion of its assets in the
securities of a smaller number of issuers, it may be more susceptible to any
single economic, political or regulatory occurrence than a more widely
diversified portfolio and may be subject to greater risk of loss with respect
to its portfolio securities.
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
industries, or the securities market as a whole.
Because the stocks the portfolio holds fluctuate in price, the value of your
investment in the portfolio go up and down.
o MEDIUM-SIZED COMPANIES
These companies present additional risks because their earnings may be less
predictable, their share price more volatile, and their securities less liquid
than larger more established companies.
o FOREIGN SECURITIES
Investments in foreign securities involve risks relating to political, social
and economic developments abroad as well as risks resulting from differences in
regulations to which U.S. and foreign issuers and markets are subject. These
risks include:
o Changes in currency values
o Currency speculation
o Currency trading costs
o Different accounting and reporting practices
o Less information available to the public
o Less (or different) regulation of securities markets
o More complex business negotiations
o Less liquidity
o More fluctuations in market prices
o Delays in settling foreign securities transactions
o Higher costs for holding foreign securities (custodial fees)
o Higher transaction costs
o Vulnerability to seizure and taxes
o Political instability and small markets
o Different market trading days
Prospectus 23
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
o EMERGING MARKETS RISK
Investing in the securities of issuers located in or principally doing business
in emerging markets bear foreign risks as discussed above. In addition, the
risks associated with investing in emerging markets are often greater than
investing in developed foreign markets. Specifically, the economic structures
in emerging markets countries are less diverse and mature than those in
developed countries, and their political systems are less stable. Investments
in emerging markets countries may be affected by national policies that
restrict foreign investments. Emerging market countries may have less developed
legal structures, and the small size of their securities markets and low
trading volumes can make investments illiquid and more volatile than
investments in developed countries. As a result, a portfolio investing in
emerging market countries may be required to establish special custody or other
arrangements before investing.
o CONVERTIBLES
As with all debt securities, the market value of convertibles tends to decline
as interest rates increase and, conversely, increase as interest rates decline.
However, when the market price of the common stock underlying a convertible
security exceeds the conversion price of the convertible security, the
convertible security tends to reflect the market price of the underlying common
stock.
o PROPRIETARY RESEARCH
Proprietary forms of research may not be effective and may cause overall
returns to be lower than if other forms of research are used.
o STYLE RISK
Securities with different characteristics tend to shift in and out of favor
depending upon market and economic conditions as well as investor sentiment. A
portfolio may underperform other portfolios that employ a different style. A
portfolio also may employ a combination of styles that impact its risk
characteristics. Examples of different styles include growth and value
investing, as well as those focusing on large, medium, or small company
securities.
o GROWTH INVESTING RISK
Growth stocks may be more volatile than other stocks because they are
more sensitive to investor perceptions of the issuing company's growth
potential. Growth oriented funds will typically underperform when value
investing is in favor.
o FUTURES AND OPTIONS
Futures and options involve additional investment risks and transactional
costs, and draw upon skills and experience which are different than those
needed to pick other securities. Special risks include:
o Inaccurate market predictions
o Imperfect correlation
o Illiquidity
o Tax considerations
The portfolios are not required to hedge their investments.
o WARRANTS AND RIGHTS
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.
o DEPOSITARY RECEIPTS
Depositary receipts represent interests in an account at a bank or trust
company which holds equity securities. They are subject to some of the same
risks as direct investments in foreign securities, including currency risk. The
regulatory requirements with respect to depositary receipts that are issued in
sponsored and unsponsored programs are generally similar, but the issuers of
unsponsored depositary receipts 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 depositary receipts.
YOU MAY LOSE MONEY IF YOU INVEST IN ANY OF THE GROWTH EQUITY PORTFOLIOS.
Prospectus 24
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
/chess piece/ INVESTOR PROFILES
WRL GREAT COMPANIES -- TECHNOLOGY(SM)
For the investor who seeks long-term growth of capital and who can tolerate
fluctuations inherent in stock investing.
WRL JANUS GROWTH
For the investor who wants capital growth in a broadly diversified stock
portfolio, and who can tolerate significant fluctuations in value.
WRL GOLDMAN SACHS GROWTH
For the investor who seeks long-term growth of capital and who can tolerate
fluctuations inherent in stock investing.
WRL GE U.S. EQUITY
For the investor who seeks long-term growth from a diversified portfolio that
combines "value" and "growth" investment management styles. As a result, the
portfolio will have characteristics similar to the S&P 500. The investor should
be comfortable with the price fluctuations of a stock portfolio and be willing
to accept higher short-term risk for potential long-term returns.
WRL GREAT COMPANIES -- AMERICA(SM)
For the investor who seeks long-term growth of capital and who can tolerate
fluctuations inherent in stock investing.
WRL SALOMON ALL CAP
For the investor who wants long-term growth of capital and who can tolerate the
risks of a non-diversified portfolio and fluctuations in their investment.
WRL C.A.S.E. GROWTH
For the investor who seeks growth 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.
WRL DREYFUS MID CAP
For the investor who seeks total returns exceeding the S&P 400 Mid Cap Index
and who can tolerate fluctuations inherent to mid-cap stock investing.
WRL NWQ VALUE EQUITY
For the investor who seeks both capital preservation and long-term capital
appreciation and who can tolerate fluctuations inherent in stock investing.
Prospectus 25
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
/graph/ PORTFOLIO PERFORMANCE
The bar charts and tables below give an indication of the portfolios' risks and
performance. The charts show changes in a portfolio's performance from year to
year. The performance calculations do not reflect charges or deductions under
the policies or the annuity contracts. These fees and expenses would lower
investment performance. The tables show how a portfolio's average annual
returns for the periods indicated compare to those of a broad measure of market
performance.
Because the WRL Salomon All Cap, WRL Goldman Sachs Growth and WRL Dreyfus Mid
Cap portfolios commenced operations in 1999 and WRL Great Companies --
America(SM) and WRL Great Companies -- Technology(SM) commenced operations in
2000, their performance history is not included.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL JANUS GROWTH
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(0.22)% 59.79% 2.35% 3.97% (8.31)% 47.12% 17.96% 17.54% 64.47% 59.67%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1990-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 33.08 % 12/31/99
Lowest (16.60)% 9/30/90
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
WRL Janus Growth 59.67% 39.89% 23.62%
S&P 500 Index 21.04% 28.56% 18.21%
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL GE U.S. EQUITY
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1997 1998 1999
---- ---- ----
27.01% 22.87% 18.41%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1997-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 19.59 % 12/31/98
Lowest (10.14)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR (JANUARY 2, 1997)
WRL GE U.S. Equity 18.41% 22.76%
S&P 500 Index 21.04% 27.56%
- - --------------------------------------------------------------------------------
Prospectus 26
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL C.A.S.E. GROWTH
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1996 1997 1998
---- ---- ----
17.50% 15.03% 2.47%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1996-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 26.60 % 12/31/98
Lowest (22.50)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR (MAY 1, 1995)
WRL C.A.S.E. Growth 33.84% 18.80%
Wilshire 5000 Index 22.05% 24.06%
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL NWQ VALUE EQUITY
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1997 1998 1999
---- ---- ----
25.04% (4.78)% 7.95%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1997-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 16.23% 6/30/99
Lowest (17.95)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR (MAY 1, 1996)
WRL NWQ Value
Equity 7.95% 10.76%
S&P 500 Index 21.04% 26.74%
- - --------------------------------------------------------------------------------
Prospectus 27
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS
- - --------------------------------------------------------------------------------
WRL T. ROWE PRICE DIVIDEND GROWTH
WRL DEAN ASSET ALLOCATION
WRL LKCM STRATEGIC TOTAL RETURN
WRL J.P. MORGAN REAL ESTATE SECURITIES
WRL FEDERATED GROWTH & INCOME
WRL AEGON BALANCED
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES EACH BALANCED PORTFOLIO OF THE FUND
AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIOS. FOR FURTHER INFORMATION
ON THESE PORTFOLIOS, PLEASE READ THE SECTION ENTITLED "EXPLANATION OF
STRATEGIES AND RISKS," BEGINNING ON PAGE 45, AND THE FUND'S SAI.
/target/ OBJECTIVES
WRL T. ROWE PRICE DIVIDEND GROWTH
This portfolio seeks to provide an increasing level of dividend income,
long-term capital appreciation, and reasonable current income through
investments primarily in dividend paying stocks.
WRL DEAN ASSET ALLOCATION
The objective of this portfolio is to seek preservation of capital and
competitive investment returns.
WRL LKCM STRATEGIC TOTAL RETURN
The objective of this portfolio is to provide current income, long-term growth
of income and capital appreciation.
WRL J.P. MORGAN REAL ESTATE SECURITIES
This portfolio 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.
WRL FEDERATED GROWTH & INCOME
This portfolio seeks total return by investing in securities that have
defensive characteristics. (These are securities that appear to have a low
probability of significant price decline relative to the overall equity market.
They also will, in the sub-adviser's view, generally have a comparatively low
volatility in share price relative to the overall equity market.)
WRL AEGON BALANCED
This portfolio seeks preservation of capital, reduced volatility, and superior
long-term risk-adjusted returns.
- - --------------------------------------------------------------------------------
WHAT IS A BALANCED PORTFOLIO?
A balanced portfolio generally tries to balance three different objectives:
moderate long-term growth of capital, moderate income, and moderate
stability in an investor's principal. To reach these goals, balanced
portfolios invest in a mixture of stocks, bonds and money market
instruments.
- - --------------------------------------------------------------------------------
Prospectus 28
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
/chess piece/ POLICIES AND STRATEGIES
WRL T. ROWE PRICE DIVIDEND GROWTH
The portfolio's sub-adviser, T. Rowe Price Associates, Inc. (T. Rowe Price),
seeks to achieve the portfolio's objective by investing principally in:
o Dividend-paying common stocks with favorable prospects for increasing
dividends and long-term appreciation
To a lesser extent, T. Rowe Price may invest in:
o Foreign securities
o Futures
T. Rowe Price typically invests at least 65% of total assets in common stocks
of dividend-paying companies that it expects to increase their dividends over
time and also provide long-term appreciation.
T. Rowe Price believes that a track record of dividend increases is an
excellent indicator of financial health and growth prospects, and over the
long-term, income that can contribute significantly to total return. Dividends
can also help reduce the portfolio's volatility during periods of market
turbulence and help offset losses when stock prices are falling.
T. Rowe Price looks for stocks with sustainable, above-average growth in
earnings and dividends, and attempts to buy them when they are temporarily out
of favor or undervalued by the market. Holdings tend to be in large to
medium-sized companies. In selecting investments, T. Rowe Price favors
companies with one or more of the following:
o Either a track record of, or the potential for, above-average earnings and
dividend growth
o A competitive current dividend yield
o A sound balance sheet and solid cash flow to support future dividend
increases
o A sustainable competitive advantage and leading market position
o Attractive valuations such as a relatively high dividend yield
While the portfolio invests primarily in common stocks, T. Rowe Price may also
purchase other securities including foreign securities, convertible securities,
warrants, preferred stocks, and corporate and government debt when considered
consistent with the portfolio's objective. Futures and options may be used for
any number of reasons, including: managing the portfolio's exposure to
securities prices and foreign currencies; to enhance income; to manage cash
flows efficiently; or to protect the value of portfolio securities. If the
portfolio uses futures and options it is exposed to additional volatility and
potential losses.
The portfolio may sell securities for a variety of reasons such as to secure
gains, limit losses, or redeploy assets into more promising opportunities.
The portfolio may take a temporary defensive position when the securities
trading markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist (which is
inconsistent with the portfolio's principal investment strategies). Under these
circumstances, the portfolio may be unable to achieve its investment objective.
WRL DEAN ASSET ALLOCATION
The portfolio's sub-adviser, Dean Investment Associates (Dean), seeks to
achieve the portfolio's investment objective by investing principally in:
o Income-producing common and preferred stocks
o Debt obligations of U.S. issuers, some of which will be convertible into
common stocks
o U.S. Treasury bonds, notes and bills
o Money market funds
In selecting stocks, Dean focuses on high-quality, liquid, large capitalization
stocks, using a bottom-up screening process to identify stocks that are
statistically undervalued. Dean's ultimate goal is to choose stocks whose price
has been driven down by a market that has over-reacted to perceived risks. With
this approach, the portfolio seeks to achieve a dividend income yield higher
than that of the Russell 1000 Index, a widely recognized unmanaged index of
market performance which measures the performance of the 1,000 largest
companies in the Russell 3000 Index, which represents approximately 89% of the
total market capitalization of the Russell 3000 Index. As of the latest
reconstitution,
Prospectus 29
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
the average market capitalization was approximately $9.9 billion; the median
market capitalization was approximately $3.7 billion. The smallest company in
the index had an approximate market capitalization of $1,404.7 million.
Dean employs an investment technique called "asset allocation," which shifts
assets from one class of investment to another (such as from equity to debt)
when it anticipates changes in market direction.
Dean will seek to enhance returns in rising stock markets by increasing its
allocation to equity, then protect itself in falling stock markets by reducing
equity exposure and shifting into fixed-income investments, as well as into
money market funds (up to 10% of total assets).
Dean has developed forecasting models to predict movements in the stock market
for both short (12 to 18-month) and long (3 to 5-year) time periods. These
models help compare the risks and rewards Dean anticipates in holding stocks
versus debt instruments and money market funds. Such techniques may result in
increased portfolio expenses such as brokerage fees.
Thus, the models determine when Dean is to "tactically" adjust the portfolio's
asset allocation among stocks, bonds, U.S. debt obligations and money market
funds.
WRL LKCM STRATEGIC TOTAL RETURN
The portfolio's sub-adviser, Luther King Capital Management Corporation (LKCM),
seeks to achieve the portfolio's investment objective by investing primarily
in:
o Common stocks
o Corporate bonds
o Convertible preferred stocks
o Corporate convertible bonds
o U.S. Treasury Notes
The portfolio seeks to invest in a blend of equity and fixed-income securities
to achieve a balance of capital appreciation and investment income while
limiting volatility. The portfolio will also invest in convertible securities,
which have both equity and fixed-income characteristics. In choosing such
securities, LKCM looks for companies with strong fundamental characteristics.
It considers factors such as:
o balance sheet quality
o cash flow generation
o earnings and dividend growth record and outlook
o profitability levels
In some cases, LKCM bases its selections on other factors. For example, some
securities may be bought at an apparent discount to their appropriate value,
with the anticipation that they'll increase in value over time.
The portfolio seeks to achieve an income yield greater than the average yield
of the stocks in the S&P 500.
The portfolio invests mainly in the stocks and bonds of companies with
established operating histories and strong fundamental characteristics. The
majority of the stocks the portfolio buys will be listed on a national exchange
or traded on NASDAQ or domestic over-the-counter markets.
LKCM closely analyzes a company's financial status and a security's valuation
in an effort to control risk at the individual level. In addition, the growth
elements of the portfolio's equity investments drive capital appreciation.
As part of its income-oriented strategy, LKCM expects to invest about 25% of
the portfolio's assets in fixed-income securities, some of which will be
convertible into common stocks, and no more than 20% of its assets in stocks
that don't pay a dividend.
WRL J.P. MORGAN REAL ESTATE SECURITIES
This portfolio's sub-adviser, J.P. Morgan Investment Management Inc. (J.P.
Morgan), seeks to achieve the portfolio's objective by investing principally in
equity securities of real estate companies which include:
o Common stocks
o Convertible securities
Under normal conditions, J.P. Morgan invests at least 65% of portfolio assets
in real estate company securities. A company is considered to be a real estate
Prospectus 30
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
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.
Companies chosen are generally 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, J.P. Morgan ranks these companies within four broad sectors of
the real estate industry from undervalued to overvalued. From this target
universe, J.P. Morgan selects stocks for the portfolio based on a variety of
criteria including managerial strength, geographic diversification, prospects
for growth and the company's competitive position.
The portfolio may also invest in debt securities of real estate and non-real
estate companies, mortgage-backed securities such as pass through certificates,
real estate mortgage investment conduit (REMIC) certificates, and
collateralized mortgage obligations (CMOs), or short-term debt obligations.
However, the portfolio does not directly invest in real estate.
The portfolio is non-diversified under federal securities laws.
The portfolio's classification as "non-diversified" under the 1940 Act means
that the portfolio has the ability to take larger positions in a smaller number
of issuers. However, to meet federal tax requirements, at the close of each
quarter the portfolio may not have more than 25% of its total assets invested
in any one issuer and, with respect to 50% of its total assets, not more than
5% of its total assets invested in any one issuer.
WRL FEDERATED GROWTH & INCOME
The portfolio's sub-adviser, Federated Investment Counseling (Federated), seeks
to achieve the portfolio's objective by investing principally in:
o Common stocks
o Convertible securities
o REITs
o Fixed income securities
o Foreign securities
Federated seeks total return by investing primarily in common stocks that
provide the opportunity for capital appreciation or high dividend income.
Federated seeks capital appreciation by investing primarily in undervalued,
overlooked common stocks. These securities are generally trading at low
historical valuations relative to the market and to industry peers. To achieve
high current income, Federated seeks to invest in securities that offer higher
dividends than the overall market. Convertible stocks and bonds, real estate
investment trusts and securities issued by utility companies are generally the
types of securities that Federated may emphasize in order to enhance the
portfolio's dividend income. Federated may also invest a portion of the
portfolio's assets in securities of companies based outside the U.S. to
diversify the portfolio's holdings and to gain exposure to the foreign market.
Federated attempts to invest in securities that have defensive characteristics,
i.e., securities that appear to have a low volatility in share price relative
to the overall equity market. Federated also may emphasize investments in
equity securities that provide high dividend income, which generally are less
volatile stocks. Federated also may allocate a portion of the portfolio's
assets in cash or government securities when the markets appear to be
overpriced.
To identify companies for portfolio investment, Federated uses a model which
looks at a company's financial and earnings strength, management skill and
business prospects, and at the prospect of comparatively low volatility in
share price. In addition, Federated performs traditional fundamental and credit
analyses to select the most promising companies for the portfolio. Federated
may emphasize investments in certain industry sectors that offer securities
that have these attributes. To determine the timing of purchases and sales of
portfolio securities, Federated looks at recent stock price performance.
WRL AEGON BALANCED
This portfolio's sub-adviser, AEGON USA Investment Management, Inc. (AIMI),
seeks to achieve the portfolio's objective by investing principally in:
o Common stocks (primarily of domestic large cap companies)
o U.S. Treasuries
Prospectus 31
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
o Convertible securities
AIMI uses a top-down investment strategy to find stocks of medium to large
capitalization companies that fit a value criteria. The process for selecting
companies is based on fundamental analysis.
More specifically, AIMI looks at the industry structure, organizational
structure, financial structure, and business prospects of each portfolio
company. It then applies the analysis of these factors to financial forecasts
which, in turn, drives the valuation of a company's stock. AIMI uses a two
stage dividend discount model to value a company. Once AIMI initiates a
position it monitors and continually reassesses its prior analysis. When AIMI
believes the price fully reflects its independent valuation or there is a
significant change in the fundamentals of the company, the portfolio sells the
security.
/warning sign/ RISKS
The principal risks of investing in Balanced Portfolios that may adversely
affect your investment are described below. (Not all of these risks apply to
each Balanced Portfolio. See the chart below for the principal risks of your
portfolio.) Please note that there are many other circumstances that could
adversely affect your investment and prevent a portfolio from achieving its
objective, which are not described here. Please refer to the section entitled
"Explanation of Strategies and Risks," beginning on page 45 and the Fund's SAI
for more information about the risks associated with investing in Balanced
Portfolios.
PRINCIPAL RISKS
BALANCED PORTFOLIOS
<TABLE>
<CAPTION>
PORTFOLIO
---------
WRL
T. ROWE
PRICE WRL WRL WRL WRL
DIVIDEND DEAN ASSET LKCM STRATEGIC J.P. MORGAN FEDERATED WRL
RISKS GROWTH ALLOCATION TOTAL RETURN REAL ESTATE SECURITIES GROWTH & INCOME AEGON BALANCED
- - -----
<S> <C> <C> <C> <C> <C> <C>
STOCKS X X X X X X
FIXED-INCOME SECURITIES X X X
CONVERTIBLES X X X X
REAL ESTATE SECURITIES X X
STYLE RISK X
QUANTITATIVE MODELS X
FUTURES AND OPTIONS X
NON-DIVERSIFIED X
FOREIGN SECURITIES X X
DIVIDEND-PAYING COMPANIES X
</TABLE>
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the short term. These
price movements may result from factors affecting individual companies,
industries or the securities market as a whole.
Because the stocks a portfolio holds fluctuate in price, the value of your
investment in a portfolio will go up and down.
o FIXED-INCOME SECURITIES
The value of these securities may change daily based on changes in the interest
rate, and other market conditions and factors. The risks include:
o Changes in interest rates
o Length of time to maturity
o Issuers defaulting on their obligations to pay interest or return
principal
Prospectus 32
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
o FOREIGN SECURITIES
Investments in foreign securities involve risks relating to political, social
and economic developments abroad as well as risks resulting from differences in
regulations to which U.S. and foreign issuers and markets are subject. These
risks include:
o Changes in currency values
o Currency speculation
o Currency trading costs
o Different accounting and reporting practices
o Less information available to the public
o Less (or different) regulation of securities markets
o More complex business negotiations
o Less liquidity
o More fluctuations in market prices
o Delays in settling foreign securities transactions
o Higher costs for holding foreign securities (custodial fees)
o Higher transaction costs
o Vulnerability to seizure and taxes
o Political instability and small markets
o Different market trading days
o HIGH-YIELD/HIGH-RISK FIXED-INCOME SECURITIES
o Credit risk
o Greater sensitivity to interest rate movements
o More speculative than higher rated securities
o Greater vulnerability to economic changes
o Decline in market value in event of default
o Less liquidity
o CONVERTIBLES
As with all debt securities, the market value of convertibles tends to decline
as interest rates increase and, conversely, to increase as interest rates
decline.
o REAL ESTATE SECURITIES
Investments in the real estate industry are subject to risks associated with
direct investment in real estate. These risks may include:
o Declining real estate value
o Risks relating to general and local economic conditions
o Over-building
o Increased competition for assets in local and regional markets
o Increases in property taxes
o Increases in operating expenses or interest rates
o Change in neighborhood value or the appeal of properties to tenants
o Insufficient levels of occupancy
o 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 government regulations (including taxes) and social and
economic trends.
o FUTURES AND OPTIONS
Futures and options involve additional investment risks and transactional
costs, and draw upon skills and experience which are different than those
needed to pick other securities. Special risks include:
o Inaccurate market predictions
o Imperfect correlation
o Illiquidity
o Tax considerations
The portfolios are not required to hedge their investments.
o QUANTITATIVE MODELS
Securities selected using statistical models may result in incorrect asset
allocations causing overall returns to be lower than if other methods of
selection were used.
o NON-DIVERSIFIED
To the extent a portfolio invests a greater proportion of its assets in the
securities of a smaller number of issuers, it may be more susceptible to any
single economic, political or regulatory occurrence than a more widely
diversified portfolio and may be subject to greater risks of loss with respect
to its portfolio securities.
Prospectus 33
<PAGE>
BALANCED PORTFOLIOS (CONTINUED)
o STYLE RISK -- DIVIDEND-PAYING COMPANIES
(WRL T. ROWE PRICE DIVIDEND GROWTH)
Securities with different characteristics tend to shift in and out of favor
depending upon market and economic conditions as well as investor sentiment. A
portfolio may underperform other portfolios that employ a different style. A
portfolio also may employ a combination of styles that impact its risk
characteristics. Examples of different styles include growth and value
investing, as well as those focusing on large, medium, or small company
securities.
T. Rowe Price's emphasis on dividend-paying companies could result in
significant investments in large-capitalization stocks. At times, stocks such
as these may lag shares of smaller, faster-growing companies. Also, a company
may reduce or eliminate its dividend. The portfolio's efforts to buy stocks
that appear temporarily out of favor also carries the risk that a stock or
group of stocks may remain out of favor for a long time and may continue to
decline.
YOU MAY LOSE MONEY IF YOU INVEST IN ANY OF THE BALANCED PORTFOLIOS.
/chess piece/ INVESTOR PROFILES
WRL T. ROWE PRICE DIVIDEND GROWTH
For the investor who wants a reasonable level of current income from equity
investments that have the potential to rise faster than inflation, and who can
tolerate significant fluctuations in the value of their investments.
WRL DEAN ASSET ALLOCATION
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.
WRL LKCM STRATEGIC TOTAL RETURN
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 portfolio that invests in both equity and
fixed-income securities.
WRL J.P. MORGAN REAL ESTATE SECURITIES
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 non-diversified portfolio invested primarily in securities of
real estate companies and their exposure to real estate markets.
WRL FEDERATED GROWTH & INCOME
For the investor who seeks high current income and moderate capital
appreciation and is willing to accept certain special risks associated with
sector investing. (A sector is a broad grouping of specific industries.)
WRL AEGON BALANCED
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.
This portfolio is not designed for investors who desire a consistent level of
income.
Prospectus 34
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
/graph/ PORTFOLIO PERFORMANCE
The bar charts and tables below give an indication of the portfolios' risks and
performance. The charts show changes in a portfolio's performance from year to
year. The performance calculations do not reflect charges or deductions under
the policies or the annuity contracts. These fees and expenses would lower
investment performance. The tables show how a portfolio's average annual
returns for the periods indicated compare to those of a broad measure of market
performance.
Because the WRL T. Rowe Price Dividend Growth portfolio commenced operations in
1999, its performance history is not included.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL DEAN ASSET ALLOCATION
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
20.09% 14.42% 16.59% 8.33% (5.64)%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1995-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 9.03 % 6/30/97
Lowest (7.87)% 9/30/99
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR (JANUARY 3, 1995)
WRL Dean Asset
Allocation (5.64)% 10.38%
S&P 500 Index 21.04 % 28.54%
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL LKCM STRATEGIC TOTAL RETURN
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
(0.53)% 24.66% 15.00% 21.85% 9.64% 12.07%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1994-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 13.06 % 6/30/97
Lowest (8.05)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (MARCH 1, 1993)
WRL LKCM Strategic
Total Return 12.07% 16.50% 13.82%
S&P 500 Index 21.04% 28.56% 21.70%
- - --------------------------------------------------------------------------------
Prospectus 35
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL J.P. MORGAN REAL ESTATE SECURITIES
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1999
----
(3.77)%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 9.17 % 6/30/99
Lowest (8.49)% 9/30/99
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR (MAY 1, 1998)
WRL J.P. Morgan
Real Estate
Securities (3.77)% (11.31)%
Morgan Stanley
REIT Index (4.55)% (10.67)%
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL FEDERATED GROWTH & INCOME
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
25.25% 11.64% 24.65% 3.05% (4.05)%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1995-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 12.15 % 6/30/99
Lowest (7.99)% 3/31/99
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEAR (MARCH 1, 1994)
WRL Federated
Growth &
Income (4.45)% 11.41% 8.82%
Russell Mid Cap
Value Index (0.11)% 18.01% 14.61%
- - --------------------------------------------------------------------------------
Prospectus 36
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL AEGON BALANCED
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
19.80% 10.72% 17.10% 6.93% 3.03%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1995-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 9.84 % 12/31/98
Lowest (7.86)% 9/30/99
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (MARCH 1, 1994)
WRL AEGON
Balanced 3.03% 11.34% 8.53%
S&P 500 Index 21.04% 28.56% 24.14%
- - --------------------------------------------------------------------------------
Prospectus 37
<PAGE>
- - --------------------------------------------------------------------------------
FIXED-INCOME PORTFOLIO(S)
- - --------------------------------------------------------------------------------
WRL AEGON BOND
THIS RISK/REWARD SUMMARY BRIEFLY DESCRIBES EACH FIXED-INCOME PORTFOLIO OF THE
FUND AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIO(S). FOR FURTHER
INFORMATION ON THE PORTFOLIO(S), PLEASE READ THE SECTION ENTITLED "EXPLANATION
OF STRATEGIES AND RISKS," BEGINNING ON PAGE 45, AND THE FUND'S SAI.
/target/ OBJECTIVES
WRL AEGON BOND
This Portfolio seeks the highest possible current income within the confines of
the primary goal of ensuring the protection of capital.
- - --------------------------------------------------------------------------------
WHAT IS A FIXED-INCOME PORTFOLIO?
Fixed-income portfolios primarily invest in debt securities that pay
interest. When the debt security is purchased, the portfolio owns "debt"
and becomes an indirect creditor to the company or government that issued
the bond.
- - --------------------------------------------------------------------------------
/chess piece/ POLICIES AND STRATEGIES
WRL AEGON BOND
The portfolio's sub-adviser, AEGON USA Investment Management, Inc. (AIMI) seeks
to achieve the portfolio's objective by investing principally in:
o U.S. government securities obligations, including Treasury and Agency
Securities
o Medium to high-quality corporate bonds
To a lesser extent AIMI may invest in:
o Mortgage-backed securities, including pass-through and Collateralized
Mortgage Obligations (CMOs)
o Asset-backed securities
o U.S. dollar-denominated foreign bonds
o Short-term securities, including agency discount notes and commercial paper
AIMI takes an approach in the daily management of the portfolio that it
considers to be conservative, striving to participate in the bond market's
advances while preserving capital on the downside.
AIMI uses its Core Fixed-Income Strategy through which it draws from all of its
organizational resources. AIMI utilizes a disciplined process to gather
information on key factors for evaluation of the market environment.
The Fixed-Income Strategy Committee then sets policy directives that reflect
AIMI's interest rate outlook and expectations for the relative performance of
the major bond market sectors.
AIMI then selects securities that are considered by it to be most appropriate
based on AIMI's findings.
/warning sign/ RISKS
The principal risks of investing in the Fixed-Income Portfolio that may
adversely affect your investment are described below. Please note that there
are many other circumstances that could adversely affect your investment and
prevent a portfolio from achieving its objective, which are not described here.
Please refer to the section entitled "Explanation of Strategies and Risks"
beginning on page 45 and the Fund's SAI for more information about the risks
associated with investing in the Fixed-Income Portfolio.
o FIXED-INCOME SECURITIES
The value of these securities may change daily based on changes in interest
rates, and other market conditions and factors. The risks include:
o Changes in interest rates
o Length of time to maturity
o Issuers defaulting on their obligations to pay interest or return
principal (Credit Risk)
Prospectus 38
<PAGE>
- - --------------------------------------------------------------------------------
FIXED-INCOME PORTFOLIO(S) (CONTINUED)
- - --------------------------------------------------------------------------------
o HIGH-YIELD/HIGH-RISK FIXED-INCOME SECURITIES
o Credit risk
o Greater sensitivity to interest rate movements than higher rated
securities
o More speculative than higher rated securities
o Greater vulnerability to economic changes
o Decline in market value in event of default
o Less liquidity
o CREDIT RISK
The price of a bond is affected by the issuer's or counterparty's credit
quality. Changes in financial condition and general economic conditions can
affect the ability to honor financial obligations and therefore credit quality.
Lower quality bonds are generally more sensitive to these changes than higher
quality bonds. Even within securities considered investment grade, differences
exist in credit quality and some investment grade debt securities may have
speculative characteristics. A security's price may be adversely affected by
the market's opinion of the security's credit quality level even if the issuer
or counterparty has suffered no degradation in ability to honor the obligation.
o INTEREST RATE RISK
Bond prices rise when interest rates decline and decline when interest rates
rise. The longer the duration of a bond, the more a change in interest rates
affects the bond's price. Short-term and long-term interest rates may not move
the same amount and may not move in the same direction, which may affect the
sub-adviser's ability to predict interest rate movements and select portfolio
investments.
o MORTGAGE- AND OTHER ASSET-BACKED SECURITIES
o Repayment sooner than stated maturity dates resulting in greater price and
yield volatility than with traditional fixed-income securities
o Prepayments resulting in lower return
o Values may change based on creditworthiness of issuers
o Interest rate risks
o PROPRIETARY RESEARCH
AIMI's proprietary forms of research may not be effective and may cause overall
returns to be lower than if other forms of research are used.
YOU MAY LOSE MONEY IF YOU INVEST IN THIS PORTFOLIO.
/chess piece/ INVESTOR PROFILE
WRL AEGON BOND
For the investor seeking current income with preservation of capital, and who
can tolerate the fluctuation in principal associated with changes in interest
rates.
Prospectus 39
<PAGE>
- - --------------------------------------------------------------------------------
FIXED-INCOME PORTFOLIO(S) (CONTINUED)
- - --------------------------------------------------------------------------------
/graph/ PORTFOLIO PERFORMANCE
The bar chart and table below gives an indication of the portfolio's risks and
performance. The chart shows changes in the portfolio's performance from year
to year. The performance calculations do not reflect charges or deductions
under the policies or the annuity contracts. These fees and expenses would
lower investment performance. The table shows how the portfolio's average
annual returns for the periods indicated compare to those of a broad measure of
market performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL AEGON BOND
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
6.21% 18.85% 6.79% 13.38% (6.94)% 22.99% 0.14% 9.16% 9.32% (2.94)%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1990-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 8.20 % 6/30/95
Lowest (4.90)% 3/31/94
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
WRL AEGON Bond (2.94)% 7.36% 7.33%
Lehman Brothers
Government/Corporate
Bond
(LBGC) Index (2.15)% 7.60% 7.65%
- - --------------------------------------------------------------------------------
Prospectus 40
<PAGE>
- - --------------------------------------------------------------------------------
CAPITAL PRESERVATION PORTFOLIO(S)
- - --------------------------------------------------------------------------------
WRL J.P. MORGAN MONEY MARKET
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES THE CAPITAL PRESERVATION
PORTFOLIO(S) AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIO. FOR FURTHER
INFORMATION ON THE PORTFOLIO(S), PLEASE READ THE SECTION ENTITLED "EXPLANATION
OF STRATEGIES AND RISKS," BEGINNING ON PAGE 45, AND THE FUND'S SAI.
/target/ OBJECTIVES
WRL J.P. MORGAN MONEY MARKET
This portfolio seeks to obtain maximum current income consistent with
preservation of principal and maintenance of liquidity.
- - --------------------------------------------------------------------------------
WHAT IS A MONEY MARKET PORTFOLIO?
A money market portfolio tries to maintain a share price of $1.00 while
paying income to its shareholders. A stable share price protects your
investment from loss ("preservation of principal"). If you need to sell
your shares at any time, you should receive your initial investment plus
any income that you have earned (thereby providing "liquidity"). However, a
money market portfolio does not guarantee that you will receive your money
back.
A money market portfolio must follow SEC rules as to the investment
quality, maturity, diversification and other features of the securities it
purchases and the average remaining maturity of the securities cannot be
greater than 90 days. The remaining maturity of a security is the period of
time until the principal amount must be repaid.
- - --------------------------------------------------------------------------------
/chess piece/ POLICIES AND STRATEGIES
WRL J.P. MORGAN MONEY MARKET
The portfolio's sub-adviser, J.P. Morgan Investment Management Inc. (J.P.
Morgan) seeks to achieve the portfolio's objective by investing in:
o U.S. government obligations
o Domestic and certain foreign bank obligations including time deposits,
certificates of deposit, bankers' acceptances and other bank obligations
o Asset-backed securities
o Repurchase and reverse repurchase agreements
J.P. Morgan will limit its investments to securities that present minimum
credit risks, as determined by guidelines adopted by the Fund's Board. 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.
The Fund's Board must approve or ratify any purchase of an unrated security or
a security rated by only one nationally recognized statistical rating
organization (NRSRO).
/warning sign/ RISKS
The principal risks of investing in the WRL J.P. Morgan Money Market portfolio
that may adversely affect your investment are described below. Please note that
there are circumstances which could adversely affect your investment and
prevent the portfolio from achieving its objective, which are not described
here. Please refer to the section entitled "Explanation of Strategies and
Risks," beginning on page 45 and the Fund's SAI for more information about the
risks associated with investing in the Capital Preservation Portfolio(s).
o U.S. GOVERNMENT OBLIGATIONS
The value of the U.S. government securities will fluctuate with changing
interest rates. A decrease in interest rates generally results in an increase
in the value of the securities and an increase in interest rates have the
opposite effect.
o BANK OBLIGATIONS
Banks are subject to extensive governmental regulations that may affect an
investment. The profitability of this industry is dependent on the availability
and cost of capital funds for lending under prevailing money market conditions.
Prospectus 41
<PAGE>
- - --------------------------------------------------------------------------------
CAPITAL PRESERVATION PORTFOLIO(S) (CONTINUED)
- - --------------------------------------------------------------------------------
Economic conditions and credit losses also affect this type of investment.
o ASSET-BACKED SECURITIES
o Repayment sooner than stated maturity dates resulting in greater price and
yield volatility than with traditional fixed-income securities
o Prepayments resulting in lower return
o Values may change based on creditworthiness of issuers
o Interest rate risks
o 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. Repurchase agreements not terminable within seven days are considered
illiquid securities.
Repurchase agreements involve the risk that the seller will fail to repurchase
the security, as agreed. In that case, the portfolio will bear the risk of
market value fluctuations until the security can be sold and may encounter
delays and incur costs in liquidating the security. In the event of bankruptcy
or insolvency of the seller, delays and costs are incurred.
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. 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.
Reverse repurchase agreements may expose a portfolio to greater fluctuations in
the value of its assets.
Portfolio shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. ALTHOUGH THE PORTFOLIO SEEKS TO PRESERVE THE VALUE OF YOUR
INVESTMENT AT $1.00 PER SHARE THERE IS NO GUARANTEE THAT IT WILL BE ABLE TO DO
SO. YOU MAY LOSE MONEY IF YOU INVEST IN THIS PORTFOLIO.
/chess piece/ INVESTOR PROFILES
WRL J.P. MORGAN MONEY MARKET
For the investor who seeks current income, preservation of capital and
maintenance of liquidity.
Prospectus 42
<PAGE>
- - --------------------------------------------------------------------------------
CAPITAL PRESERVATION PORTFOLIO(S) (CONTINUED)
- - --------------------------------------------------------------------------------
/graph/ PORTFOLIO PERFORMANCE
The bar chart and table below gives an indication of the portfolio's risks and
performance. The chart shows changes in the portfolio's performance from year
to year. The performance calculations do not reflect charges or deductions
under the policies or the annuity contracts. These fees and expenses would
lower investment performance. The table shows how the portfolio's average
annual return for the periods indicated compare to those of a broad measure of
market performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL J.P. MORGAN MONEY MARKET
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
7.09% 5.25% 3.03% 2.45% 3.44% 5.40% 5.03% 5.24% 5.26% 4.63%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1990-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 1.87% May 31, 1990
Lowest 0.56% April 30, 1993
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
WRL J.P. Morgan
Money Market 4.63% 5.11% 4.67%
- - --------------------------------------------------------------------------------
7 DAY YIELD
- - --------------------------------------------------------------------------------
As of December 31, 1999 5.15%
- - --------------------------------------------------------------------------------
Prospectus 43
<PAGE>
- - --------------------------------------------------------------------------------
RISK/REWARD INFORMATION
- - --------------------------------------------------------------------------------
BEFORE YOU CHOOSE AN INVESTMENT PORTFOLIO,
PLEASE CONSIDER . . .
All of the investment portfolios involve risk, but there is also the potential
for reward. You can lose money -- and you can make money. The Fund portfolios
are structured so that each offers a slightly different degree of risk and
reward than others.
In this prospectus, we've arranged the portfolios in order of risk/
reward from highest to lowest. Notice the scale at the right. It covers the
full spectrum of risk/reward of the portfolios described in this prospectus.
WHAT RISK/REWARD LEVEL IS FOR YOU? ASK YOURSELF THE FOLLOWING:
(1) HOW WELL DO I HANDLE FLUCTUATIONS IN MY ACCOUNT VALUE? The higher a
portfolio is on the risk/reward spectrum, the more its price is likely
to move up and down on a day to day basis. If this makes you
uncomfortable, you may prefer an investment at the lower end of the
scale that may not fluctuate in price as much.
(2) AM I LOOKING FOR A HIGHER RATE OF RETURN? Generally, the higher the
potential return, the higher the risk. If you find the potential to
make money is worth the possibility of losing more, then a portfolio
at the higher end of the spectrum may be right for you.
A final note: These portfolios are designed for long-term investment.
Each portfolio has an investment objective that it tries to achieve by
following certain investment strategies and techniques. The objective can be
changed without shareholder vote.
HIGHER
WRL VKAM EMERGING GROWTH
WRL T. ROWE PRICE SMALL CAP
WRL GOLDMAN SACHS SMALL CAP
WRL PILGRIM BAXTER MID CAP GROWTH AGGRESSIVE GROWTH
WRL ALGER AGGRESSIVE GROWTH
WRL THIRD AVENUE VALUE
WRL VALUE LINE AGGRESSIVE GROWTH
WRL GE INTERNATIONAL EQUITY FOREIGN EQUITY
WRL JANUS GLOBAL
WRL GREAT COMPANIES -- TECHNOLOGY(SM)
WRL JANUS GROWTH
WRL GOLDMAN SACHS GROWTH
WRL GE U.S. EQUITY
WRL GREAT COMPANIES -- AMERICA(SM) GROWTH EQUITY
WRL SALOMON ALL CAP
WRL C.A.S.E. GROWTH
WRL DREYFUS MID CAP
WRL NWQ VALUE EQUITY
RISK/REWARD
WRL T. ROWE PRICE DIVIDEND GROWTH
WRL DEAN ASSET ALLOCATION
WRL LKCM STRATEGIC TOTAL RETURN
WRL J.P. MORGAN REAL BALANCED
ESTATE SECURITIES
WRL FEDERATED GROWTH & INCOME
WRL AEGON BALANCED
WRL AEGON BOND FIXED-INCOME
WRL J.P. MORGAN MONEY MARKET CAPITAL PRESERVATION
LOWER
Prospectus 44
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS
- - --------------------------------------------------------------------------------
HOW TO USE THIS SECTION
In the discussions of the individual portfolios on pages 2 through 43, you
found descriptions of the strategies and risks associated with each. In those
pages, you were referred to this section for a more complete description of the
risks. For best understanding, first read the description of the portfolio
you're interested in. Then refer to this section and read about the risks
particular to that portfolio. For even more discussions of strategies and
risks, see the SAI, which is available upon request. See the back cover of this
prospectus for information on how to order the SAI.
/chess piece/
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 WRL Salomon All Cap, WRL Third Avenue Value, WRL
Great Companies -- America(SM), WRL Great Companies -- Technology(SM), and WRL
J.P. Morgan Real Estate Securities) 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):
o 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.
o 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
would cause the portfolio's holdings of that issuer to amount to more than 5%
of the portfolio's total assets.
o 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.
WRL Salomon All Cap, WRL Third Avenue Value, WRL Great Companies -- America(SM),
WRL Great Companies -- Technology(SM), and WRL J.P. Morgan Real Estate
Securities each reserves the right to become a diversified investment company
(as defined by the 1940 Act).
/warning sign/
INVESTING IN COMMON STOCKS. Many factors cause common stocks to go up and down
in price. A major one is the financial performance of the company that issues
the stock. Other factors include the overall economy, conditions in a
particular industry, and monetary factors like interest rates. When your
portfolio holds stocks, there's a risk that some or all of them may be down in
price when you choose to sell, causing you to lose money. This is called MARKET
RISK.
/warning sign/
INVESTING IN PREFERRED STOCKS. Because these stocks come with a promise to pay
a stated dividend, their price depends more on the size of the dividend than on
the company's performance. But if a company fails to pay the dividend, its
preferred stock is likely to drop in price. Changes in interest rates can also
affect their price. (See "Investing in Bonds," below.)
/warning sign/
INVESTING IN CONVERTIBLE SECURITIES, PREFERRED STOCKS, AND BONDS. Since
preferred stocks and corporate bonds pay a stated return, their prices usually
don't depend on the price of the company's common stock. But some companies
issue preferred stocks and bonds that are CONVERTIBLE into their common stocks.
Linked to the common stock in this way, convertible securities go up and down
in price as the common stock does, adding to their market risk.
Prospectus 45
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS
- - --------------------------------------------------------------------------------
/warning sign/
VARIOUS INVESTMENT TECHNIQUES. Various investment techniques are utilized to
increase or decrease exposure to changing security prices, interest rates,
currency exchange rates, commodity prices or other factors that affect security
values. These techniques may involve derivative securities and transactions
such as buying and selling options and futures contracts, entering into
currency exchange contracts or swap agreements and purchasing indexed
securities. These techniques are designed to adjust the risk and return
characteristics of the portfolio of investment and are not used for leverage.
/warning sign/
T. ROWE PRICE RESERVE INVESTMENT FUND. The WRL T. Rowe Price Small Cap and WRL
T. Rowe Price Dividend Growth portfolios may invest in money market instruments
directly or indirectly through investment in the Reserve Investment Fund
(Reserve Fund). The Reserve Fund is advised by T. Rowe Price and charges no
advisory fees to the Reserve Fund, but other fees may be incurred which may
result in a duplication of fees. Further information is included in the SAI.
/warning sign/
GEI SHORT-TERM INVESTMENT FUND. The WRL GE International Equity and WRL GE U.S.
Equity portfolios may invest in money market instruments directly or indirectly
through investment in the GEI Short-Term Investment Fund (Investment Fund). The
Investment Fund is advised by GEAM; GEAM charges no advisory fee to the
Investment Fund, but other fees may be incurred which may result in a
duplication of fees. Further information is included in the SAI.
/warning sign/
VOLATILITY. The more an investment goes up and down in price, the more VOLATILE
it is. Volatility increases the market risk because even though your portfolio
may go UP more than the market in good times, it may also go DOWN more than the
market in bad times. If you decide to sell when a volatile portfolio is down,
you could lose more.
/warning sign/
INVESTING IN BONDS. Like common stocks, bonds fluctuate in value, though the
factors causing this fluctuation are different, including:
o CHANGES IN INTEREST RATES. Bond prices tend to move the opposite of interest
rates. Why? Because when interest rates on new bond issues go up, rates on
existing bonds stay the same and they become less desirable. When rates go
down, the reverse happens. This is also true for most preferred stocks and
some convertible securities.
o LENGTH OF TIME TO MATURITY. When a bond matures, the issuer must pay the
owner its face value. If the maturity date is a long way off, many things can
affect its value, so a bond is more volatile the farther it is from maturity.
As that date approaches, fluctuations usually become smaller and the price
gets closer to face value.
o DEFAULTS. All bond issuers make at least two promises: (1) to pay interest
during the bond's term and (2) to return principal when it matures. If an
issuer fails to keep one or both of these promises, the bond will probably
drop in price dramatically, and may even become worthless. Changes in
financial condition and general economic conditions can affect the ability to
honor financial obligations and therefore credit quality. A security's price
may be adversely affected by the market's opinion of the security's credit
quality level even if the issuer or counterparty has suffered no degradation
in ability to honor the obligation.
o DECLINES IN RATINGS. At the time of issue, most bonds are rated by
professional rating services, such as Moody's Investors Service, Inc.
(Moody's) and Standard & Poor's Corporation (S&P). The stronger the financial
backing behind the bond, the higher the rating. If this backing is weakened
or lost, the rating service may downgrade the bond's rating. This is
virtually certain to cause the bond to drop in price. Bonds that are rated
below BBB by S&P, and below Ba by Moody's, are considered to be below
investment grade. Moody's rates bonds in nine categories, from Aaa to C, with
Aaa being the highest with least risk. S&P rates bonds in six categories,
from AAA to D, with AAA being the highest.
o LOW RATING. High-yield/high-risk fixed-income securities (commonly known as
"junk bonds") have
Prospectus 46
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS (CONTINUED)
- - --------------------------------------------------------------------------------
greater credit risk, are more sensitive to interest rate movements, are
considered more speculative than higher rated bonds, have a greater
vulnerability to economic changes and are less liquid. The market for such
securities may be less active than for higher rated securities, which can
adversely affect the price at which these securities may be sold and may
diminish a portfolio's ability to obtain accurate market quotations when
valuing the portfolio securities and calculating the portfolio's net asset
value.
o LACK OF RATING. Some bonds are considered speculative, or for other reasons
are not rated. Such bonds must pay a higher interest rate in order to attract
investors. They're considered riskier because of the higher possibility of
default or loss of liquidity.
o LOSS OF LIQUIDITY. If a bond is downgraded, or for other reasons drops in
price, the market demand for it may "dry up". In that case, the bond may be
hard to sell or "liquidate" (convert to cash).
/warning sign/
INVESTING IN FOREIGN SECURITIES. These are investments offered by foreign
companies, governments and government agencies. They involve risks not usually
associated with U.S. securities, including:
o CHANGES IN CURRENCY VALUES. Foreign securities are sold in currencies other
than U.S. dollars. If a currency's value drops, the value of the securities
held by a portfolio could drop too, even if the securities are strong. In
turn, the value of the shares of the portfolio could also drop. Dividend and
interest payments may be lower. Factors affecting exchange rates are:
differing interest rates among countries; balances of trade; amount of a
country's overseas investments; and any currency manipulation by banks.
o CURRENCY SPECULATION. The foreign currency market is largely unregulated and
subject to speculation.
o ADRS/ADSS. Some portfolios also invest in American Depositary Receipts (ADRs)
and American Depositary Shares (ADSs). They represent securities of foreign
companies traded on U.S. exchanges, and their values are expressed in U.S.
dollars. Changes in the value of the underlying foreign currency will change
the value of the ADR or ADS. A portfolio incurs costs when it converts other
currencies into dollars, and vice-versa.
o EURO CONVERSION. On January 1, 1999, certain participating countries in the
European Economic Monetary Union adopted the "Euro" as their official
currency. Other EU member countries may convert to the Euro at a later date.
As of January 1, 1999, governments in participating countries issued new debt
and redenominated existing debt in Euros; corporations chose to issue stocks
or bonds in Euros or national currency. The new European Central Bank (the
"ECB") will assume responsibility for a uniform monetary policy in
participating countries. Euro conversion risks that could affect a
portfolio's foreign investments include: (1) the readiness of Euro payment,
clearing, and other operational systems; (2) the legal treatment of debt
instruments and financial contracts in existing national currencies rather
than the Euro; (3) exchange-rate fluctuations between the Euro and non-Euro
currencies during the transition period of January 1, 1999 through December
31, 2002 and beyond; (4) potential U.S. tax issues with respect to portfolio
securities; and (5) the ECB's abilities to manage monetary policies among the
participating countries; and (6) the ability of financial institution systems
to process Euro transactions. o DIFFERENT ACCOUNTING AND REPORTING PRACTICES.
Foreign tax laws are different, as are laws, practices and standards for
accounting, auditing and reporting data to investors. o LESS INFORMATION
AVAILABLE TO THE PUBLIC. Foreign companies usually make less information
available to the public. o LESS REGULATION. Securities regulations in many
foreign countries are more lax than in the U.S.
o MORE COMPLEX NEGOTIATIONS. Because of differing business and legal
procedures, a portfolio may find it hard to enforce obligations or negotiate
favorable brokerage commission rates.
o LESS LIQUIDITY/MORE VOLATILITY. Some foreign securities are harder to convert
to cash than U.S. securities, and their prices may fluctuate more
dramatically.
o SETTLEMENT DELAYS. "Settlement" is the process of completing a securities
transaction. In many countries, this process takes longer than it does in the
U.S.
o HIGHER CUSTODIAL CHARGES. Fees charged by the Fund's custodian for holding
shares are higher for foreign securities than that of domestic securities.
Prospectus 47
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS (CONTINUED)
- - --------------------------------------------------------------------------------
o HIGHER TRANSACTION COSTS. Fees charged by securities brokers are often higher
for transactions involving foreign securities than domestic securities.
Higher expenses, such as brokerage fees, may reduce the return a portfolio
might otherwise achieve.
o VULNERABILITY TO SEIZURE AND TAXES. Some governments can seize assets. They
may also limit movement of assets from the country. A portfolio's interest,
dividends and capital gains may be subject to foreign withholding taxes.
o POLITICAL INSTABILITY AND SMALL EMERGING MARKETS. Developing countries can be
politically unstable. Economies can be dominated by a few industries, and
markets may trade a small number of securities. Regulations of banks and
capital markets can be weak.
o DIFFERENT MARKET TRADING DAYS. Foreign markets may not be open for trading
when U.S. markets are and asset values can change before your transaction
occurs.
o HEDGING. A portfolio may, but will not necessarily, enter into forward
currency contracts to hedge against declines in the value of securities
denominated in, or whose value is tied to, a currency other than the U.S.
dollar or to reduce the impact of currency fluctuation on purchases, and
sales of such securities.
/warning sign/
INVESTING IN FUTURES, OPTIONS AND DERIVATIVES. Besides conventional securities,
your portfolio may seek to increase returns by investing in financial contracts
related to its primary investments. Such contracts involve additional risks and
costs. Risks include:
o INACCURATE MARKET PREDICTIONS. If the sub-adviser is wrong in its
expectation, for example, with respect to interest rates, securities prices
or currency markets, the contracts could produce losses instead of gains.
o PRICES MAY NOT MATCH. Movements in the price of the financial contracts may
be used to offset movements in the price of other securities you own. If
those prices don't correlate or match closely, the benefits of the
transaction might be diminished.
o ILLIQUID MARKETS. If there's no market for the contracts, the portfolio may
not be able to control losses.
o TAX CONSEQUENCES. Sometimes the possibility of incurring high taxes on a
transaction may delay closing out a position and limit the gains it would
have produced.
/warning sign/
INVESTING IN SPECIAL SITUATIONS. Each portfolio may invest in "special
situations" from time to time. Special situations arise when, in the opinion of
a portfolio manager, a company's securities may be undervalued, then increase
considerably in price, due to:
o A NEW PRODUCT OR PROCESS
o A MANAGEMENT CHANGE
o A TECHNOLOGICAL BREAKTHROUGH
o AN EXTRAORDINARY CORPORATE EVENT
o A TEMPORARY IMBALANCE IN THE SUPPLY OF, AND DEMAND FOR, THE SECURITIES OF AN
ISSUER
Investing in a special situation carries an additional risk of loss if the
expected development does not happen or does not attract the expected
attention. The impact of special situation investing to a portfolio will depend
on the size of a portfolio's investment in a situation.
/chess piece/
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 short-term debt securities that
are considered cash equivalents. This may be done as a temporary 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 decrease.
/question mark/
PORTFOLIO TURNOVER
A portfolio turnover rate is, in general, the percentage calculated by taking
the lesser of purchases or sales of portfolio securities (excluding short-term
securities) for a year and dividing it by the monthly average of the market
value of such securities during the year.
Prospectus 48
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS (CONTINUED)
- - --------------------------------------------------------------------------------
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 unforeseen developments.
The rate of portfolio turnover will not be a limiting factor when short-term
investing is considered appropriate. Increased turnover rates result in higher
brokerage costs and other transaction based expenses for a portfolio. These
charges are ultimately borne by the policyholders.
/chess piece/
SHORT SALES
A 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 convertible into, or exchangeable without
further consideration for, securities of the same issue as the securities sold
short.
/chess piece/
VALUE LINE RANKING SYSTEMS (WRL VALUE LINE AGGRESSIVE GROWTH)
In selecting securities for purchase or sale for the portfolio, Value Line
relies on the Value Line Timeliness/trademark/ Ranking System and the Value
Line Performance/trademark/ Ranking System. The Value Line Timeliness Ranking
System has evolved after many years of research and has been used in
substantially its present form since 1965. It is based upon historical prices
and reported earnings, recent earnings and price momentum and the degree to
which the last reported earnings deviated from estimated earnings, among other
factors. The Timeliness Rankings are published weekly in the Standard Edition
of The Value Line Investment Survey for approximately 1,700 of the most
actively traded stocks in U.S. markets, including stocks with large, mid and
small market capitalizations. There are only a few stocks of foreign issuers
that are included and stocks that have traded for less than two years are not
ranked. On a scale of 1 (highest) to 5 (lowest), the rankings compare an
estimate of the probable market performance of each stock during the coming six
to twelve months relative to all 1,700 stocks under review. The Rankings are
updated weekly to reflect the most recent information.
The Value Line Performance Ranking System for common stocks was introduced in
1995. It is a variation of the Value Line Small-Capitalization Ranking System,
which has been employed by Value Line in managing private accounts assets since
1981, and in managing the Value Line Emerging Opportunities since 1993. The
Performance Ranking System evaluates the approximately 1,800 stocks in the
Expanded Edition of The Value Line Investment Survey which consists of stocks
with mostly smaller market capitalizations and only a few stocks of foreign
issuers. This stock ranking system relies on factors similar to those found in
the Value Line Timeliness Ranking System except that it does not utilize
earnings estimates. The Performance Ranking uses a scale of 1 (highest) to 5
(lowest) to compare the sub-adviser's estimate of the probable market
performance of each Expanded Edition stock during the coming six to twelve
months relative to all 1,800 stocks under review in the Expanded Edition.
Neither the Value Line Timeliness Ranking System nor the Value Line Performance
Ranking System eliminates market risk but the sub-adviser believes that they
provide objective standards for determining expected relative performance over
the next six to twelve months. The portfolio will usually invest in common
stocks ranked 1 or 2 but it may also invest in common stocks ranked as low as
3. The utilization of these Rankings is no assurance that the portfolio will
perform more favorably than the market in general over any particular period.
/question mark/ INVESTMENT STRATEGIES
A portfolio is permitted to use other securities and investment strategies in
pursuit of its investment objective, subject to limits established by the
Fund's Board of Directors. No portfolio is under any obligation to use any of
the techniques or strategies at any given time or under any particular economic
condition. Certain instruments and investment strategies may expose the
portfolios to other risks and considerations, which are discussed in the Fund's
SAI.
Prospectus 49
<PAGE>
- - --------------------------------------------------------------------------------
HOW THE FUND IS MANAGED AND ORGANIZED
- - --------------------------------------------------------------------------------
/question mark/
HOW THE FUND IS MANAGED AND ORGANIZED
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.
WRL Investment Management, Inc. (WRL Management) located at 570 Carillon
Parkway, St. Petersburg, Florida 33716, has served as the Fund's investment
adviser since 1997. (Prior to this date, Western Reserve served as investment
adviser to the Fund). The investment adviser is a direct, wholly-owned
subsidiary of Western Reserve Life Assurance Co. of Ohio (Western Reserve),
which is wholly-owned by First AUSA Life Insurance Company, a stock life
insurance company, which is wholly-owned by AEGON USA, Inc. AEGON USA, Inc. is
a financial services holding company whose primary emphasis is on life and
health insurance and annuity and investment products. AEGON USA, Inc. is a
wholly-owned indirect subsidiary of AEGON N.V., a Netherlands corporation which
is a publicly traded international insurance group. The investment adviser had
no prior experience as an adviser.
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.
The Fund has received an order from the Securities and Exchange Commission that
will permit the Fund and the investment adviser, subject to certain conditions,
and without the approval of shareholders to: (1) employ a new unaffiliated
sub-adviser for a portfolio pursuant to the terms of a new investment
sub-advisory agreement, either as a replacement for an existing sub-adviser or
as an additional sub-adviser; (2) materially change the terms of any
sub-advisory agreement; and (3) continue the employment of an existing
sub-adviser on the same sub-advisory contract terms where a contract has been
assigned because of a change in control of the sub-adviser. In such
circumstances, shareholders would receive notice and information about the new
sub-adviser within ninety (90) days after the hiring of any new sub-adviser.
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 advisory fees for each portfolio are:
ADVISORY
PORTFOLIO FEE
WRL Janus Growth* 0.80%
WRL AEGON Bond 0.45%
WRL Janus Global** 0.80%
WRL J.P. Morgan Money Market 0.40%
WRL AEGON Balanced 0.80%
WRL GE International Equity 1.00%
WRL Third Avenue Value 0.80%
WRL VKAM Emerging Growth 0.80%
WRL LKCM Strategic
Total Return 0.80%
WRL Alger Aggressive Growth 0.80%
WRL Federated Growth
& Income 0.75%
WRL Dean Asset Allocation 0.80%
WRL C.A.S.E. Growth 0.80%
WRL NWQ Value Equity 0.80%
WRL GE U.S. Equity 0.80%
WRL J.P. Morgan Real
Estate Securities 0.80%
WRL Value Line Aggressive Growth 0.80%
WRL Great Companies -- America(SM) 0.80%
WRL Great Companies -- Technology(SM) 0.80%
* WRL Management currently waives 0.025% of its advisory fee for the first $3
billion of the portfolio's average daily net assets (net fee -- 0.775%); and
0.05% of assets above $3 billion (net fee -- 0.75%). This waiver will terminate
on June 25, 2000.
** WRL Management currently waives 0.025% of its advisory fee for the
portfolio's average daily net assets above $2 billion (net fee -- 0.775%.) This
waiver will terminate on June 25, 2000.
Prospectus 50
<PAGE>
- - --------------------------------------------------------------------------------
HOW THE FUND IS MANAGED AND ORGANIZED (CONTINUED)
- - --------------------------------------------------------------------------------
ADVISORY
PORTFOLIO FEE
WRL Salomon All Cap 0.90% up to $100 million
0.80% over $100 million
WRL T. Rowe Price 0.90% up to $100 million
Dividend Growth 0.80% over $100 million
WRL T. Rowe Price 0.75%
Small Cap
WRL Dreyfus Mid Cap 0.85% up to $100 million
0.80% over $100 million
WRL Pilgrim Baxter 0.90% up to $100 million
Mid Cap Growth 0.80% over $100 million
WRL Goldman Sachs Small Cap 0.90%
WRL Goldman Sachs Growth 0.90% up to $100 million
0.80% over $100 million
EXPENSE REIMBURSEMENT
WRL Management has entered into an expense limitation agreement with the Fund
on behalf of each applicable portfolio, pursuant to which WRL Management has
agreed to reimburse a portfolio for certain operating expenses so that the
total annual operating expenses of each applicable portfolio do not exceed the
total operating expenses specified for that portfolio (expense cap) in the
portfolio's then-current SAI. The Fund, on behalf of an applicable portfolio,
will at a later date reimburse WRL Management for operation expenses previously
paid on behalf of such portfolio during the previous 36 months, but only if,
after such reimbursement, the portfolio's expense ratio does not exceed the
expense cap. The agreement has an initial term through April 30, 2001, and will
automatically renew for one-year terms unless WRL Management provides written
notice to the Fund at least 30 days prior to the end of the then-current term.
In addition, the agreement will terminate upon termination of the Investment
Advisory Agreement, or may be terminated by the Fund, without payment of any
penalty, upon ninety (90) days' prior written notice to WRL Management.
SUB-ADVISERS
Here is a listing of the sub-advisers and the portfolios they manage:
SUB-ADVISER PORTFOLIO
Alger WRL Alger Aggressive Growth
GEAM WRL GE International Equity
WRL GE U.S. Equity
Janus WRL Janus Global
WRL Janus Growth
C.A.S.E. WRL C.A.S.E. Growth
NWQ WRL NWQ Value Equity
Dean WRL Dean Asset Allocation
AIMI WRL AEGON Bond
WRL AEGON Balanced
T. Rowe Price WRL T. Rowe Price Dividend Growth
WRL T. Rowe Price Small Cap
SBAM WRL Salomon All Cap
GSAM WRL Goldman Sachs Growth
WRL Goldman Sachs Small Cap
Pilgrim Baxter WRL Pilgrim Baxter Mid Cap Growth
VKAM WRL VKAM Emerging Growth
EQSF WRL Third Avenue Value
LKCM WRL LKCM Strategic Total Return
J.P. Morgan WRL J.P. Morgan Real Estate Securities
WRL J.P. Morgan Money Market
Federated WRL Federated Growth & Income
Dreyfus WRL Dreyfus Mid Cap
Value Line WRL Value Line Aggressive Growth
Great Companies, Inc. WRL Great Companies -- America(SM)
WRL Great Companies -- Technology(SM)
Prospectus 51
<PAGE>
- - --------------------------------------------------------------------------------
HOW THE FUND IS MANAGED AND ORGANIZED (CONTINUED)
- - --------------------------------------------------------------------------------
DAY-TO-DAY MANAGEMENT OF THE INVESTMENTS IN EACH PORTFOLIO IS THE
RESPONSIBILITY OF THE PORTFOLIO MANAGER. THE PORTFOLIO MANAGERS OF THE FUND
ARE:
WRL VKAM EMERGING GROWTH
GARY M. LEWIS leads an investment team and is primarily responsible for the day
to day management of this portfolio. Mr. Lewis has been senior vice president
of VKAM since October, 1995. Previously, he has served as vice
president/portfolio manager of VKAM from 1989 to October 1995.
WRL T. ROWE PRICE SMALL CAP
RICHARD T. WHITNEY, CFA has managed this portfolio since inception and heads
the Investment Team for this portfolio. He joined T. Rowe Price in 1985.
WRL GOLDMAN SACHS SMALL CAP
ROBERT C. JONES, MANAGING DIRECTOR, has served as the head of an investment
team that has managed the portfolio since its inception. Mr. Jones joined GSAM
as a portfolio manager in 1989.
WRL PILGRIM BAXTER MID CAP GROWTH
JEFFREY A. WRONA, CFA has managed this portfolio since inception. Prior to
joining Pilgrim Baxter, he was a senior portfolio manager at Munder Capital
Management.
WRL ALGER AGGRESSIVE GROWTH
DAVID D. ALGER has been employed by Alger since 1971 and has served as
president since 1995. He has managed this portfolio since inception.
DAVID HYUN has served as co-manager of this portfolio since February 1998. He
has been employed by Alger as a senior research analyst since 1991, as a
portfolio manager since 1997 and as a senior vice president since 1998.
WRL THIRD AVENUE VALUE
MARTIN J. WHITMAN has served as portfolio manager of this portfolio since its
inception. He is Chairman, President and Chief Executive Officer of the
sub-adviser.
WRL GE INTERNATIONAL EQUITY
RALPH R. LAYMAN has served as the head of a team of portfolio managers that has
managed a portion of the portfolio's assets since its inception. Prior to May
1, 2000, GEAM was sub-adviser for one half of the portfolio's assets. Mr.
Layman joined GEAM in 1991 as an executive vice president for international
investments.
WRL JANUS GLOBAL
HELEN YOUNG HAYES, CFA and LAURENCE CHANG, CFA have served as co-portfolio
managers of this portfolio since January 2000. Ms. Hayes previously served as
manager of this portfolio since its inception. She has been employed by Janus
since 1987.
Mr. Chang has been employed by Janus since 1993. Before joining Janus, Mr.
Chang was a project director at the National Security Archive.
WRL SALOMON ALL CAP
ROSS S. MARGOLIES has managed this portfolio since inception. Mr. Margolies
joined Salomon in 1992.
ROBERT M. DONAHUE, JR. assists in the day-to-day management of the portfolio.
Prior to joining SBAM in 1997, Mr. Donahue worked as an equity analyst at
Gabelli & Company.
WRL JANUS GROWTH
EDWARD KEELY has served as manager of this portfolio since January 2000. He
previously served as co-portfolio manager of this portfolio since January 1999.
Prior to joining Janus in 1998, Mr. Keely was a senior vice president of
investments at Founders.
WRL GOLDMAN SACHS GROWTH
HERBERT E. EHLERS has served as head of a thirteen person investment team that
has managed the portfolio since inception. Prior to joining GSAM in 1997, he
was chief investment officer at Liberty Investment Management, Inc. from
1994-1997.
WRL C.A.S.E GROWTH
This portfolio is managed by a team of professionals, called the Portfolio
Management Committee. WILLIAM E.
Prospectus 52
<PAGE>
- - --------------------------------------------------------------------------------
HOW THE FUND IS MANAGED AND ORGANIZED (CONTINUED)
- - --------------------------------------------------------------------------------
LANGE is the head manager of this Committee. He has been president of C.A.S.E.
since 1984.
WRL GE U.S. EQUITY
EUGENE K. BOLTON leads a team of portfolio managers for this portfolio. He has
served in that capacity since the portfolio's inception. Mr. Bolton joined GEAM
in 1984 as Chief Financial Officer and has been a portfolio manager since 1986.
WRL DREYFUS MID CAP
JOHN O'TOOLE has served as portfolio manager since inception and has been
employed by Dreyfus as portfolio manager since 1994. Mr. O'Toole is a senior
vice president and portfolio manager for Mellon Equity Associates. He has been
employed by Mellon Bank since 1979.
WRL NWQ VALUE EQUITY
EDWARD C. FRIEDEL has been the senior manager of this portfolio since
inception. He has been a managing director and investment strategist with NWQ
since 1983.
WRL T. ROWE PRICE DIVIDEND GROWTH
THOMAS HUBER, CFA, has served as manager of this portfolio since March 2000.
Mr. Huber is a Vice President of T. Rowe Price Associates. Within the Equity
Division, he covers consumer products, leisure and gaming, apparel, drugstores
and supermarkets. Before joining the firm in 1994, he worked for NationsBank as
a Corporate Banking Officer.
WRL DEAN ASSET ALLOCATION
JOHN C. RIAZZI, CFA serves as portfolio manager of this portfolio.
Previously, Mr. Riazzi served as co-portfolio manager of the portfolio. He
joined Dean in 1989 and has served as a manager of the portfolio since its
inception.
WRL LKCM STRATEGIC TOTAL RETURN
LUTHER KING, JR., CFA and SCOT C. HOLLMANN, CFA have co-managed this portfolio
since inception.
Mr. King has been the president of Luther King since 1979.
Mr. Hollmann has been a vice president of Luther King since 1983.
WRL J.P. MORGAN REAL
ESTATE SECURITIES
DANIEL P. O'CONNOR serves as portfolio manager of this portfolio.
Mr. O'Connor has served as the sole manager of this portfolio since its
inception. Prior to joining J.P. Morgan in 1996, Mr. O'Connor served two years
as Director of Real Estate Securities at INVESCO.
WRL FEDERATED GROWTH & INCOME
STEVEN J. LEHMAN, CFA and LINDA A. DUESSEL, CFA serve as co-portfolio managers
of this portfolio.
Mr. Lehman has served as co-portfolio manager since 1997. He joined Federated
in 1997. From 1985 to 1997, he served as portfolio manager, vice president and
senior portfolio manager at First Chicago NBD.
Ms. Duessel, senior vice president, has been employed by Federated since 1991
and has been a portfolio manager of this portfolio since 1996.
WRL AEGON BALANCED
MICHAEL VAN METER has served as the senior portfolio manager of this portfolio
since inception. Mr. Van Meter has been employed by VMF Capital, LLC (VMF)
since July, 1998. Prior to joining VMF, Mr. Van Meter was employed by AIMI.
WRL AEGON BOND
CLIFFORD A. SHEETS, CFA and DAVID R. HALFPAP, CFA have served as co-portfolio
managers of this portfolio since January 2000. Mr. Sheets previously served as
a co-portfolio manager of this portfolio since 1998, and prior to that date, as
manager since the portfolio's inception. Mr. Sheets joined AIMI in 1990.
Mr. Halfpap has been employed by AIMI since 1975 and is currently a senior vice
president.
Prospectus 53
<PAGE>
- - --------------------------------------------------------------------------------
HOW THE FUND IS MANAGED AND ORGANIZED (CONTINUED)
- - --------------------------------------------------------------------------------
WRL J.P. MORGAN MONEY MARKET
JOHN T. DONOHUE and MARK SETTLES have served as co-portfolio managers of this
portfolio since January 2000. Mr. Donohue has been employed by J.P. Morgan
since 1997 and is a portfolio manager in the Fixed Income Group. He previously
served as senior money market trader. Mr. Donohue was a portfolio manager at
Goldman Sachs for 10 years prior to his employment at J.P. Morgan.
MR. SETTLES is a product portfolio manager in the Short Term Fixed Income Group
at J.P. Morgan. Previously, he spent five years trading dollar and euro-
denominated fixed income products on J.P. Morgan's New York and London trading
desks.
WRL VALUE LINE AGGRESSIVE GROWTH
A committee of employees of Value Line, Inc. is jointly and primarily
responsible for the day-to-day management of the portfolio.
WRL GREAT COMPANIES - AMERICA(SM)
WRL GREAT COMPANIES - TECHNOLOGY(SM)
JAMES H. HUGUET and GERALD W. BOLLMAN, CFA serve as co-portfolio managers of
these portfolios. Mr. Huguet serves as director, president and Co-CEO of Great
Companies, L.L.C. Mr. Huguet also serves as director and president of Great
Companies, Inc. From 1994-1998, Mr. Huguet was executive vice president of
Information Resources, Inc., Chicago, Il, a market research firm.
Mr. Bollman is executive vice president of Great Companies, L.L.C. and Great
Companies, Inc. From 1995-1999, Mr. Bollman was chairman and manager of
Intrinsic Value Associates, an investment advisory service for institutional
managers. He previously served as executive vice president and portfolio
manager for Continental Asset Management Corporation.
Prospectus 54
<PAGE>
- - --------------------------------------------------------------------------------
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 information for the separate
accounts, policies or annuity contracts.
YIELD
Yield quotations for the WRL AEGON 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.
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.
SIMILAR 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. Each portfolio's future performance may be
greater or less than the historical performance of the corresponding Similar
Sub-Adviser Fund. There can be no assurance, and no representation is made,
that the investment results of any portfolio will be comparable to the results
of any of the Similar Sub-Adviser Funds or any other fund managed by WRL
Management or any sub-adviser.
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, 1999. 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.
Prospectus 55
<PAGE>
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PERFORMANCE INFORMATION (CONTINUED)
- - --------------------------------------------------------------------------------
SIMILAR SUB-ADVISER FUND PERFORMANCE
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(WITH SALES LOADS)
-------------------------------
SIMILAR 10 YEARS
SUB-ADVISER INCEPTION TOTAL OR SINCE
WRL PORTFOLIO FUND DATE ASSETS 1 YEAR 5 YEARS INCEPTION
- - --------------------------- -------------------------------- ----------- -------------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
WRL Janus Global Janus Worldwide(1) 5/15/91 $ 33,802.9M 64.37% 30.88% 25.10%
WRL Alger Aggressive The Alger Fund Class A $ 226.6M 65.74% N/A 40.59%
Growth Capital Appreciation Portfolio 12/31/96 (Net)
Class A Shares(2)
WRL VKAM Emerging Van Kampen Class A $113,175,800,000 92.01% 39.86% 27.16%
Growth Emerging Growth(3) 10/2/70
WRL Third Avenue Value Third Avenue 11/1/90 $ 1,372,960,198 12.82% 18.45% 19.26%
Value Fund(1)
WRL Dreyfus Mid Cap Dreyfus Premier Midcap Class A $ 28,320,316 4.30% 21.74% 17.43%
Stock Fund(7) 4/6/94
WRL Goldman Sachs Goldman Sachs Capital Class A $ 3,285,584,250 20.24% 27.15% 19.81%
Growth Growth Fund(4) 4/20/90
WRL Goldman Sachs Small Goldman Sachs CORE Class A $ 61,240,964 20.20% N/A 4.85%
Cap Small Cap Equity Fund(5) 8/15/97
WRL T. Rowe Price T. Rowe Price Dividend 12/30/92 $ 1,027,968,177 (2.09)% 20.32% 17.75%
Dividend Growth Growth Fund(1)
WRL T. Rowe Price Small T. Rowe Price Diversified 6/30/97 $ 74,803,935 29.27% N/A 16.36%
Cap Small-Cap Growth Fund(1)(8)
WRL Pilgrim Baxter PBHG Growth II Portfolio(1) 4/30/97 $ 178.6M 98.19% N/A 36.70%
Mid Cap Growth
WRL Salomon All Cap Salomon Brothers Class O $ 215,308,000 23.44% 28.36% 16.11%
Capital Fund(6) 8/23/76
WRL Value Line Aggressive Value Line Leveraged Growth(1) 2/14/72 $ 763,203,000 30.99% 30.57% 19.55%
Growth
</TABLE>
(1) The Janus Worldwide Fund, T. Rowe Price Dividend Growth, Third Avenue
Value, PBHG Growth II, T. Rowe Price Diversified Small Cap Growth and
Value Line Leveraged Growth Funds do not have sales loads.
(2) Total returns are for Class A shares of The Alger Fund Capital Appreciation
Portfolio and reflect a deduction of a 4.75% front-end sales load. The
Portfolio also offers Class B and Class C shares with different sales
loads. Calculating total return with those sales loads may have resulted
in lower total returns. The inception dates for Class A, B and C shares
are 12/31/96, 10/29/93 and 8/1/97, respectively.
(3) Total returns are for Class A shares of the Van Kampen Emerging Growth Fund
and reflect a deduction of a 5.75% front end sales load and an annual
12b-1 fee of up to 0.25%. The fund also has Class B and Class C shares
with different sales loads and annual 12b-1 fees. Calculating total return
with those sales loads may have resulted in lower total returns. The
Fund's performance during the one-year period ended December 31, 1999 is
largely attributable to investments in the technology sector, which
performed favorably for the period. This performance was achieved during a
rising market, and there is no guarantee that this performance record or
the circumstances leading to it can be replicated in the future. As the
Fund expects to have a substantial portion of its assets invested in
equity securities of emerging growth companies, the Fund will be subject
to more volatility and erratic movements than the market in general.
(4) Total returns are for Class A shares of the Goldman Sachs Capital Growth
Fund and reflects a deduction of a 5.5% front-end sales load. The Fund
also offers Class B and Class C shares with different sales loads.
Calculating total return with those sales loads may have resulted in lower
total returns.
(5) Total returns are for Class A shares of the Goldman Sachs CORE Small Cap
Equity Fund and reflects a deduction of a 5.5% front-end sales load. The
fund also offers Class B and Class C shares with different sales loads.
Calculating total returns with those sales loads may have resulted in lower
total returns.
(6) Total returns are for Class O shares of the Salomon Brothers Capital Fund.
Class O shares are sold without any sales charge to the fund. The fund
also offers Class A, Class B and Class 2 shares. Since May 1, 1990, the
Fund has been managed by Salomon Brothers Asset Management Inc. Prior
hereto, it was managed by Lehman Management Co.
(7) Total returns are for Class A of the Dreyfus Premier Mid Cap Stock Fund and
reflect the deduction of a 5.75% front-end sales load. The Fund also
offers Class B, Class C and Class T shares with different sales loads.
Calculating total returns with those sales loads may have resulted in
lower total returns.
(8) Total returns for the T. Rowe Price Diversified Small-Cap Growth Fund
reflect past and present expense limitations, which increased the fund's
total return.
Prospectus 56
<PAGE>
- - --------------------------------------------------------------------------------
PERFORMANCE INFORMATION (CONTINUED)
- - --------------------------------------------------------------------------------
SIMILAR SUB-ADVISER FUND PERFORMANCE
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(WITHOUT SALES LOADS)
--------------------------------
SIMILAR 10 YEARS
SUB-ADVISER INCEPTION TOTAL OR SINCE
WRL PORTFOLIO FUND DATE ASSETS 1 YEAR 5 YEARS INCEPTION
- - ----------------------------- -------------------------------- ----------- -------------------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
WRL Janus Global Janus Worldwide(3) 5/15/91 $ 33,802.9M 64.37% 30.88% 25.10%
WRL Alger Aggressive Growth The Alger Fund(1) Class A $ 266.6M 74.01% N/A 42.89%
Capital Appreciation Portfolio 12/31/96 (Net)
WRL VKAM Emerging Growth Van Kampen Class A $113,175,800,000 103.72% 41.53% 27.92%
Emerging Growth(1)(2) 10/2/70
WRL Third Avenue Value Third Avenue 11/1/90 $ 1,372,960,198 12.82% 18.45% 19.26%
Value Fund(3)
WRL Dreyfus Mid Cap Dreyfus Premier Midcap Class R $ 28,320,316 10.84% 23.50% 17.63%
Stock Fund(6) 11/12/93
WRL Goldman Sachs Growth Goldman Sachs Capital Class A $ 3,285,584,250 27.23% 28.58% 20.51%
Growth Fund(1) 4/20/90
WRL Goldman Sachs Small Cap Goldman Sachs CORE Class A $ 61,240,964 16.63% N/A 7.36%
Small Cap Equity Fund(1) 8/15/97
WRL T. Rowe Price Dividend T. Rowe Price Dividend 12/30/92 $ 1,027,968,177 (2.09)% 20.32% 17.75%
Growth Growth Fund(3)
WRL T. Rowe Price Small Cap T. Rowe Price Diversified 6/30/97 $ 74,803,935 29.27% N/A 16.36%
Small-Cap Growth Fund(3)(5)
WRL Pilgrim Baxter Mid Cap PBHG Growth II Portfolio(3) 4/30/97 $ 178.6M 98.19% N/A 36.70%
Growth
WRL Salomon All Cap Salomon Brothers Class O $ 215,308,000 23.44% 28.36% 16.11%
Capital Fund(4) 8/23/76
WRL Value Line Aggressive Value Line Leveraged Growth(3) 2/14/72 $ 763,203,000 30.99% 30.57% 19.55%
Growth
</TABLE>
(1) The fund offers Class B and Class C shares as well. Returns for those
classes may differ from those of Class A shares due to differing fee
structures.
(2) The Fund's performance during the one-year period ended December 31, 1999
is largely attributable to investments in the technology sector, which
performed favorably for the period. This performance was achieved during a
rising market, and there is no guarantee that this performance record or
the circumstances leading to it can be replicated in the future. As the
Fund expects to have a substantial portion of its assets invested in
equity securities of emerging growth companies, the Fund will be subject
to more volatility and erratic movements than the market in general.
(3) The T. Rowe Price Dividend Growth, Janus Worldwide, Third Avenue Value,
PBHG Growth II, T. Rowe Price Diversified Small-Cap Growth and Value Line
Leveraged Growth Funds do not have sales loads.
(4) The Salomon Brothers Capital Fund Class O shares does not have a sales
load. Since May 1, 1990, the Fund has been managed by Salomon Brothers
Asset Management Inc. Prior hereto, it was managed by Lehman Management
Co.
(5) Total returns for the T. Rowe Price Diversified Small-Cap Growth Fund
reflect past and present expense limitations, which increased the fund's
total return.
(6) The fund offers Class B, Class C and Class T shares as well. Returns for
those classes may differ from those of Class A shares due to differing fee
structures.
THE PERFORMANCE OF SIMILAR SUB-ADVISER FUNDS DOES NOT REFLECT ANY OF THE
CHARGES, FEES, AND EXPENSES IMPOSED UNDER THE POLICIES OR 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-ADVISERS FUNDS AS "SIMILAR SUB-ADVISED FUNDS.")
(See the SAI for more information about the portfolios' performance.)
Prospectus 57
<PAGE>
- - --------------------------------------------------------------------------------
OTHER INFORMATION
- - --------------------------------------------------------------------------------
/question mark/ PURCHASE AND REDEMPTION OF SHARES
As described earlier in the prospectus, shares of the portfolios are sold
exclusively to certain separate accounts of Western Reserve Life Assurance Co.
of Ohio, PFL Life Insurance Company, AUSA Life Insurance Company, Inc., Peoples
Benefit Life Insurance Company and Transamerica Occidental Life Insurance
Company are not offered to the public. Shares are sold and redeemed at their
net asset value without the imposition of any sales commission or redemption
charge. (However, certain sales or other charges may apply to the policies or
annuity contracts, as described in the product prospectus.)
/question mark/ 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 (NYSE) (usually 4:00 p.m., Eastern Time), on each day the exchange is
open.
Net asset value (NAV) 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. Share prices for any transaction are those next calculated after
receipt of an order.
- - --------------------------------------------------------------------------------
WHAT IS NET ASSET VALUE?
The 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 WRL J.P. Morgan Money Market) are valued at
market value. If market values are not readily available, securities are valued
at fair value as determined by the Fund's Valuation Committee under the
supervision of the Fund's Board.
Money market instruments maturing in 60 days or less, and all securities held
in the WRL J.P. Morgan Money Market, are valued on the amortized cost basis.
Under this method, the NAV of the money market 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 NAV. (See the SAI for details.)
/question mark/ 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.
/question mark/ TAXES
Each portfolio has either qualified and expects to continue to qualify or will
qualify in its initial year as a regulated investment company under Subchapter
M of the Internal Revenue Code of 1986, as amended ("Code"). As qualified, a
portfolio is not subject to federal income tax on that part of its taxable
income that it distributes to you. Taxable income consists generally of net
investment income, and any capital gains. It is each portfolio's intention to
distribute all such income and gains.
Shares of each portfolio are offered only to the separate accounts of Western
Reserve and its affiliates. Separate accounts 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 Income Tax Considerations" included in the respective prospectuses for
the policies and the annuity contracts.
Section 817(h) of the Code and the regulations thereunder impose
"diversification" requirements on each portfolio. Each portfolio intends to
comply with the diversification requirements. These requirements
Prospectus 58
<PAGE>
- - --------------------------------------------------------------------------------
OTHER INFORMATION
- - --------------------------------------------------------------------------------
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. Specifically, the regulations provide that,
except as permitted by "safe harbor," rules described below, as of the end of
each calendar quarter or within 30 days thereafter, no more than 55% of the
portfolio's total assets may be represented by any one investment, no more than
70% by any two investments, no more than 80% by any three investments, and no
more than 90% by any four investments.
Section 817(h) also 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, 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. If a portfolio does
not satisfy the section 817(h) requirements, the separate accounts, the
insurance companies, the policies and the annuity contracts may be taxable. See
the prospectuses for the policies and annuity contracts.
The foregoing is only a summary of some of the important federal income tax
considerations generally affecting a portfolio and you; see the SAI for a more
detailed discussion. You are urged to consult your tax advisors.
/question mark/ REPORT TO POLICYHOLDERS
The fiscal year of each portfolio ends on December 31 of each year. The Fund
will send to you, at least semi-annually, reports which show the portfolios'
composition and other information. An annual report, with audited financial
information, will be sent to you each year.
/question mark/ DISTRIBUTION AND SERVICE PLANS
The Fund has adopted a plan pursuant to Rule 12b-1 under the 1940 Act (the
"Plan") and pursuant to the Plan, entered into a Distribution Agreement with
AFSG Securities Corporation (AFSG) located at 4333 Edgewood Road NE, Cedar
Rapids, Iowa 52499. AFSG is an affiliate of the investment adviser, and serves
as principal underwriter for the Fund. The Plan permits the use of Fund assets
to help finance the distribution of the shares of the portfolios. Under the
Plan, the Fund, on behalf of the portfolios, is permitted to pay to various
service providers up to 0.15% of the average daily net assets of each portfolio
as payment for actual expenses incurred in connection with the distribution of
the shares of the portfolios. Because these fees are paid out of Fund assets on
an on-going basis, over time these costs will increase the cost of your
investment and may cost you more than other types of sales charges.
As of the date of this prospectus, the Fund has not paid any distribution fees
under the Plan and does not intend to do so before April 30, 2001. You will
receive written notice prior to the payment of any fees under the Plan.
Prospectus 59
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
THE FINANCIAL HIGHLIGHTS TABLE IS INTENDED TO HELP YOU UNDERSTAND A PORTFOLIO'S
FINANCIAL PERFORMANCE FOR THE PAST 5 YEARS (OR, IF SHORTER, THE PERIOD OF THE
PORTFOLIO'S OPERATIONS). CERTAIN INFORMATION REFLECTS FINANCIAL RESULTS FOR A
SINGLE PORTFOLIO SHARE. THE TOTAL RETURNS IN THE TABLE REPRESENT THE RATE AN
INVESTOR WOULD HAVE EARNED (OR LOST) ON AN INVESTMENT IN EACH PORTFOLIO
(ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS). THIS INFORMATION HAS BEEN DERIVED
FROM FINANCIAL STATEMENTS AUDITED BY PRICEWATERHOUSECOOPERS LLP, INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS, WHOSE REPORT, ALONG WITH THE FUND'S FINANCIAL
STATEMENTS, IS INCLUDED IN THE FUND'S ANNUAL REPORT, WHICH IS AVAILABLE UPON
REQUEST BY CALLING THE FUND AT 1-800-851-9777. (INFORMATION IS NOT INCLUDED FOR
WRL GREAT COMPANIES -- AMERICA(SM), WRL GREAT COMPANIES -- TECHNOLOGY(SM) OR WRL
VALUE LINE AGGRESSIVE GROWTH AS THESE PORTFOLIOS COMMENCED OPERATIONS MAY 1,
2000.)
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL J.P. MORGAN MONEY MARKET
=====================================================
DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from operations:
Net investment income (loss) ....................................... 0.05 0.05 0.05 0.05 0.05
Net realized and unrealized gain (loss) on investments ............. 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- -------
Net income (loss) from operations ................................. 0.05 0.05 0.05 0.05 0.05
-------- -------- -------- -------- -------
Distributions:
Dividends from net investment income ............................... (0.05) (0.05) (0.05) (0.05) (0.05)
Dividends in excess of net investment income ....................... 0.00 0.00 0.00 0.00 0.00
Distributions from net realized gains on investments ............... 0.00 0.00 0.00 0.00 0.00
Distributions in excess of net realized gains on investments ....... 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- -------
Total distributions ............................................... (0.05) (0.05) (0.05) (0.05) (0.05)
-------- -------- -------- -------- -------
Net asset value, end of year ......................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== =======
Total return ......................................................... 4.63 % 5.26 % 5.24 % 5.03 % 5.40 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................... $429,811 $ 169,731 $ 119,708 $ 122,114 $ 80,544
Ratio of expenses to average net assets ............................ 0.44 % 0.46 % 0.48 % 0.52 % 0.56 %
Ratio of net investment income (loss) to average net assets ........ 4.81 % 5.24 % 5.32 % 5.03 % 5.30 %
Portfolio turnover rate ............................................ n/a n/a n/a n/a n/a
</TABLE>
<TABLE>
<CAPTION>
WRL AEGON BOND
========================================================
DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year .................................. $ 11.59 $ 11.14 $ 10.71 $ 11.35 $ 9.80
Income from operations:
Net investment income (loss) ...................................... 0.64 0.64 0.65 0.64 0.69
Net realized and unrealized gain (loss) on investments ............ (0.97) 0.40 0.32 (0.64) 1.55
-------- -------- -------- -------- --------
Net income (loss) from operations ................................ (0.33) 1.04 0.97 0.00 2.24
-------- -------- -------- -------- --------
Distributions:
Dividends from net investment income .............................. (0.65) (0.59) (0.54) (0.64) (0.69)
Dividends in excess of net investment income ...................... 0.00 0.00 0.00 0.00 0.00
Distributions from net realized gains on investments .............. 0.00 0.00 0.00 0.00 0.00
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- --------
Total distributions .............................................. (0.65) (0.59) (0.54) (0.64) (0.69)
-------- -------- -------- -------- --------
Net asset value, end of year ........................................ $ 10.61 $ 11.59 $ 11.14 $ 10.71 $ 11.35
======== ======== ======== ======== ========
Total return ........................................................ (2.94)% 9.32 % 9.16 % 0.14 % 22.99 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $153,885 $170,744 $129,654 $95,759 $96,972
Ratio of expenses to average net assets ........................... 0.53 % 0.54 % 0.64 % 0.64 % 0.61 %
Ratio of net investment income (loss) to average net assets ....... 5.67 % 5.54 % 5.90 % 5.96 % 6.45 %
Portfolio turnover rate ........................................... 26.40 % 51.60 % 213.03 % 187.72 % 120.54 %
</TABLE>
Prospectus 60
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL JANUS GROWTH
==============================================================
DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year .............................. $ 59.94 $ 36.84 $ 35.00 $ 31.66 $ 23.81
Income from operations:
Net investment income (loss) .................................. (0.04) 0.12 0.31 0.34 0.26
Net realized and unrealized gain (loss) on investments ........ 34.02 23.49 5.88 5.35 10.97
---------- ---------- ---------- ---------- ----------
Net income (loss) from operations ............................ 33.98 23.61 6.19 5.69 11.23
---------- ---------- ---------- ---------- ----------
Distributions:
Dividends from net investment income .......................... 0.00 (0.09) (0.26) (0.35) (0.24)
Dividends in excess of net investment income .................. (1.17) 0.00 0.00 (0.01) 0.00
Distributions from net realized gains on investments .......... (14.75) (0.42) (4.09) (1.99) (3.14)
Distributions in excess of net realized gains on investments .. 0.00 0.00 0.00 0.00 0.00
---------- ---------- ---------- ---------- ----------
Total distributions .......................................... (15.92) (0.51) (4.35) (2.35) (3.38)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year .................................... $ 78.00 $ 59.94 $ 36.84 $ 35.00 $ 31.66
========== ========== ========== ========== ==========
Total return .................................................... 59.67 % 64.47 % 17.54 % 17.96 % 47.12 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ...................... $4,141,240 $3,086,057 $1,839,453 $1,527,409 $1,195,174
Ratio of expenses to average net assets ....................... 0.82 % 0.83 % 0.87 % 0.88 % 0.86 %
Ratio of net investment income (loss) to average net assets ... (0.05)% 0.25 % 0.80 % 0.98 % 0.90 %
Portfolio turnover rate ....................................... 70.95 % 35.29 % 85.88 % 45.21 % 130.48 %
</TABLE>
<TABLE>
<CAPTION>
WRL JANUS GLOBAL
============================================================
DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ............................... $ 23.71 $ 19.04 $ 18.12 $ 15.52 $ 13.12
Income from operations:
Net investment income (loss) ................................... (0.04) 0.05 0.08 0.08 0.10
Net realized and unrealized gain (loss) on investments ......... 16.42 5.61 3.32 4.20 2.91
---------- ---------- -------- -------- --------
Net income (loss) from operations ............................. 16.38 5.66 3.40 4.28 3.01
---------- ---------- -------- -------- --------
Distributions:
Dividends from net investment income ........................... 0.00 (0.13) (0.13) (0.04) 0.00
Dividends in excess of net investment income ................... 0.00 0.00 (1.01) (0.17) 0.00
Distributions from net realized gains on investments ........... (2.63) (0.80) (1.34) (1.47) (0.61)
Distributions in excess of net realized gains on investments ... 0.00 (0.06) 0.00 0.00 0.00
---------- ---------- -------- -------- --------
Total distributions ........................................... (2.63) (0.99) (2.48) (1.68) (0.61)
---------- ---------- -------- -------- --------
Net asset value, end of year ..................................... $ 37.46 $ 23.71 $ 19.04 $ 18.12 $ 15.52
========== ========== ======== ======== ========
Total return ..................................................... 71.10 % 30.01 % 18.75 % 27.74 % 23.06 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ....................... $1,926,210 $1,069,765 $785,966 $534,820 $289,506
Ratio of expenses to average net assets ........................ 0.92 % 0.95 % 1.00 % 0.99 % 0.99 %
Ratio of net investment income (loss) to average net assets .... (0.14)% 0.23 % 0.41 % 0.46 % 0.75 %
Portfolio turnover rate ........................................ 68.10 % 87.36 % 97.54 % 88.31 % 130.60 %
</TABLE>
Prospectus 61
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL LKCM STRATEGIC TOTAL RETURN
========================================================
DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year .................................. $ 16.40 $ 15.62 $ 13.97 $ 12.86 $ 10.90
Income from operations:
Net investment income (loss) ...................................... 0.34 0.39 0.37 0.37 0.37
Net realized and unrealized gain (loss) on investments ............ 1.59 1.09 2.68 1.56 2.33
-------- -------- -------- -------- --------
Net income (loss) from operations ................................ 1.93 1.48 3.05 1.93 2.70
-------- -------- -------- -------- --------
Distributions:
Dividends from net investment income .............................. (0.35) (0.38) (0.35) (0.32) (0.37)
Dividends in excess of net investment income ...................... 0.00 0.00 (0.03) 0.00 0.00
Distributions from net realized gains on investments .............. (1.13) (0.32) (1.02) (0.50) (0.37)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- --------
Total distributions .............................................. (1.48) (0.70) (1.40) (0.82) (0.74)
-------- -------- -------- -------- --------
Net asset value, end of year ........................................ $ 16.85 $ 16.40 $ 15.62 $ 13.97 $ 12.86
======== ======== ======== ======== ========
Total return ........................................................ 12.07 % 9.64 % 21.85 % 15.00 % 24.66 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $624,416 $592,312 $526,577 $390,141 $256,806
Ratio of expenses to average net assets ........................... 0.86 % 0.86 % 0.88 % 0.91 % 0.87 %
Ratio of net investment income (loss) to average net assets ....... 2.02 % 2.43 % 2.43 % 2.72 % 3.07 %
Portfolio turnover rate ........................................... 45.42 % 49.20 % 48.20 % 49.32 % 52.59 %
</TABLE>
<TABLE>
<CAPTION>
WRL VKAM EMERGING GROWTH
==========================================================
DECEMBER 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year .................................. $ 26.92 $ 20.37 $ 18.46 $ 16.25 $ 11.55
Income from operations:
Net investment income (loss) ...................................... (0.15) (0.08) (0.05) (0.04) 0.01
Net realized and unrealized gain (loss) on investments ............ 26.83 7.56 4.03 3.10 5.42
---------- -------- -------- -------- --------
Net income (loss) from operations ................................ 26.68 7.48 3.98 3.06 5.43
---------- -------- -------- -------- --------
Distributions: .....................................................
Dividends from net investment income .............................. 0.00 0.00 0.00 0.00 0.00
Dividends in excess of net investment income ...................... (0.21) 0.00 0.00 0.00 0.00
Distributions from net realized gains on investments .............. (7.38) (0.93) (2.07) (0.85) (0.73)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00 0.00 0.00
---------- -------- -------- -------- --------
Total distributions .............................................. (7.59) (0.93) (2.07) (0.85) (0.73)
---------- -------- -------- -------- --------
Net asset value, end of year ........................................ $ 46.01 $ 26.92 $ 20.37 $ 18.46 $ 16.25
========== ======== ======== ======== ========
Total return ........................................................ 105.16 % 37.33 % 21.45 % 18.88 % 46.79 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $1,916,025 $853,440 $592,003 $431,454 $288,519
Ratio of expenses to average net assets ........................... 0.87 % 0.89 % 0.93 % 0.94 % 0.91 %
Ratio of net investment income (loss) to average net assets ....... (0.44)% (0.36)% (0.27)% (0.24)% 0.03 %
Portfolio turnover rate ........................................... 117.72 % 99.50 % 99.78 % 80.02 % 124.13 %
</TABLE>
Prospectus 62
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL ALGER AGGRESSIVE GROWTH
==========================================================
DECEMBER 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year .................................. $ 22.44 $ 16.04 $ 14.18 $ 13.25 $ 9.86
Income from operations:
Net investment income (loss) ...................................... (0.15) (0.04) (0.01) (0.01) (0.06)
Net realized and unrealized gain (loss) on investments ............ 14.95 7.68 3.44 1.38 3.96
---------- -------- -------- -------- --------
Net income (loss) from operations ................................ 14.80 7.64 3.43 1.37 3.90
---------- -------- -------- -------- --------
Distributions:
Dividends from net investment income .............................. (0.16) 0.00 0.00 0.00 0.00
Dividends in excess of net investment income ...................... (1.38) (0.05) (0.42) (0.19) 0.00
Distributions from net realized gains on investments .............. (2.42) (1.19) (1.15) (0.25) (0.51)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00 0.00 0.00
---------- -------- -------- -------- --------
Total distributions .............................................. (3.96) (1.24) (1.57) (0.44) (0.51)
---------- -------- -------- -------- --------
Net asset value, end of year ........................................ $ 33.28 $ 22.44 $ 16.04 $ 14.18 $ 13.25
========== ======== ======== ======== ========
Total return ........................................................ 69.02 % 48.69 % 24.25 % 10.45 % 38.02 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $1,117,511 $574,164 $336,166 $220,552 $158,534
Ratio of expenses to average net assets ........................... 0.89 % 0.91 % 0.96 % 0.98 % 1.07 %
Ratio of net investment income (loss) to average net assets ....... (0.56)% (0.21)% (0.06)% (0.10)% (0.48)%
Portfolio turnover rate ........................................... 101.71 % 117.44 % 136.18 % 101.28 % 108.04 %
</TABLE>
<TABLE>
<CAPTION>
WRL AEGON BALANCED
=====================================================
DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................................... $ 12.54 $ 12.01 $ 11.39 $ 10.63 $ 9.24
Income from operations:
Net investment income (loss) ....................................... 0.26 0.35 0.38 0.34 0.44
Net realized and unrealized gain (loss) on investments ............. 0.12 0.47 1.56 0.80 1.38
-------- ------- ------- ------- -------
Net income (loss) from operations ................................. 0.38 0.82 1.94 1.14 1.82
-------- ------- ------- ------- -------
Distributions:
Dividends from net investment income ............................... (0.26) (0.28) (0.36) (0.28) (0.43)
Dividends in excess of net investment income ....................... 0.00 0.00 (0.30) 0.00 0.00
Distributions from net realized gains on investments ............... 0.00 0.00 (0.66) (0.10) 0.00
Distributions in excess of net realized gains on investments ....... 0.00 (0.01) 0.00 0.00 0.00
-------- ------- ------- ------- -------
Total distributions ............................................... (0.26) (0.29) (1.32) (0.38) (0.43)
-------- ------- ------- ------- -------
Net asset value, end of year ......................................... $ 12.66 $ 12.54 $ 12.01 $ 11.39 $ 10.63
======== ======= ======= ======= =======
Total return ......................................................... 3.03 % 6.93 % 17.10 % 10.72 % 19.80 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................... $108,473 $95,000 $73,451 $49,331 $31,114
Ratio of expenses to average net assets ............................ 0.89 % 0.91 % 0.94 % 0.97 % 0.97 %
Ratio of net investment income (loss) to average net assets ........ 2.06 % 2.89 % 3.13 % 3.14 % 4.38 %
Portfolio turnover rate ............................................ 74.88 % 83.94 % 77.06 % 76.90 % 98.55 %
</TABLE>
Prospectus 63
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL FEDERATED GROWTH & INCOME
=========================================================
DECEMBER 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year .................................. $ 12.28 $ 12.56 $ 11.76 $ 11.12 $ 9.30
Income from operations:
Net investment income (loss) ...................................... 0.48 0.53 0.49 0.42 0.46
Net realized and unrealized gain (loss) on investments ............ (1.00) (0.16) 2.35 0.87 1.93
-------- ------- -------- ------- -------
Net income (loss) from operations ................................ (0.52) 0.37 2.84 1.29 2.39
-------- ------- -------- ------- -------
Distributions:
Dividends from net investment income .............................. (0.73) (0.55) (0.43) (0.33) (0.46)
Dividends in excess of net investment income ...................... (0.02) 0.00 (0.59) 0.00 0.00
Distributions from net realized gains on investments .............. (0.10) (0.10) (1.02) (0.32) (0.11)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00 0.00 0.00
-------- ------- -------- ------- -------
Total distributions .............................................. (0.85) (0.65) (2.04) (0.65) (0.57)
-------- ------- -------- ------- -------
Net asset value, end of year ........................................ $ 10.91 $ 12.28 $ 12.56 $ 11.76 $ 11.12
======== ======= ======== ======= =======
Total return ........................................................ (4.45)% 3.05 % 24.65 % 11.64 % 25.25 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 76,280 $87,616 $60,492 $38,115 $24,607
Ratio of expenses to average net assets ........................... 0.89 % 0.90 % 0.96 % 1.00 % 1.00 %
Ratio of net investment income (loss) to average net assets ....... 4.01 % 4.35 % 3.84 % 3.73 % 4.56 %
Portfolio turnover rate ........................................... 17.14 % 97.17 % 155.77 % 68.53 % 78.34 %
</TABLE>
<TABLE>
<CAPTION>
WRL DEAN ASSET ALLOCATION
=========================================================
DECEMBER 31,
---------------------------------------------------------
1999 1998 1997 1996 1995(a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year .................................. $ 13.35 $ 13.61 $ 12.61 $ 11.49 $ 10.00
Income from operations:
Net investment income (loss) ...................................... 0.39 0.41 0.36 0.33 0.41
Net realized and unrealized gain (loss) on investments ............ (1.14) 0.71 1.72 1.33 1.93
-------- -------- -------- -------- --------
Net income (loss) from operations ................................ (0.75) 1.12 2.08 1.66 2.34
-------- -------- -------- -------- --------
Distributions:
Dividends from net investment income .............................. (0.41) (0.39) (0.33) (0.30) (0.41)
Dividends in excess of net investment income ...................... 0.00 0.00 (0.19) 0.00 0.00
Distributions from net realized gains on investments .............. (0.04) (0.99) (0.56) (0.24) (0.44)
Distributions in excess of net realized gains on investments ...... (0.02) 0.00 0.00 0.00 0.00
-------- -------- -------- -------- --------
Total distributions .............................................. (0.47) (1.38) (1.08) (0.54) (0.85)
-------- -------- -------- -------- --------
Net asset value, end of year ........................................ $ 12.13 $ 13.35 $ 13.61 $ 12.61 $ 11.49
======== ======== ======== ======== ========
Total return ........................................................ (5.64)% 8.33 % 16.59 % 14.42 % 20.09 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $261,707 $365,738 $302,745 $206,172 $120,531
Ratio of expenses to average net assets ........................... 0.87 % 0.86 % 0.87 % 0.90 % 0.93 %
Ratio of net investment income (loss) to average net assets ....... 2.99 % 2.93 % 2.65 % 2.78 % 3.76 %
Portfolio turnover rate ........................................... 88.78 % 76.62 % 63.76 % 98.97 % 38.68 %
</TABLE>
Prospectus 64
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL C.A.S.E. GROWTH
========================================================
DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995(b)
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year .................................. $ 12.99 $ 14.01 $ 13.42 $ 11.66 $ 10.00
Income from operations:
Net investment income (loss) ...................................... (0.05) 0.02 0.04 0.12 0.12
Net realized and unrealized gain (loss) on investments ............ 4.38 0.31 1.95 1.92 2.49
-------- -------- -------- -------- ---------
Net income (loss) from operations ................................ 4.33 0.33 1.99 2.04 2.61
-------- -------- -------- -------- ---------
Distributions:
Dividends from net investment income .............................. (0.66) (0.36) (0.03) (0.05) (0.12)
Dividends in excess of net investment income ...................... (0.96) (0.90) (1.23) 0.00 0.00
Distributions from net realized gains on investments .............. 0.00 (0.09) (0.14) (0.23) (0.83)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- ---------
Total distributions .............................................. (1.62) (1.35) (1.40) (0.28) (0.95)
-------- -------- -------- -------- ---------
Net asset value, end of year ........................................ $ 15.70 $ 12.99 $ 14.01 $ 13.42 $ 11.66
======== ======== ======== ======== =========
Total return ........................................................ 33.84 % 2.47 % 15.03 % 17.50 % 20.65 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 93,608 $ 69,401 $ 60,596 $ 26,559 $ 2,578
Ratio of expenses to average net assets ........................... 1.00 % 1.00 % 1.00 % 1.00 % 1.00 %
Ratio of net investment income (loss) to average net assets ....... (0.36)% 0.14 % 0.25 % 0.94 % 1.02 %
Portfolio turnover rate ........................................... 143.52 % 205.28 % 196.50 % 160.27 % 121.62 %
</TABLE>
<TABLE>
<CAPTION>
WRL NWQ VALUE EQUITY
===================================================
DECEMBER 31,
---------------------------------------------------
1999 1998 1997 1996(c)
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ................................... $ 12.12 $ 13.90 $ 11.27 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 0.10 0.12 0.12 0.10
Net realized and unrealized gain (loss) on investments ............. 0.85 (0.78) 2.69 1.23
-------- -------- -------- -------
Net income (loss) from operations ................................. 0.95 (0.66) 2.81 1.33
-------- -------- -------- -------
Distributions:
Dividends from net investment income ............................... (0.10) (0.13) (0.09) (0.04)
Dividends in excess of net investment income ....................... 0.00 (0.12) (0.07) 0.00
Distributions from net realized gains on investments ............... 0.00 (0.62) (0.02) (0.02)
Distributions in excess of net realized gains on investments ....... (0.20) (0.25) 0.00 0.00
-------- -------- -------- -------
Total distributions ............................................... (0.30) (1.12) (0.18) (0.06)
-------- -------- -------- -------
Net asset value, end of year ......................................... $ 12.77 $ 12.12 $ 13.90 $ 11.27
======== ======== ======== =======
Total return ......................................................... 7.95 % (4.78)% 25.04 % 13.19 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................... $137,158 $157,157 $173,435 $49,394
Ratio of expenses to average net assets ............................ 0.90 % 0.89 % 0.89 % 1.00 %
Ratio of net investment income (loss) to average net assets ........ 0.77 % 0.89 % 0.90 % 0.89 %
Portfolio turnover rate ............................................ 34.19 % 43.60 % 17.28 % 7.93 %
</TABLE>
Prospectus 65
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL GE/SCOTTISH
EQUITABLE INTERNATIONAL EQUITY
======================================
DECEMBER 31,
--------------------------------------
1999 1998 1997(d)
------- ------- -------
<S> <C> <C> <C>
Net asset value, beginning of year ................................... $ 12.07 $ 10.70 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 0.04 0.03 0.02
Net realized and unrealized gain (loss) on investments ............. 2.90 1.35 0.73
------- ------- -------
Net income (loss) from operations ................................. 2.94 1.38 0.75
------- ------- -------
Distributions:
Dividends from net investment income ............................... (0.05) (0.01) (0.01)
Dividends in excess of net investment income ....................... 0.00 0.00 (0.04)
Distributions from net realized gains on investments ............... (0.68) 0.00 0.00
Distributions in excess of net realized gains on investments ....... 0.00 0.00 0.00
------- ------- -------
Total distributions ............................................... (0.73) (0.01) (0.05)
------- ------- -------
Net asset value, end of year ......................................... $ 14.28 $ 12.07 $ 10.70
======= ======= =======
Total return ......................................................... 24.95 % 12.85 % 7.50 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................... $33,579 $32,149 $19,795
Ratio of expenses to average net assets ............................ 1.50 % 1.50 % 1.50 %
Ratio of net investment income (loss) to average net assets ........ 0.31 % 0.30 % 0.18 %
Portfolio turnover rate ............................................ 99.77 % 71.74 % 54.33 %
</TABLE>
<TABLE>
<CAPTION>
WRL GE U.S. EQUITY
========================================
DECEMBER 31,
----------------------------------------
1999 1998 1997(d)
-------- -------- -------
<S> <C> <C> <C>
Net asset value, beginning of year ................................... $ 14.42 $ 12.23 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 0.07 0.09 0.09
Net realized and unrealized gain (loss) on investments ............. 2.55 2.69 2.60
-------- -------- -------
Net income (loss) from operations ................................. 2.62 2.78 2.69
-------- -------- -------
Distributions:
Dividends from net investment income ............................... (0.18) (0.15) (0.04)
Dividends in excess of net investment income ....................... (0.33) (0.33) (0.38)
Distributions from net realized gains on investments ............... (0.74) (0.11) (0.04)
Distributions in excess of net realized gains on investments ....... 0.00 0.00 0.00
-------- -------- -------
Total distributions ............................................... (1.25) (0.59) (0.46)
-------- -------- -------
Net asset value, end of year ......................................... $ 15.79 $ 14.42 $ 12.23
======== ======== =======
Total return ......................................................... 18.41 % 22.87 % 27.01 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................... $179,267 $110,803 $42,951
Ratio of expenses to average net assets ............................ 0.93 % 1.05 % 1.30 %
Ratio of net investment income (loss) to average net assets ........ 0.46 % 0.67 % 0.75 %
Portfolio turnover rate ............................................ 44.01 % 63.08 % 92.35 %
</TABLE>
Prospectus 66
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL THIRD AVENUE WRL J.P. MORGAN
VALUE REAL ESTATE SECURITIES
=========================== =========================
DECEMBER 31, DECEMBER 31,
--------------------------- -------------------------
1999 1998(e) 1999 1998(f)
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ................................... $ 9.29 $ 10.00 $ 8.51 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 0.16 0.06 0.49 0.36
Net realized and unrealized gain (loss) on investments ............. 1.28 (0.74) (0.79) (1.85)
------- ------- -------- --------
Net income (loss) from operations ................................. 1.44 (0.68) (0.30) (1.49)
------- ------- -------- --------
Distributions:
Dividends from net investment income ............................... (0.28) (0.03) (0.15) 0.00
Dividends in excess of net investment income ....................... 0.00 0.00 0.00 0.00
Distributions from net realized gains on investments ............... 0.00 0.00 0.00 0.00
Distributions in excess of net realized gains on investments ....... 0.00 0.00 0.00 0.00
------- ------- -------- --------
Total distributions ............................................... (0.28) (0.03) (0.15) 0.00
------- ------- -------- --------
Net asset value, end of year ......................................... $ 10.45 $ 9.29 $ 8.06 $ 8.51
======= ======= ======== ========
Total return ......................................................... 15.72 % (6.84)% (3.77)% (14.93)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................... $19,217 $18,206 $ 3,199 $ 2,414
Ratio of expenses to average net assets ............................ 1.00 % 1.00 % 1.00 % 1.00 %
Ratio of net investment income (loss) to average net assets ........ 1.76 % 0.63 % 5.91 % 6.03 %
Portfolio turnover rate ............................................ 9.56 % 4.35 % 189.80 % 100.80 %
</TABLE>
<TABLE>
<CAPTION>
WRL WRL WRL WRL
GOLDMAN SACHS GOLDMAN SACHS T. ROWE PRICE T. ROWE PRIC
GROWTH SMALL CAP DIVIDEND GROWTH SMALL CAP
=============== =============== ================= =============
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
--------------- --------------- ----------------- -------------
1999(G) 1999(G) 1999(G) 1999(G)
--------------- --------------- ----------------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ............................... $ 10.00 $ 10.00 $ 10.00 $ 10.00
Income from operations:
Net investment income (loss) ................................... 0.01 0.03 0.11 (0.03)
Net realized and unrealized gain (loss) on investments ......... 1.74 1.74 (0.85) 3.87
-------- --------- ------- ---------
Net income (loss) from operations ............................. 1.75 1.77 (0.74) 3.84
-------- --------- ------- ---------
Distributions:
Dividends from net investment income ........................... 0.00 (0.04) 0.00 0.00
Dividends in excess of net investment income ................... 0.00 (0.48) 0.00 (0.43)
Distributions from net realized gains on investments ........... 0.00 0.00 0.00 0.00
Distributions in excess of net realized gains on investments.... 0.00 0.00 0.00 0.00
-------- --------- ------- ---------
Total distributions ........................................... 0.00 (0.52) 0.00 (0.43)
-------- --------- ------- ---------
Net asset value, end of year ..................................... $ 11.75 $ 11.25 $ 9.26 $ 13.41
======== ========= ======= =========
Total return ..................................................... 17.50 % 17.82 % (7.40)% 38.49 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ....................... $ 8,204 $ 2,783 $ 8,730 $ 9,824
Ratio of expenses to average net assets ........................ 1.00 % 1.00 % 1.00 % 1.00 %
Ratio of net investment income (loss) to average net assets .... 0.12 % 0.50 % 1.75 % (0.44)%
Portfolio turnover rate ........................................ 40.46 % 340.66 % 43.76 % 159.02 %
</TABLE>
Prospectus 67
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL WRL WRL
SALOMON PILGRIM BAXTER DREYFUS
ALL CAP MID CAP GROWTH MID CAP
============== ================ =============
DECEMBER 31, DECEMBER 31, DECEMBER 31,
-------------- ---------------- -------------
1999(G) 1999(G) 1999(G)
-------------- ---------------- -------------
<S> <C> <C> <C>
Net asset value, beginning of year ................................... $ 10.00 $ 10.00 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 0.08 (0.03) 0.04
Net realized and unrealized gain (loss) on investments ............. 1.48 7.83 0.68
-------- -------- --------
Net income (loss) from operations ................................. 1.56 7.80 0.72
-------- -------- --------
Distributions:
Dividends from net investment income ............................... (0.06) 0.00 0.00
Dividends in excess of net investment income ....................... (0.32) (0.05) 0.00
Distributions from net realized gains on investments ............... 0.00 0.00 0.00
Distributions in excess of net realized gains on investments ....... 0.00 0.00 0.00
-------- -------- --------
Total distributions ............................................... (0.38) (0.05) 0.00
-------- -------- --------
Net asset value, end of year ......................................... $ 11.18 $ 17.75 $ 10.72
======== ======== ========
Total return ......................................................... 15.57 % 78.00 % 7.20 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................... $ 6,686 $ 37,201 $ 3,384
Ratio of expenses to average net assets ............................ 1.00 % 1.00 % 1.00 %
Ratio of net investment income (loss) to average net assets ........ 1.09 % (0.30)% 0.58 %
Portfolio turnover rate ............................................ 216.29 % 155.71 % 94.19 %
</TABLE>
Prospectus 68
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS
Per share information has been computed using average shares outstanding
throughout each period. Total return reflects all Portfolio expenses and
includes reinvestment of dividends and capital gains; it does not reflect the
charges and deductions under the policies or annuity contracts. Total return
and portfolio turnover rate are not annualized for periods of less than one
year. Ratio of expenses and ratio of net investment income (loss) to average
net assets are annualized for periods of less than one year. For the year ended
December 31, 1999, ratio of expenses to average net assets is net of the
advisory fee waiver. For the years prior to 1999, ratio of expenses to average
net assets is net of the advisory fee waiver and fees paid indirectly. Without
the advisory fee waived by WRL Management and the fees paid indirectly, ratio
of expenses to average net assets for each period presented would be as follows
(ratios are annualized for periods of less than one year):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
PORTFOLIO 1999 1998 1997 1996 1995
- - --------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
WRL J.P. Morgan Money Market ........................... * * * * *
WRL AEGON Bond ......................................... * * * * *
WRL Janus Growth ....................................... 0.82 % * * * *
WRL Janus Global ....................................... * * * * *
WRL LKCM Strategic Total Return ........................ * * * * *
WRL VKAM Emerging Growth ............................... * * * * *
WRL Alger Aggressive Growth ............................ * * * * *
WRL AEGON Balanced ..................................... * * * * *
WRL Federated Growth & Income .......................... * * * * 1.08 %
WRL Dean Asset Allocation .............................. * * * * *
WRL C.A.S.E. Growth .................................... * * 1.14 % 1.70 % 4.17 %
WRL NWQ Value Equity ................................... * * * 1.10 % **
WRL GE/Scottish Equitable International Equity ......... 1.84 % 1.96 % 3.14 % ** **
WRL GE U.S. Equity ..................................... * * 1.54 % ** **
WRL Third Avenue Value ................................. 1.06 % 1.13 % ** ** **
WRL J.P. Morgan Real Estate Securities ................. 2.69 % 3.34 % ** ** **
WRL Goldman Sachs Growth ............................... 2.68 % ** ** ** **
WRL Goldman Sachs Small Cap ............................ 5.57 % ** ** ** **
WRL T. Rowe Price Dividend Growth ...................... 2.35 % ** ** ** **
WRL T. Rowe Price Small Cap ............................ 2.46 % ** ** ** **
WRL Salomon All Cap .................................... 2.87 % ** ** ** **
WRL Pilgrim Baxter Mid Cap Growth ...................... 1.40 % ** ** ** **
WRL Dreyfus Mid Cap .................................... 4.89 % ** ** ** **
</TABLE>
* Ratio difference less than 0.01%.
** Portfolio was not in existence during this period.
(a) The inception date of this portfolio was January 3, 1995.
(b) The inception date of this portfolio was May 1, 1995.
(c) The inception date of this portfolio was May 1, 1996.
(d) The inception date of this portfolio was January 2, 1997.
(e) The inception date of this portfolio was January 2, 1998.
(f) The inception date of this portfolio was May 1, 1998.
(g) The inception date of this portfolio was May 1, 1999.
Prospectus 69
<PAGE>
ADDITIONAL INFORMATION ABOUT THESE PORTFOLIOS IS CONTAINED IN THE FUND'S ANNUAL
AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS AND IN THE STATEMENT OF ADDITIONAL
INFORMATION, DATED MAY 1, 2000, WHICH IS INCORPORATED BY REFERENCE INTO THIS
PROSPECTUS. IN THE FUND'S ANNUAL REPORT, YOU WILL FIND A DISCUSSION OF THE
MARKET CONDITIONS AND INVESTMENT STRATEGIES THAT SIGNIFICANTLY AFFECTED THE
FUND'S PERFORMANCE DURING THE LAST FISCAL YEAR.
YOU MAY ALSO CALL 1-800-851-9777 TO REQUEST THIS ADDITIONAL INFORMATION ABOUT
THE FUND WITHOUT CHARGE OR TO MAKE SHAREHOLDER INQUIRIES.
OTHER INFORMATION ABOUT THESE PORTFOLIOS HAS BEEN FILED WITH AND IS AVAILABLE
FROM THE U.S. SECURITIES AND EXCHANGE COMMISSION. INFORMATION ABOUT THE FUND
(INCLUDING THE SAI) CAN BE REVIEWED AND COPIED AT THE SECURITIES AND EXCHANGE
COMMISSION'S PUBLIC REFERENCE ROOM IN WASHINGTON, D.C. INFORMATION ON THE
OPERATION OF THE PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE COMMISSION
AT 202-942-8090. INFORMATION MAY BE OBTAINED, UPON PAYMENT OF A DUPLICATING FEE
BY WRITING THE PUBLIC REFERENCE SECTION OF THE COMMISSION, WASHINGTON, D.C.
20549-6009.
REPORTS AND OTHER INFORMATION ABOUT THE FUND ARE ALSO AVAILABLE ON THE
COMMISSION'S INTERNET SITE AT HTTP://WWW.SEC.GOV. (WRL SERIES FUND FILE NO.
811-4419.)
FOR MORE INFORMATION ABOUT THESE PORTFOLIOS, YOU MAY OBTAIN A COPY OF THE SAI OR
THE ANNUAL OR SEMI-ANNUAL REPORTS WITHOUT CHARGE, OR TO MAKE OTHER INQUIRIES
ABOUT THIS FUND, CALL THE NUMBER LISTED ABOVE.
(WRL SERIES FUND FILE NO. 811-4419.)
<PAGE>
- - --------------------------------------------------------------------------------
WRL SERIES FUND, INC.
AGGRESSIVE EQUITY PORTFOLIOS
o WRL VKAM EMERGING GROWTH
o WRL T. ROWE PRICE SMALL CAP
o WRL GOLDMAN SACHS SMALL CAP
o WRL PILGRIM BAXTER MID CAP GROWTH
o WRL ALGER AGGRESSIVE GROWTH
o WRL THIRD AVENUE VALUE
FOREIGN EQUITY PORTFOLIOS
o WRL GE INTERNATIONAL EQUITY
o WRL JANUS GLOBAL
GROWTH EQUITY PORTFOLIOS
o WRL JANUS GROWTH
o WRL GOLDMAN SACHS GROWTH
o WRL GE U.S. EQUITY
o WRL SALOMON ALL CAP
o WRL C.A.S.E. GROWTH
o WRL DREYFUS MID CAP
o WRL NWQ VALUE EQUITY
BALANCED PORTFOLIOS
o WRL T. ROWE PRICE DIVIDEND GROWTH
o WRL DEAN ASSET ALLOCATION
o WRL LKCM STRATEGIC TOTAL RETURN
o WRL J.P. MORGAN REAL ESTATE SECURITIES
o WRL FEDERATED GROWTH & INCOME
o WRL AEGON BALANCED
FIXED-INCOME PORTFOLIOS
o WRL AEGON BOND
CAPITAL PRESERVATION PORTFOLIOS
o WRL J.P. MORGAN MONEY MARKET
- - --------------------------------------------------------------------------------
PROSPECTUS
The Securities and Exchange Commission
has not approved or disapproved these
securities or passed upon
the adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
May 1, 2000
<PAGE>
- - --------------------------------------------------------------------------------
TABLE OF CONTENTS
- - --------------------------------------------------------------------------------
INVESTOR INFORMATION ...................................................... 1
ALL ABOUT THE FUND
AGGRESSIVE EQUITY PORTFOLIOS
WRL VKAM Emerging Growth ............................................... 2
WRL T. Rowe Price Small Cap ............................................ 3
WRL Goldman Sachs Small Cap ............................................ 4
WRL Pilgrim Baxter Mid Cap Growth ...................................... 4
WRL Alger Aggressive Growth ............................................ 5
WRL Third Avenue Value ................................................ 5
FOREIGN EQUITY PORTFOLIOS
WRL GE International Equity ............................................ 11
WRL Janus Global ....................................................... 12
GROWTH EQUITY PORTFOLIOS
WRL Janus Growth ....................................................... 17
WRL Goldman Sachs Growth ............................................... 17
WRL GE U.S. Equity ..................................................... 17
WRL Salomon All Cap .................................................... 18
WRL C.A.S.E. Growth .................................................... 18
WRL Dreyfus Mid Cap .................................................... 19
WRL NWQ Value Equity ................................................... 20
BALANCED PORTFOLIOS
WRL T. Rowe Price Dividend Growth ...................................... 27
WRL Dean Asset Allocation .............................................. 27
WRL LKCM Strategic Total Return ........................................ 28
WRL J.P. Morgan Real Estate Securities ................................ 28
WRL Federated Growth & Income .......................................... 29
WRL AEGON Balanced ..................................................... 29
FIXED-INCOME PORTFOLIOS
WRL AEGON Bond ......................................................... 36
CAPITAL PRESERVATION PORTFOLIOS
WRL J.P. Morgan Money Market .......................................... 39
RISK/REWARD INFORMATION ................................................... 42
EXPLANATION OF STRATEGIES AND RISKS ....................................... 43
HOW THE FUND IS MANAGED AND ORGANIZED ..................................... 48
PERFORMANCE INFORMATION ................................................... 53
OTHER INFORMATION ......................................................... 56
FINANCIAL HIGHLIGHTS ...................................................... 58
- - --------------------------------------------------------------------------------
WRL Series Fund, Inc. (Fund) currently offers twenty-six separate series
or investment portfolios. This prospectus includes twenty-three of those
portfolios. The Fund is an open-end management investment company, more
commonly known as a mutual fund.
Shares of these portfolios are currently only sold to separate accounts of
Western Reserve Life Assurance Co. of Ohio, PFL Life Insurance Company,
AUSA Life Insurance Company, Peoples Benefit Life Insurance Company and
Transamerica Occidental Life Insurance Company to fund the benefits under
certain individual flexible premium variable life insurance policies and
individual and group variable annuity contracts.
A particular portfolio of the Fund may not be available under the policy
or annuity contract you have chosen. The prospectus or disclosure document
for your policy or annuity contract shows the portfolios available to you.
Please read this prospectus carefully before selecting a portfolio. It
provides information to assist you in your decision. If you would like
additional information about a portfolio, please request a copy of the
Statement of Additional Information (SAI) (see back cover). The SAI is
incorporated by reference into this prospectus.
- - --------------------------------------------------------------------------------
Prospectus
<PAGE>
- - --------------------------------------------------------------------------------
INVESTOR INFORMATION
- - --------------------------------------------------------------------------------
TO HELP YOU UNDERSTAND . . .
In this prospectus, you will see the symbols below.
These are "icons" which serve as tools to direct you to the type of information
that is included in the accompanying paragraphs.
The icons are for your convenience and to assist you as you read this
prospectus.
/target/ The target directs you to a portfolio's goal or objective.
/chess piece/ The chess piece indicates discussion about a portfolio's
strategies.
/warning sign/ The warning sign indicates the risks of investing in a portfolio.
/graph/ The graph indicates investment performance.
/question mark/ The question mark provides additional information about the Fund
or may direct you on how to obtain further information.
SHARES OF A PORTFOLIO ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY
BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT.
Prospectus 1
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS
- - --------------------------------------------------------------------------------
WRL VKAM EMERGING GROWTH
WRL T. ROWE PRICE SMALL CAP
WRL GOLDMAN SACHS SMALL CAP
WRL PILGRIM BAXTER MID CAP GROWTH
WRL ALGER AGGRESSIVE GROWTH
WRL THIRD AVENUE VALUE
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES EACH AGGRESSIVE EQUITY PORTFOLIO OF
THE FUND AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIOS. FOR FURTHER
INFORMATION ON THESE PORTFOLIOS, PLEASE READ THE SECTION ENTITLED "EXPLANATION
OF STRATEGIES AND RISKS," BEGINNING ON PAGE 43, AND THE FUND'S SAI.
/target/ OBJECTIVES
WRL VKAM EMERGING GROWTH
This portfolio seeks capital appreciation by investing primarily in common
stocks of small and medium-sized companies.
WRL T. ROWE PRICE SMALL CAP
This portfolio seeks long-term growth of capital by investing primarily in
common stocks of small growth companies.
WRL GOLDMAN SACHS SMALL CAP
This portfolio seeks long-term growth of capital.
WRL PILGRIM BAXTER MID CAP GROWTH
This portfolio seeks capital appreciation.
WRL ALGER AGGRESSIVE GROWTH
This portfolio seeks long-term capital appreciation.
WRL THIRD AVENUE VALUE
This portfolio seeks long-term capital appreciation.
- - --------------------------------------------------------------------------------
WHAT IS AN AGGRESSIVE EQUITY PORTFOLIO?
Aggressive Equity Portfolios are those that seek maximum capital
appreciation (a rise in the share price/value). Current income is not a
significant factor. Some portfolios that are included in this category may
invest in out-of-the main-stream stocks, such as those of fledging or
struggling companies, or those in new or currently out-of-favor industries.
Some portfolios in this category may also use specialized investment
techniques such as options or short-term investing. For these reasons,
these portfolios usually entail greater risk than the overall equity
portfolio category.
- - --------------------------------------------------------------------------------
/chess piece/ POLICIES AND STRATEGIES
WRL VKAM EMERGING GROWTH
The portfolio's sub-adviser, Van Kampen Asset Management Inc. (VKAM), seeks to
achieve the portfolio's objective by investing:
o At least 65% of the portfolio's total assets in common stocks of emerging
growth companies. Emerging growth companies are those companies in the
early stages of their life cycles that the portfolio's sub-adviser believes
have the potential to become major enterprises.
o Options
o Futures
Prospectus 2
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
VKAM invests at least 65% of the portfolio's assets (under normal market
conditions) in common stocks of companies that are in the early stages of their
life cycle, and are believed by VKAM to have the potential to become major
enterprises. Some securities may have above average price volatility. VKAM
attempts to reduce overall exposure to risk from declines in the security
prices by spreading the portfolio's investments over many different companies
in a variety of industries.
VKAM will utilize options on securities, futures contracts and options thereon
in several different ways, depending upon the status of the portfolio's
investment portfolio and its expectations concerning the securities market.
VKAM will invest up to 20% of the portfolio's total assets in securities of
foreign issuers.
In times of stable or rising stock prices, the portfolio generally seeks to be
fully invested. Even when the portfolio is fully invested, VKAM believes that
at least a small portfolio of assets will be held as cash or cash equivalents
to honor redemption requests and for other short-term needs.
The amount of portfolio assets 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 seek to "equalize" the cash portion of its assets
and obtain performance that is equivalent to investing 100% in equity
securities.
The portfolio may take a temporary defensive position when the securities
trading markets or the economy are experiencing volatility or a prolonged
general decline, or other adverse conditions exist. This may be inconsistent
with the portfolio's principal investment strategies. Under these conditions,
the portfolio will be unable to achieve its investment objective.
- - --------------------------------------------------------------------------------
WHAT IS A TOP-DOWN APPROACH?
When using a "top-down" approach, the portfolio manager looks first at
broad market factors, and on the basis of those market factors, chooses
certain sectors, or industries within the overall market. The manager then
looks at individual companies within those sectors or industries.
- - --------------------------------------------------------------------------------
WRL T. ROWE PRICE SMALL CAP
The portfolio's sub-adviser, T. Rowe Price Associates, Inc. (T. Rowe Price),
seeks to achieve the portfolio's objective by investing principally in:
o Common stocks of small-cap growth companies
This portfolio will invest at least 65% of the fund's total assets in small-cap
growth companies. These companies are defined as companies whose market
capitalization falls within the range of or smaller than the bottom 100
companies in the Standard & Poor's 500 Stock Index (S&P 500), which was
approximately $3.3 billion and below as of December 31, 1999, but the upper size
limit will vary with market fluctuations. The S&P 500 measures the performance
of the common stocks of 500 large U.S. companies in the manufacturing,
utilities, transportation, and financial industries. It also tracks the
performance of common stocks issued by foreign and smaller U.S. companies in
similar industries. (A company's market "cap" is found by multiplying its shares
outstanding by its stock price.) Companies whose capitalization increases above
this range after the portfolio's initial purchase continue to be considered
small companies for purposes of this policy.
To help manage cash flows efficiently, T. Rowe Price may also buy and sell
stock index futures. The portfolio intends to be invested in a large number of
holdings. T. Rowe Price believes this diversification should minimize the
effects of individual security selection on portfolio performance.
Prospectus 3
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
Quantitative models are furnished by a sub-adviser to assist the sub-adviser in
evaluating a potential security. Characteristics are included in the model that
the sub-adviser deems advantageous in a security. Based on these models, stocks
are selected in a "top-down" manner so that the portfolio's portfolio as a
whole reflects characteristics T. Rowe Price considers important, such as
valuations (price/earnings or price/
book value ratios, for example) and projected earnings growth.
While the portfolio invests principally in common stocks, and, to a lesser
extent in stock index futures, it may also purchase other securities, in
keeping with its objective.
The portfolio may sell securities for a variety of reasons, such as to secure
gains, limit losses, or redeploy assets into more promising opportunities.
The portfolio may take a temporary defensive position when the securities
trading markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist. This may be
inconsistent with the portfolio's principal investment strategies. Under these
circumstances, the portfolio may be unable to achieve its investment objective.
- - --------------------------------------------------------------------------------
WHAT IS A QUANTITATIVE MODEL?
A quantitative model is fashioned by a portfolio's sub-adviser to assist
the sub-adviser in evaluating a potential security. The sub-adviser creates
a model that is designed using characteristics that the sub-adviser deems
advantageous in a security. The sub-adviser then compares a potential
security's characteristics against those of the model, and makes a
determination of whether or not to purchase the security based on the
results of that comparison.
- - --------------------------------------------------------------------------------
WRL GOLDMAN SACHS SMALL CAP
The portfolio's sub-adviser, Goldman Sachs Asset Management (GSAM), seeks to
achieve the portfolio's objective by investing principally in:
o Equity securities of U.S. issuers, and certain foreign issuers that are
traded in the U.S.
The portfolio will invest at least 90% of its assets in equity securities of
companies with public stock market capitalizations within the range of the
market capitalization of companies constituting the Russell 2000 (a widely
recognized unmanaged index of market performance which measures the performance
of the 2000 smallest companies in the Russell 3000 Index) at the time of
investment (currently $3.1 million to $12.3 billion). The equity securities
include those of U.S. issuers, and certain foreign issuers traded in the U.S.
The portfolio's fixed-income securities are limited to securities that are
considered cash equivalents.
The portfolio may also purchase Standard & Poor's Depositary Receipts
("SPDRs"). SPDRs are American Stock Exchange-traded securities that represent
ownership in the SPDR Trust, a trust which has been established to accumulate
and hold a portfolio of common stocks that is intended to track the price
performance and dividend yield of the S&P 500. SPDRs are included in the
portfolio's 10% limitation on investments in investment companies.
GSAM uses the CORE investment process. CORE is an acronym for
"Computer-Optimized, Research-Enhanced." GSAM selects the portfolio's
investments using both a variety of quantitative techniques and fundamental
research while seeking to maximize the portfolio's expected return, while
maintaining risk, style, capitalization and industry characteristics similar to
the Russell 2000 Index.
GSAM may take a temporary defensive position when the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist. This may be inconsistent
with the portfolio's principal investment strategies. Under these
circumstances, the portfolio may be unable to pursue its investment objective.
WRL PILGRIM BAXTER MID CAP GROWTH
The portfolio's sub-adviser, Pilgrim Baxter & Associates, Ltd. (Pilgrim
Baxter), seeks to achieve the portfolio's objective by investing principally
in:
o Common stocks
o Convertible securities
In seeking capital appreciation, Pilgrim Baxter normally invests at least 65%
of the portfolio's total assets in
Prospectus 4
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
growth securities, such as common stocks, issued by companies with market
capitalizations or annual revenues between $500 million and $10 billion. The
portfolio invests primarily in companies that Pilgrim Baxter believes have
strong business momentum, earnings growth and capital-appreciation potential.
The portfolio may also invest in foreign securities, warrants and rights.
Pilgrim Baxter uses its own fundamental research, computer models and
proprietary measures of growth and business momentum in managing this
portfolio.
Pilgrim Baxter's decision to sell a stock depends on many factors. Generally
speaking, Pilgrim Baxter considers selling a security when its anticipated
appreciation is no longer probable, alternate investments offer more superior
appreciation prospects, or the risk of a decline in its market price is too
great.
Pilgrim Baxter may take a temporary defensive position when the securities
trading markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist. Under these
circumstances, the portfolio may be unable to achieve its investment objective.
While the fund invests principally in common stocks of medium-sized companies,
Pilgrim Baxter may, to a lesser extent, elect to invest in options and futures
contracts for hedging and risk management, or in other securities and
investment strategies in pursuit of its investment objective, which are
explained beginning on page 43 and in the SAI.
WRL ALGER AGGRESSIVE GROWTH
The portfolio's sub-adviser, Fred Alger Management, Inc. (Alger), seeks to
achieve the portfolio's objective by investing principally in:
o Equity securities such as common or preferred stocks
o Convertible securities (convertible securities are securities which can be
exchanged or converted into common stock of such companies)
To a lesser extent, the sub-adviser may invest portfolio assets in:
o U.S. dollar denominated securities of foreign issuers (American Depositary
Receipts (ADRs))
o Money market instruments
o Repurchase agreements
Under normal market conditions, the portfolio invests at least 85% of its
assets in common stocks, which may include stocks of developing companies, of
older companies that are entering a new stage of growth, and of companies whose
products or services have a high unit volume growth rate.
The portfolio may also use leveraging, a technique that involves borrowing
money to invest in an effort to enhance shareholder returns.
The portfolio's manager may take a temporary defensive position when the
securities trading markets or the economy are experiencing excessive volatility
or a prolonged general decline, or other adverse conditions exist. This may be
inconsistent with the portfolio's principal investment strategies. During this
time, the portfolio may invest up to 100% of its assets in money market
instruments and cash equivalents. Under these circumstances, the portfolio will
be unable to pursue its investment objective.
WRL THIRD AVENUE VALUE
The portfolio's sub-adviser, EQSF Advisers, Inc. (EQSF), seeks to achieve the
portfolio's investment objective by investing principally in:
o Common stocks
o Debt securities
o High-yield/high-risk fixed-income securities
o Foreign securities
The portfolio invests to a lesser extent, in trade claims and engages in
foreign currency transactions for hedging purposes. (Trade claims are interests
in amounts owed to suppliers or services and are purchased from creditors of
companies in financial difficulty.)
EQSF seeks to achieve the portfolio's objective by seeking to acquire common
stocks of well-financed companies at a substantial discount for what EQSF
believes is their value as a private business or as a take over candidate. It
also seeks to acquire senior securities, such as preferred stock and debt
instruments, that have strong covenant protections and above-average yields.
Prospectus 5
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
EQSF seeks portfolio securities whose prices are low enough at the time of
acquisition so both the risk is lowered and appreciation potential is enhanced.
EQSF believes that value is created more by past corporate prosperity than by
bear markets.
To choose such securities, EQSF uses a "bottom-up" approach. EQSF believes the
knowledge it obtains through extensive research of individual companies reduces
risk more than does diversification so the portfolio is non-diversified.
The portfolio's classification as "non-diversified" under the Investment
Company Act of 1940 (1940 Act) means that the portfolio has the ability to take
larger positions in a smaller number of issuers.
However, to meet federal tax requirements, at the close of each quarter the
portfolio may not have more than 25% of its total assets invested in any one
issuer and, with respect to 50% of its total assets, not more than 5% of its
total assets invested in any one issuer.
The portfolio may take a temporary defensive position when the securities
trading markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist. This may be
inconsistent with the portfolio's principal investment strategies. Under these
conditions, the portfolio may be unable to achieve its investment objective.
/warning sign/ RISKS OF INVESTING IN AGGRESSIVE EQUITY PORTFOLIOS
The principal risks of investing in Aggressive Equity Portfolios that may
adversely affect your investment are described below. (Not all of these risks
apply to each Aggressive Equity Portfolio. See the chart below for the
principal risks of your portfolio.) Please note that there are many other
circumstances which could adversely affect your investment and prevent a
portfolio from achieving its objective, which are not described here. Please
refer to the section entitled "Explanation of Strategies and Risks" beginning
on page 43 and the Fund's SAI for more information about the risks of investing
in the Aggressive Equity Portfolios.
PRINCIPAL RISKS
AGGRESSIVE EQUITY PORTFOLIOS
<TABLE>
<CAPTION>
PORTFOLIO
---------
WRL WRL WRL WRL WRL WRL
VKAM EMERGING T. ROWE PRICE GOLDMAN PILGRIM BAXTER ALGER AGGRESSIVE THIRD AVENUE
RISKS GROWTH SMALL CAP SACHS SMALL CAP MID CAP GROWTH GROWTH VALUE
<S> <C> <C> <C> <C> <C> <C>
STOCKS X X X X X X
INVESTING
AGGRESSIVELY X X X X X X
SMALL-CAP AND
GROWTH COMPANIES X X
QUANTITATIVE MODELS X X
NON-DIVERSIFICATION X
FUTURES & OPTIONS X X
FOREIGN SECURITIES X X X
DEPOSITARY RECEIPTS X X
CONVERTIBLES X X
LEVERAGING X
VALUE INVESTING X X
</TABLE>
Prospectus 6
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the short term. These
price movements may result from factors affecting individual companies, certain
industries or the securities market as a whole.
Because the stocks a portfolio holds fluctuate in price, the value of your
investment in the portfolio will go up and down.
o INVESTING AGGRESSIVELY
o The value of developing-company stocks may be very volatile, and can drop
significantly in a short period of time
o Rights, options and futures contracts may not be exercised and may expire
worthless
o Warrants and rights may be less liquid than stocks
o Use of futures and other derivatives may make the portfolio more volatile
o SMALL-CAP AND GROWTH COMPANIES
Investing in small companies involves greater risk than is customarily
associated with more established companies. Stocks of small companies may be
subject to more abrupt or erratic price movements than larger company
securities. Small companies often have limited product lines, markets, or
financial resources, and their management may lack depth and experience.
Securities of such issuers may lack sufficient market liquidity to enable a
portfolio to effect sales at an advantageous time or without a substantial drop
in price.
Also, growth stocks can experience steep price declines if the company's
earnings disappoint investors. Since many of the Aggressive Equity Portfolios
will typically be fully invested in this market sector, investors are fully
exposed to its volatility.
o QUANTITATIVE MODELS
Stocks selected using quantitative models may not perform as well as these
models might otherwise suggest effective and may cause overall returns to be
lower than if other methods are used.
o NON-DIVERSIFICATION
To the extent a portfolio invests a greater proportion of its assets in the
securities of a smaller number of issuers, it may be more susceptible to any
single economic, political or regulatory occurrence than a more widely
diversified portfolio and may be subject to greater risk of loss with respect
to its portfolio securities.
o FUTURES AND OPTIONS
Futures and options involve additional investment risks and transactional
costs, and draw upon skills and experience which are different than those
needed to pick other securities. Special risks include:
o Inaccurate market predictions
o Imperfect correlation
o Illiquidity
o Tax considerations
The portfolios are not required to hedge their investments.
o FOREIGN SECURITIES
Investments in foreign securities involve risks relating to political, social
and economic developments abroad as well as risks resulting from differences in
regulations to which U.S. and foreign issuers and markets are subject. To the
extent a portfolio invests in emerging markets, these risks would be greater.
These risks include:
o Changes in currency values
o Currency speculation
o Currency trading costs
o Different accounting and reporting practices
o Less information available to the public
o Less (or different) regulation of securities markets
o More complex business negotiations
o Less liquidity
o More fluctuations in market prices
o Delays in settling foreign securities transactions
o Higher transaction costs
o Higher costs for holding foreign securities (custodial fees)
Prospectus 7
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
o Vulnerability to seizure and taxes
o Political instability and small markets
o Different market trading days
o ADRS
Many securities of foreign issuers are represented by American Depositary
Receipts (ADRs). While ADRs principally are traded on domestic securities
exchanges, investing in ADRs involves many of the same risks associated with
foreign securities in general. These risks include:
o Changes in currency value
o Currency speculation
o Currency trading costs
o More fluctuations in market prices
o Less information available
o CONVERTIBLES
As with all debt securities, the market value of convertibles tends to decline
as interest rates increase and, conversely, to increase as interest rates
decline.
o VALUE INVESTING RISK
Undervalued stocks may not realize their perceived value for extended periods
of time. Value stocks may respond differently to market and other developments
than other types of stocks. Value oriented funds will typically underperform
when growth investing is in favor.
o LEVERAGING
Leveraging by a portfolio involves special risks:
o Leveraging practices may make a portfolio more volatile
o Leveraging may exaggerate the effect on net asset value of any increase or
decrease in the market value of the portfolio's securities
o Money borrowed for leveraging is subject to interest costs
o Minimum average balances may need to be maintained or a line of
credit in connection with borrowing may be necessary resulting in an
increase in the cost of borrowing over the stated interest rate.
YOU MAY LOSE MONEY IF YOU INVEST IN ANY OF THE AGGRESSIVE EQUITY PORTFOLIOS.
/chess piece/ INVESTOR PROFILES
WRL VKAM EMERGING GROWTH
May be appropriate for the investor who seeks capital appreciation over the
long term; is willing to take on the increased risks of investing in smaller
and medium-sized, less established companies in exchange for potentially higher
capital appreciation; can withstand substantial volatility in the value of
their shares of the portfolio; and wish to add to their personal holdings a
portfolio that invests primarily in common stocks of emerging growth companies.
WRL T. ROWE PRICE SMALL CAP
For the investor who wants an aggressive, long-term approach to building
capital and who is comfortable with significant fluctuations inherent in
small-cap stock investing.
WRL GOLDMAN SACHS SMALL CAP
For the investor who seeks long-term growth of capital, who can tolerate the
fluctuations inherent in small-cap investing and is willing to accept the
special risks involved in quantitative stock selection techniques.
WRL PILGRIM BAXTER MID CAP GROWTH
For the investor who wants long-term growth of capital and who can tolerate the
fluctuations inherent in stock investing.
WRL ALGER AGGRESSIVE GROWTH
For the investor who seeks capital growth aggressively, and can tolerate wide
swings in the value of their investment.
WRL THIRD AVENUE VALUE
For the investor who is willing to hold shares through periods of market
fluctuations and the accompanying changes in share prices.
Prospectus 8
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
/graph/ PORTFOLIO PERFORMANCE
The bar charts and tables below give an indication of the portfolios' risks and
performance. The charts show changes in a portfolio's performance from year to
year. The performance calculations do not reflect charges or deductions under
the policies or the annuity contracts. These fees and expenses would lower
investment performance. The tables show how a portfolio's average annual
returns for the periods indicated compare to those of a broad measure of market
performance.
Because the WRL T. Rowe Price Small Cap, WRL Goldman Sachs Small Cap and WRL
Pilgrim Baxter Mid Cap Growth portfolios commenced operations in 1999 their
performance history is not included.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL VKAM EMERGING GROWTH
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
(7.36)% 46.76% 18.88% 21.45% 37.33% 105.16
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1994-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 62.73 % 12/31/99
Lowest (12.53)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (MARCH 1, 1993)
WRL VKAM
Emerging Growth 105.16% 42.96% 32.64%
S&P 500 Index 21.04% 28.56% 21.70%
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL ALGER AGGRESSIVE GROWTH
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
38.02% 10.45% 24.25% 48.69% 69.02%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1995-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 44.67 % 12/31/99
Lowest (9.72)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (MARCH 1, 1994)
WRL Alger
Aggressive Growth 69.02% 36.62% 30.35%
S&P 500 Index 21.04% 28.56% 24.15%
- - --------------------------------------------------------------------------------
Prospectus 9
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL THIRD AVENUE VALUE
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1998 1999
---- ----
(6.84)% 15.72%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1998 - 1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 17.85 % 12/31/98
Lowest (17.57)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
Since
Inception
One Year (January 2, 1998)
WRL Third Avenue Value 15.72% 3.84%
S&P 500 Index 21.04% 24.75%
- - --------------------------------------------------------------------------------
Prospectus 10
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIOS
- - --------------------------------------------------------------------------------
WRL GE INTERNATIONAL EQUITY (FORMERLY GE/SCOTTISH EQUITABLE INTERNATIONAL
EQUITY PORTFOLIO)
WRL JANUS GLOBAL
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES EACH FOREIGN EQUITY PORTFOLIO OF THE
FUND AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIOS. FOR FURTHER
INFORMATION ON THESE PORTFOLIOS, PLEASE READ THE SECTION ENTITLED "EXPLANATION
OF STRATEGIES AND RISKS," BEGINNING ON PAGE 43, AND THE FUND'S SAI.
/target/ OBJECTIVES
WRL GE INTERNATIONAL EQUITY
This Portfolio seeks long-term growth of capital.
WRL JANUS GLOBAL
This Portfolio seeks long-term growth of capital in a manner consistent with
the preservation of capital.
- - --------------------------------------------------------------------------------
WHAT IS A FOREIGN EQUITY PORTFOLIO?
This type of portfolio principally invests in equity securities of
companies located outside the U.S.
- - --------------------------------------------------------------------------------
/chess piece/ POLICIES AND STRATEGIES
WRL GE INTERNATIONAL EQUITY
(FORMERLY WRL GE/SCOTTISH EQUITABLE INTERNATIONAL EQUITY)
The portfolio's sub-adviser, GE Asset Management Incorporated (GEAM) seeks to
achieve the portfolio's investment objective by investing principally in:
o Common stocks of companies located in developed and developing countries
other than the U.S.
GEAM focuses on companies that it expects will grow faster than relevant
markets and whose security price does not, in GEAM's view, fully reflect their
potential for growth. Under normal circumstances, the portfolio's assets are
invested in foreign securities of companies representing at least three
different countries.
GEAM determines the country represented by an issuer by reference to the
country in which the issuer is organized; derives at least 50% of its revenues
or profits from goods produced or sold, investments made or services performed;
has at least 50% of its assets situated; or has the principal trading market
for its securities.
GEAM seeks to identify securities of growth companies with characteristics such
as:
o low prices relative to their long-term cash earnings potential
o potential for significant improvement in the company's business
o financial strength
o sufficient liquidity
The portfolio invests, not only in the larger markets of Europe and Japan, but
also, may invest in the smaller markets of Asia, emerging Europe, Latin
America, and other emerging markets.
Overseas economies often do not move in the same direction and operate
differently. This creates situations the portfolio aims to take advantage of
through asset allocation among international markets.
The portfolio may, to a lesser extent, invest in equity securities other than
common stocks (including preferred securities other than common stocks
(including preferred securities, depositary receipts such as ADRs, EDRs and
GDRs, convertible securities, and rights and warrants), securities of companies
located in the United States, debt securities or other securities.
The portfolio also may use various investment techniques to adjust the
portfolio's investment exposure, but there is no guarantee that these
techniques will work.
Prior to May 1, 2000, Scottish Equitable Investment Management Limited served
as co-manager of this portfolio, and was responsible for managing a discrete
portion of its assets.
Prospectus 11
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIOS
- - --------------------------------------------------------------------------------
WRL JANUS GLOBAL
The portfolio's sub-adviser, Janus Capital Corporation (Janus) seeks to achieve
the portfolio's investment objective by investing principally in:
o Common stocks of foreign and domestic issuers
o Depositary receipts including ADRs, GDRs and EDRs
The portfolio may also use forward foreign currency contracts for hedging.
Janus' main strategy is to use a "bottom up" approach to build the portfolio's
portfolio. They seek to identify individual companies with earnings growth
potential that may not be recognized by the market at large.
Foreign securities are generally selected on a stock-by-stock basis without
regard to defined allocation among countries or geographic regions.
When evaluating foreign investments, Janus (in addition to looking at
individual companies) considers such factors as:
o Expected levels of inflation in various countries
o Government policies that might affect business conditions
o The outlook for currency relationships
o Prospects for economic growth among countries, regions or geographic areas
- - --------------------------------------------------------------------------------
WHAT IS A "BOTTOM-UP" APPROACH?
When portfolio managers use a "bottom-up" approach, they look primarily at
individual companies against the context of broader market factors.
- - --------------------------------------------------------------------------------
/warning sign/ RISKS OF INVESTING IN FOREIGN EQUITY PORTFOLIOS
The principal risks of investing in Foreign Equity Portfolios that may
adversely affect your investment are described below. (Not all of these risks
apply to each Foreign Equity Portfolio. See the chart below for the principal
risks of your portfolio.) Please note that there are many other circumstances
which could adversely affect your investment and prevent a portfolio from
achieving its objective, which are not described here. Please refer to the
section entitled "Explanation of Strategies and Risks" beginning on page 43,
and the Fund's SAI for more information about the risks associated with
investing in the Foreign Equity Portfolios.
PRINCIPAL RISKS
FOREIGN EQUITY PORTFOLIOS
PORTFOLIO
---------
WRL
GE WRL
INTERNATIONAL JANUS
RISKS EQUITY GLOBAL
STOCKS X X
FOREIGN SECURITIES X X
EMERGING MARKETS RISK X X
FORWARD FOREIGN CURRENCY
CONTRACTS X X
DEPOSITARY RECEIPTS X X
WARRANTS & RIGHTS X
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
certain industries or the securities market as a whole.
Because the stocks the portfolio holds fluctuate in price, the value of your
investment in the portfolio will go up and down.
o FOREIGN SECURITIES
Investments in foreign securities involve risks relating to political, social
and economic developments abroad as well as risks resulting from differences in
regulations to which U.S. and foreign issuers and markets are subject. To the
extent a portfolio invests in emerging markets, these risks would be greater.
These risks include:
o Changes in currency values
o Currency speculation
o Currency trading costs
o Different accounting and reporting practices
o Less information available to the public
o Less (or different) regulation of securities markets
Prospectus 12
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIOS
- - --------------------------------------------------------------------------------
o Greater complex business negotiations
o Less liquidity
o More fluctuations in prices
o Delays in settling foreign securities transactions
o Higher costs for holding shares (custodial fees)
o Higher transaction costs
o Vulnerability to seizure and taxes
o Political instability and small markets
o Different market trading days
o Forward foreign currency contracts for hedging
o EMERGING MARKETS RISK
Investing in the securities of issuers located in or principally doing business
in emerging markets bear foreign risks as discussed above. In addition, the
risks associated with investing in emerging markets are often greater than
investing in developed foreign markets. Specifically, the economic structures
in emerging markets countries are less diverse and mature than those in
developed countries, and their political systems are less stable. Investments
in emerging markets countries may be affected by national policies that
restrict foreign investments. Emerging market countries may have less developed
legal structures, and the small size of their securities markets and low
trading volumes can make investments illiquid and more volatile than
investments in developed countries. As a result, a portfolio investing in
emerging market countries may be required to establish special custody or other
arrangements before investing.
o FORWARD FOREIGN CURRENCY CONTRACTS
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of portfolio securities decline.
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 the portfolio's
limitation on investing in illiquid securities.
If the portfolio manager's judgment of markets proves incorrect or the strategy
does not correlate well with a portfolio's investment, the use of such hedging
transactions could result in a loss regardless of whether the intent was to
reduce risk or increase return and may increase a portfolio's volatility. In
addition, in the event that non-exchange traded forward currency contracts are
used, such transactions could result in a loss if the counterparty to the
transaction does not perform as promised.
o CONVERTIBLES
As with all debt securities, the market value of convertibles tends to decline
as interest rates increase and, conversely, to increase as the interest rates
decline.
o WARRANTS AND RIGHTS
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.
o DEPOSITARY RECEIPTS
Depositary receipts represent interests in an account at a bank or trust
company which holds equity securities. They are subject to some of the same
risks as direct investments in foreign securities, including currency risk. The
regulatory requirements with respect to depositary receipts that are issued in
sponsored and unsponsored programs are generally similar, but the issuers of
unsponsored depositary receipts 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 depositary receipts.
Prospectus 13
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIOS
- - --------------------------------------------------------------------------------
o GROWTH INVESTING RISK
Securities with different characteristics tend to shift in and out of favor
depending upon market and economic conditions as well as investor sentiment. A
portfolio may underperform other portfolios that employ a different style.
Growth stocks may be more volatile than other stocks because they are more
sensitive to investor perceptions of the issuing company's growth potential.
Growth-oriented funds typically will underperform when value investing is in
favor.
YOU MAY LOSE MONEY IF YOU INVEST IN EITHER OF THE FOREIGN EQUITY PORTFOLIOS.
/chess piece/ INVESTOR PROFILES
WRL GE INTERNATIONAL EQUITY
For the investor who seeks long-term capital growth through foreign
investments, and who is able to tolerate the significant risks in such
investments.
WRL JANUS GLOBAL
For the investor who seeks capital growth without being limited to investments
in U.S. securities, and who can tolerate the significant risks associated with
foreign investing.
Prospectus 14
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIOS
- - --------------------------------------------------------------------------------
/graph/ PORTFOLIO PERFORMANCE
The bar charts and tables below give an indication of the portfolios' risks and
performance. The charts show changes in a portfolio's performance from year to
year. The performance calculations do not reflect charges or deductions under
the policies or the annuity contracts. These fees and expenses would lower
investment performance. The tables show how a portfolio's average annual
returns for the periods indicated compare to those of a broad measure of market
performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL GE INTERNATIONAL EQUITY
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1997 1998 1999
---- ---- ----
7.50% 12.85% 24.95%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1997-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 22.87 % 12/31/99
Lowest (17.69)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR (JANUARY 2, 1997)
WRL GE International Equity 24.95% 14.90%
Morgan Stanley Capital
International-Europe,
Asia & Far East
(MSCI-EAFE) 28.24% 13.18%
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL JANUS GLOBAL
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ----
35.05% 0.25% 23.06% 27.74% 18.75% 30.01% 71.10%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1993-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 46.11 % 12/31/99
Lowest (16.52)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (DECEMBER 3, 1992)
WRL Janus Global 71.10% 32.94% 27.91%
Morgan Stanley
Capital
International
World Index 24.93% 20.08% 18.23%
- - --------------------------------------------------------------------------------
Prospectus 15
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS
- - --------------------------------------------------------------------------------
WRL JANUS GROWTH
WRL GOLDMAN SACHS GROWTH
WRL GE U.S. EQUITY
WRL SALOMON ALL CAP
WRL C.A.S.E. GROWTH
WRL DREYFUS MID CAP
WRL NWQ VALUE EQUITY
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES EACH GROWTH EQUITY PORTFOLIO OF THE
FUND AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIOS. FOR FURTHER
INFORMATION ON THESE PORTFOLIOS, PLEASE READ THE SECTION ENTITLED "EXPLANATION
OF STRATEGIES AND RISKS," BEGINNING ON PAGE 43, AND THE FUND'S SAI.
/target/ OBJECTIVES
WRL JANUS GROWTH
This portfolio seeks growth of capital.
WRL GOLDMAN SACHS GROWTH
This portfolio seeks long-term growth of capital.
WRL GE U.S. EQUITY
This portfolio seeks long-term growth of capital.
WRL SALOMON ALL CAP
This portfolio seeks capital appreciation.
WRL C.A.S.E. GROWTH
This portfolio 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.
WRL DREYFUS MID CAP
This portfolio seeks total investment returns (including capital appreciation
and income) which consistently outperform the S&P 400 Mid Cap Index.
WRL NWQ VALUE EQUITY
This portfolio seeks to achieve maximum, consistent total return with minimum
risk to principal.
- - --------------------------------------------------------------------------------
WHAT IS A GROWTH EQUITY PORTFOLIO?
Each growth equity portfolio invests in the common stock of companies that
offer potentially rising share prices. These portfolios primarily aim to
provide capital appreciation (a rise in share price) rather than steady
income.
- - --------------------------------------------------------------------------------
Prospectus 16
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
/chess piece/ POLICIES AND STRATEGIES
WRL JANUS GROWTH
The Portfolio's sub-adviser, Janus Capital Corporation (Janus), seeks to
achieve the portfolio's objective by investing principally in:
o Common stocks
The portfolio's strategy is to invest almost all of its assets in common stock
at times when Janus believes the market environment favors such investing.
Janus generally takes a "bottom-up" approach to building the stock portfolio.
In other words, Janus seeks to identify individual companies with earnings
growth potential that may not be recognized by the stock market at large.
Although themes may emerge in the portfolio, securities are generally selected
without regard to any defined industry sector or other similarly defined
selection procedure. Realization of income is not a significant investment
consideration for the portfolio and any income realized on the portfolio's
investments is incidental to its objective.
Janus may take a temporary defensive position when the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse market conditions exist. This may be
inconsistent with the portfolio's principal investment strategies. Under these
circumstances, the portfolio may be unable to achieve its investment objective.
WRL GOLDMAN SACHS GROWTH
The portfolio's sub-adviser, Goldman Sachs Asset Management (GSAM), seeks to
achieve the portfolio's objective by investing principally in:
o Equity securities
The portfolio will invest at least 90% of total assets in a diversified
portfolio of equity securities that are considered by GSAM to have long-term
capital appreciation potential. Although the portfolio will invest primarily in
publicly traded U.S. securities, it may invest up to 10% of its total assets in
foreign securities, including securities of issuers in emerging (developing)
countries and securities quoted in foreign currencies.
Equity securities for this portfolio are selected based on their prospects for
above-average growth. GSAM will select securities of growth companies trading,
in GSAM's opinion, at a reasonable price relative to other industries,
competitors and historical price/earnings multiples.
In order to determine whether a security has favorable growth prospects, GSAM
ordinarily looks for one or more of the following characteristics in relation
to the security's prevailing price:
o prospects for above average sales and earnings growth per share
o high return on invested capital
o free cash flow generation
o sound balance sheet, financial and accounting policies, and overall
financial strength
o strong competitive advantages
o effective research, product development, and marketing
o pricing flexibility
o strength of management
o general operating characteristics that will enable the company to compete
successfully in its marketplace
The portfolio generally will invest in companies whose earnings are believed to
be in a relatively strong growth trend, or, to a lesser extent, in companies in
which significant further growth is not anticipated, but whose market value per
share is thought to be undervalued.
GSAM may take a temporary defensive position when the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist. This may be inconsistent
with the portfolio's principal investment strategies. Under these
circumstances, the portfolio may be unable to achieve its investment objective.
WRL GE U.S. EQUITY
The portfolio's sub-adviser, GE Asset Management Incorporated (GEAM), seeks to
meet the portfolio's investment objective by investing primarily in:
Prospectus 17
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
o Common stocks of U.S. Companies
GEAM uses a Multi-Style/registered trademark/ investment strategy that combines
growth and value investment management styles. As a result, the portfolio has
characteristics similar to the Standard & Poor's 500 Composite Stock Index,
including capital appreciation and income potential. Stock selection is key to
the performance of the portfolio.
Through fundamental company research, the portfolio managers seek to identify
securities of large companies with characteristics such as: attractive
valuations, financial strength and high quality management focused on
generating shareholder value.
The portfolio may, to a lesser extent, invest in equity securities other than
common stocks (including preferred securities, depositary receipts such as
ADRs, EDRs and GDRs, convertible securities, and rights and warrants), foreign
securities, and rights and warrants), foreign securities, debt securities or
other securities, and use various investment techniques and investment
strategies in pursuit of its investment objective.
WRL SALOMON ALL CAP
The portfolio's sub-adviser, Salomon Brothers Asset Management Inc (SBAM),
seeks to achieve the portfolio's investment objective by investing principally
in:
o Common stocks
o Convertible securities
To a lesser extent, the portfolio may invest in:
o Cash and cash equivalents
This portfolio is non-diversified. The portfolio will primarily invest in
common stocks, or securities convertible into or exchangeable for common
stocks, such as convertible preferred stocks or convertible debentures.
The portfolio's classification as "non-diversified" under the 1940 Act means
that the portfolio has the ability to take larger positions in a smaller number
of issuers. However, to meet federal tax requirements, at the close of each
quarter the portfolio may not have more than 25% of its total assets invested
in any one issuer and, with respect to 50% of its total assets, not more than
5% of its total assets invested in any one issuer.
In seeking capital appreciation, the portfolio may purchase securities of:
seasoned issuers; small companies; newer companies; and new issues. The
portfolio may be subject to wide fluctuations in market value. Portfolio
securities may have limited marketability or may be widely and publicly traded.
SBAM anticipates that the portfolio's investments generally will be in
securities of companies which it considers to reflect the following
characteristics:
o Undervalued share prices
o Special situations such as existing or possible changes in management or
management policies, corporate structure or control, capitalization,
regulatory environment, or other circumstances which could be expected to
favor earnings or market price of such company's shares
o Growth potential due to technological advances, new methods in marketing
or production, new or unique products or services, changes in demands for
products or services or other significant new developments
SBAM uses a "bottom-up," fundamental research process to select the portfolio's
securities. They seek to identify individual companies with earnings growth
potential that may not be recognized by the market.
SBAM may take a temporary defensive position when the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist. This may be inconsistent
with the portfolio's principal investment strategies. Under these
circumstances, the portfolio may be unable to pursue its investment objective.
WRL C.A.S.E. GROWTH
The portfolio's sub-adviser, C.A.S.E. Management, Inc. (C.A.S.E.), seeks to
achieve the portfolio's investment objective by investing principally in:
o Common stocks
o Preferred stocks
o Convertible stocks
Prospectus 18
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
Using proprietary forms of research, C.A.S.E. selects companies after
evaluating the current economic cycle, and identifying potentially attractive
sectors, industries and company-specific circumstances.
C.A.S.E. invests in common, preferred and convertible stocks of companies that
it believes show below-market risk, supported by below-market multiples, along
with above-average fundamentals. These fundamentals include return on equity,
price-to-earnings ratio and other balance sheet factors that contribute to
long-term capital growth.
The portfolio's assets are invested in companies whose stocks are traded on
national exchanges or over-the-counter markets. C.A.S.E. focuses on companies
that are fundamentally strong compared to other companies in the same industry,
the same sector and the broad market.
C.A.S.E. applies its proprietary forms of research to companies that exhibit
superior products and above-average growth rates along with sound management
and financials.
Each company selected for the portfolio is monitored against more than two
dozen measures of financial strength, including:
o insiders' activity
o market style leadership
o earnings surprise
o analysts' change in earnings projections
o return on equity
o 5-year earnings-per-share growth rate
o price-earnings ratio
o price-to-book ratio
o price-to-cash flow
o institutional activity and holdings
o relative strength price change
o price-to-200-day moving average
o price-to-historical rising inflation
o price-to-declining U.S. dollar
o earnings projected change
o quarterly earnings per-share growth rate
Stocks are sold when C.A.S.E. views them as overvalued, or when C.A.S.E. feels
the stocks have lost their strong fundamentals.
In seeking to achieve the investment objective of the portfolio, C.A.S.E. will
make investment decisions without giving consideration to the turnover rate of
the portfolio. As a result, the turnover rate of the portfolio may be higher
than other comparable portfolios. Consequently, the portfolio may incur higher
transaction related expenses than portfolios that do not engage in frequent
trading.
WRL DREYFUS MID CAP
The portfolio's sub-adviser, The Dreyfus Corporation (Dreyfus), seeks to
achieve the portfolio's investment objective by investing principally in:
o Common stocks of medium capitalization companies
To a lesser extent, Dreyfus may invest portfolio assets in:
o Common stocks of large and small capitalization companies, including emerging
(developing) and cyclical growth companies
Dreyfus seeks to have a diversified portfolio of the common stocks of
mid-capitalization companies which offer above-average potential for
appreciation based on its multi-factor evaluation approach. The multi-factor
evaluation approach centers around the ability to identify and dynamically
weigh the fundamental characteristics driving current market returns, and to
construct portfolios by actively selecting stocks possessing positive exposure
to these preferred characteristics.
Generally, the factors which drive the investment process can be classified
into three categories:
o Earnings momentum indicators
o Company financial attributes
o Relative value measures
Prospectus 19
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
WRL NWQ VALUE EQUITY
The portfolio's sub-adviser, NWQ Investment Management Company, Inc. (NWQ),
seeks to achieve its objective by investing principally in:
o Common stocks
To a lesser extent, NWQ may invest portfolio assets in:
o Money market and short-term instruments (Treasury Bills)
o ADRs and exchange listed foreign stocks
NWQ employs a value-oriented approach to investing, combining top-down and
bottom-up disciplines.
NWQ will use statistical measures to look for above-average stock valuations,
screening for below-average price-to-earnings and price-to-book ratios,
above-average dividend yields and strong financial stability.
NWQ also identifies those market sectors believed to benefit from long-term
positive fundamentals, and focuses on the companies within these sectors which
represent above-average statistical value and are undervalued when purchased.
The portfolio consists primarily of mid-capitalization to large capitalization
companies. NWQ considers the following when making a security selection:
o below-average price-to-earnings ratios
o below-average price-to-book
o strong financial stability
o industries/sectors with strong long-term fundamentals
o leading/strong market positions
o uses earnings averaged over both strong and weak periods in evaluating
cyclical companies
/warning sign/ RISKS
The principal risks of investing in Growth Equity Portfolios that may adversely
affect your investment are described below. (Not all of these risks apply to
each Growth Equity Portfolio. See the chart below for the principal risks of
your portfolio.) Please note that there are many other circumstances which
could adversely affect your investment and prevent a portfolio from achieving
its objective, which are not described here. Please refer to the section
entitled "Explanation of Strategies and Risks," beginning on page 43, and the
Fund's SAI for more information about the risks associated with investing in
the Growth Equity Portfolios.
Prospectus 20
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
PRINCIPAL RISKS
GROWTH EQUITY PORTFOLIOS
<TABLE>
<CAPTION>
WRL WRL
WRL GOLDMAN WRL WRL WRL WRL NWQ
JANUS SACHS GE U.S. SALOMON C.A.S.E. DREYFUS VALUE
RISKS GROWTH GROWTH EQUITY ALL CAP GROWTH MID CAP EQUITY
- - -----
<S> <C> <C> <C> <C> <C> <C> <C>
NON-DIVERSIFICATION X
STOCKS X X X X X X X
MEDIUM SIZED COMPANIES
FOREIGN SECURITIES X X X X
EMERGING MARKETS RISK X
CONVERTIBLES X X X X
PROPRIETARY RESEARCH X
STYLE RISK X X X X X X X
FUTURES AND OPTIONS X
DEPOSITARY RECEIPTS X X X
WARRANTS & RIGHTS
</TABLE>
o NON-DIVERSIFICATION
To the extent a portfolio invests a greater proportion of its assets in the
securities of a smaller number of issuers, it may be more susceptible to any
single economic, political or regulatory occurrence than a more widely
diversified portfolio and may be subject to greater risk of loss with respect
to its portfolio securities.
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
industries, or the securities market as a whole.
Because the stocks the portfolio holds fluctuate in price, the value of your
investment in the portfolio go up and down.
o MEDIUM-SIZED COMPANIES
These companies present additional risks because their earnings may be less
predictable, their share price more volatile, and their securities less liquid
than larger more established companies.
o FOREIGN SECURITIES
Investments in foreign securities involve risks relating to political, social
and economic developments abroad as well as risks resulting from differences in
regulations to which U.S. and foreign issuers and markets are subject. These
risks include:
o Changes in currency values
o Currency speculation
o Currency trading costs
o Different accounting and reporting practices
o Less information available to the public
o Less (or different) regulation of securities markets
o More complex business negotiations
o Less liquidity
o More fluctuations in market prices
o Delays in settling foreign securities transactions
o Higher costs for holding foreign securities (custodial fees)
o Higher transaction costs
o Vulnerability to seizure and taxes
o Political instability and small markets
o Different market trading days
o EMERGING MARKETS RISK
Investing in the securities of issuers located in or principally doing business
in emerging markets bear foreign risks as discussed above. In addition, the
risks associated with investing in emerging markets are often greater than
investing in developed foreign markets. Specifically, the economic structures
in emerging markets countries are less diverse and mature than
Prospectus 21
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
those in developed countries, and their political systems are less stable.
Investments in emerging markets countries may be affected by national policies
that restrict foreign investments. Emerging market countries may have less
developed legal structures, and the small size of their securities markets and
low trading volumes can make investments illiquid and more volatile than
investments in developed countries. As a result, a portfolio investing in
emerging market countries may be required to establish special custody or other
arrangements before investing.
o CONVERTIBLES
As with all debt securities, the market value of convertibles tends to decline
as interest rates increase and, conversely, increase as interest rates decline.
However, when the market price of the common stock underlying a convertible
security exceeds the conversion price of the convertible security, the
convertible security tends to reflect the market price of the underlying common
stock.
o PROPRIETARY RESEARCH
Proprietary forms of research may not be effective and may cause overall
returns to be lower than if other forms of research are used.
o STYLE RISK
Securities with different characteristics tend to shift in and out of favor
depending upon market and economic conditions as well as investor sentiment. A
portfolio may underperform other portfolios that employ a different style. A
portfolio also may employ a combination of styles that impact its risk
characteristics. Examples of different styles include growth and value
investing, as well as those focusing on large, medium, or small company
securities.
o GROWTH INVESTING RISK
Growth stocks may be more volatile than other stocks because they are
more sensitive to investor perceptions of the issuing company's growth
potential. Growth oriented funds will typically underperform when value
investing is in favor.
o FUTURES AND OPTIONS
Futures and options involve additional investment risks and transactional
costs, and draw upon skills and experience which are different than those
needed to pick other securities. Special risks include:
o Inaccurate market predictions
o Imperfect correlation
o Illiquidity
o Tax considerations
The portfolios are not required to hedge their investments.
o WARRANTS AND RIGHTS
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.
o DEPOSITARY RECEIPTS
Depositary receipts represent interests in an account at a bank or trust
company which holds equity securities. They are subject to some of the same
risks as direct investments in foreign securities, including currency risk. The
regulatory requirements with respect to depositary receipts that are issued in
sponsored and unsponsored programs are generally similar, but the issuers of
unsponsored depositary receipts 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 depositary receipts.
YOU MAY LOSE MONEY IF YOU INVEST IN ANY OF THE GROWTH EQUITY PORTFOLIOS.
Prospectus 22
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
/chess piece/ INVESTOR PROFILES
WRL JANUS GROWTH
For the investor who wants capital growth in a broadly diversified stock
portfolio, and who can tolerate significant fluctuations in value.
WRL GOLDMAN SACHS GROWTH
For the investor who seeks long-term growth of capital and who can tolerate
fluctuations inherent in stock investing.
WRL GE U.S. EQUITY
For the investor who seeks long-term growth from a diversified portfolio that
combines "value" and "growth" investment management styles. As a result, the
portfolio will have characteristics similar to the S&P 500. The investor should
be comfortable with the price fluctuations of a stock portfolio and be willing
to accept higher short-term risk for potential long-term returns.
WRL SALOMON ALL CAP
For the investor who wants long-term growth of capital and who can tolerate the
risks of a non-diversified portfolio and fluctuations in their investment.
WRL C.A.S.E. GROWTH
For the investor who seeks growth 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.
WRL DREYFUS MID CAP
For the investor who seeks total returns exceeding the S&P 400 Mid Cap Index
and who can tolerate fluctuations inherent to mid-cap stock investing.
WRL NWQ VALUE EQUITY
For the investor who seeks both capital preservation and long-term capital
appreciation and who can tolerate fluctuations inherent in stock investing.
Prospectus 23
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
/graph/ PORTFOLIO PERFORMANCE
The bar charts and tables below give an indication of the portfolios' risks and
performance. The charts show changes in a portfolio's performance from year to
year. The performance calculations do not reflect charges or deductions under
the policies or the annuity contracts. These fees and expenses would lower
investment performance. The tables show how a portfolio's average annual
returns for the periods indicated compare to those of a broad measure of market
performance.
Because the WRL Salomon All Cap, WRL Goldman Sachs Growth, and WRL Dreyfus Mid
Cap portfolios commenced operations in 1999, their performance history is not
included.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL JANUS GROWTH
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(0.22)% 59.79% 2.35% 3.97% (8.31)% 47.12% 17.96% 17.54% 64.47% 59.67%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1990-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 33.08 % 12/31/99
Lowest (16.60)% 9/30/90
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
WRL Janus Growth 59.67% 39.89% 23.62%
S&P 500 Index 21.04% 28.56% 18.21%
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL GE U.S. EQUITY
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1997 1998 1999
---- ---- ----
27.01% 22.87% 18.41%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1997-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 19.59 % 12/31/98
Lowest (10.14)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR (JANUARY 2, 1997)
WRL GE U.S. Equity 18.41% 22.76%
S&P 500 Index 21.04% 27.56%
- - --------------------------------------------------------------------------------
Prospectus 24
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL C.A.S.E. GROWTH
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1996 1997 1998 1999
---- ---- ---- ----
17.50% 15.03% 2.47% 33.84%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1996-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 26.60 % 12/31/98
Lowest (22.50)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR (MAY 1, 1995)
WRL C.A.S.E. Growth 33.84% 18.80%
Wilshire 5000 Index 22.05% 24.06%
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL NWQ VALUE EQUITY
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1997 1998 1999
---- ---- ----
25.04% (4.78)% 7.95%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1997-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 16.23 % 6/30/99
Lowest (17.95)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR (MAY 1, 1996)
WRL NWQ Value
Equity 7.95% 10.76%
S&P 500 Index 21.04% 26.74%
- - --------------------------------------------------------------------------------
Prospectus 25
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS
- - --------------------------------------------------------------------------------
WRL T. ROWE PRICE DIVIDEND GROWTH
WRL DEAN ASSET ALLOCATION
WRL LKCM STRATEGIC TOTAL RETURN
WRL J.P. MORGAN REAL ESTATE SECURITIES
WRL FEDERATED GROWTH & INCOME
WRL AEGON BALANCED
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES EACH BALANCED PORTFOLIO OF THE FUND
AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIOS. FOR FURTHER INFORMATION
ON THESE PORTFOLIOS, PLEASE READ THE SECTION ENTITLED "EXPLANATION OF
STRATEGIES AND RISKS," BEGINNING ON PAGE 43, AND THE FUND'S SAI.
/target/ OBJECTIVES
WRL T. ROWE PRICE DIVIDEND GROWTH
This portfolio seeks to provide an increasing level of dividend income,
long-term capital appreciation, and reasonable current income through
investments primarily in dividend paying stocks.
WRL DEAN ASSET ALLOCATION
The objective of this portfolio is to seek preservation of capital and
competitive investment returns.
WRL LKCM STRATEGIC TOTAL RETURN
The objective of this portfolio is to provide current income, long-term growth
of income and capital appreciation.
WRL J.P. MORGAN REAL ESTATE SECURITIES
This portfolio 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.
WRL FEDERATED GROWTH & INCOME
This portfolio seeks total return by investing in securities that have
defensive characteristics. (These are securities that appear to have a low
probability of significant price decline relative to the overall equity market.
They also will, in the sub-adviser's view, generally have a comparatively low
volatility in share price relative to the overall equity market.)
WRL AEGON BALANCED
This portfolio seeks preservation of capital, reduced volatility, and superior
long-term risk-adjusted returns.
- - --------------------------------------------------------------------------------
WHAT IS A BALANCED PORTFOLIO?
A balanced portfolio generally tries to balance three different objectives:
moderate long-term growth of capital, moderate income, and moderate
stability in an investor's principal. To reach these goals, balanced
portfolios invest in a mixture of stocks, bonds and money market
instruments.
- - --------------------------------------------------------------------------------
Prospectus 26
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
/chess piece/ POLICIES AND STRATEGIES
WRL T. ROWE PRICE DIVIDEND GROWTH
The portfolio's sub-adviser, T. Rowe Price Associates, Inc. (T. Rowe Price),
seeks to achieve the portfolio's objective by investing principally in:
o Dividend-paying common stocks with favorable prospects for increasing
dividends and long-term appreciation
To a lesser extent, T. Rowe Price may invest in:
o Foreign securities
o Futures
T. Rowe Price typically invests at least 65% of total assets in common stocks
of dividend-paying companies that it expects to increase their dividends over
time and also provide long-term appreciation.
T. Rowe Price believes that a track record of dividend increases is an
excellent indicator of financial health and growth prospects, and over the
long-term, income can contribute significantly to total return. Dividends can
also help reduce the portfolio's volatility during periods of market turbulence
and help offset losses when stock prices are falling.
T. Rowe Price looks for stocks with sustainable, above-average growth in
earnings and dividends, and attempts to buy them when they are temporarily out
of favor or undervalued by the market. Holdings tend to be in large to
medium-sized companies. In selecting investments, T. Rowe Price favors
companies with one or more of the following:
o Either a track record of, or the potential for, above-average earnings and
dividend growth
o A competitive current dividend yield
o A sound balance sheet and solid cash flow to support future dividend
increases
o A sustainable competitive advantage and leading market position
o Attractive valuations such as a relatively high dividend yield
While the portfolio invests primarily in common stocks, T. Rowe Price may also
purchase other securities including foreign securities, convertible securities,
warrants, preferred stocks, and corporate and government debt when considered
consistent with the portfolio's objective. Futures and options may be used for
any number of reasons, including: managing the portfolio's exposure to
securities prices and foreign currencies; to enhance income; to manage cash
flows efficiently; or to protect the value of portfolio securities. If the
portfolio uses futures and options it is exposed to additional volatility and
potential losses.
The portfolio may sell securities for a variety of reasons such as to secure
gains, limit losses, or redeploy assets into more promising opportunities.
The portfolio may take a temporary defensive position when the securities
trading markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist (which is
inconsistent with the portfolio's principal investment strategies). Under these
circumstances, the portfolio may be unable to achieve its investment objective.
WRL DEAN ASSET ALLOCATION
The portfolio's sub-adviser, Dean Investment Associates (Dean), seeks to
achieve the portfolio's investment objective by investing principally in:
o Income-producing common and preferred stocks
o Debt obligations of U.S. issuers, some of which will be convertible into
common stocks
o U.S. Treasury bonds, notes and bills
o Money market funds
In selecting stocks, Dean focuses on high-quality, liquid, large capitalization
stocks, using a bottom-up screening process to identify stocks that are
statistically undervalued. Dean's ultimate goal is to choose stocks whose price
has been driven down by a market that has over-reacted to perceived risks. With
this approach, the portfolio seeks to achieve a dividend income yield higher
than that of the Russell 1000 Index, a widely recognized unmanaged index of
market performance which measures the performance of the 1,000 largest
companies in the Russell 3000 Index, which represents approximately 89% of the
total market capitalization of the Russell 3000 Index. As of the latest
reconstitution,
Prospectus 27
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
the average market capitalization was approximately $9.9 billion; the median
market capitalization was approximately $3.7 billion. The smallest company in
the index had an approximate market capitalization of $1,404.7 million.
Dean employs an investment technique called "asset allocation," which shifts
assets from one class of investment to another (such as from equity to debt)
when it anticipates changes in market direction.
Dean will seek to enhance returns in rising stock markets by increasing its
allocation to equity, then protect itself in falling stock markets by reducing
equity exposure and shifting into fixed-income investments, as well as into
money market funds (up to 10% of total assets).
Dean has developed forecasting models to predict movements in the stock market
for both short (12 to 18-month) and long (3 to 5-year) time periods. These
models help compare the risks and rewards Dean anticipates in holding stocks
versus debt instruments and money market funds. Such techniques may result in
increased portfolio expenses such as brokerage fees.
Thus, the models determine when Dean is to "tactically" adjust the portfolio's
asset allocation among stocks, bonds, U.S. debt obligations and money market
funds.
WRL LKCM STRATEGIC TOTAL RETURN
The portfolio's sub-adviser, Luther King Capital Management Corporation (LKCM),
seeks to achieve the portfolio's investment objective by investing primarily
in:
o Common stocks
o Corporate bonds
o Convertible preferred stocks
o Corporate convertible bonds
o U.S. Treasury Notes
The portfolio seeks to invest in a blend of equity and fixed-income securities
to achieve a balance of capital appreciation and investment income while
limiting volatility. The portfolio will also invest in convertible securities,
which have both equity and fixed-income characteristics. In choosing such
securities, LKCM looks for companies with strong fundamental characteristics.
It considers factors such as:
o balance sheet quality
o cash flow generation
o earnings and dividend growth record and outlook
o profitability levels
In some cases, LKCM bases its selections on other factors. For example, some
securities may be bought at an apparent discount to their appropriate value,
with the anticipation that they'll increase in value over time.
The portfolio seeks to achieve an income yield greater than the average yield
of the stocks in the S&P 500.
The portfolio invests mainly in the stocks and bonds of companies with
established operating histories and strong fundamental characteristics. The
majority of the stocks the portfolio buys will be listed on a national exchange
or traded on NASDAQ or domestic over-the-counter markets.
LKCM closely analyzes a company's financial status and a security's valuation
in an effort to control risk at the individual level. In addition, the growth
elements of the portfolio's equity investments drive capital appreciation.
As part of its income-oriented strategy, LKCM expects to invest about 25% of
the portfolio's assets in fixed-income securities, some of which will be
convertible into common stocks, and no more than 20% of its assets in stocks
that don't pay a dividend.
WRL J.P. MORGAN REAL ESTATE SECURITIES
This portfolio's sub-adviser, J.P. Morgan Investment Management Inc. (J.P.
Morgan), seeks to achieve the portfolio's objective by investing principally in
equity securities of real estate companies which include:
o Common stocks
o Convertible securities
Under normal conditions, J.P. Morgan invests at least 65% of portfolio assets
in real estate company securities. A company is considered to be a real estate
Prospectus 28
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
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.
Companies chosen are generally 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, J.P. Morgan ranks these companies within four broad sectors of
the real estate industry from undervalued to overvalued. From this target
universe, J.P. Morgan selects stocks for the portfolio based on a variety of
criteria including managerial strength, geographic diversification, prospects
for growth and the company's competitive position.
The portfolio may also invest in debt securities of real estate and non-real
estate companies, mortgage-backed securities such as pass through certificates,
real estate mortgage investment conduit (REMIC) certificates, and
collateralized mortgage obligations (CMOs), or short-term debt obligations.
However, the portfolio does not directly invest in real estate.
The portfolio is non-diversified under federal securities laws.
The portfolio's classification as "non-diversified" under the 1940 Act means
that the portfolio has the ability to take larger positions in a smaller number
of issuers. However, to meet federal tax requirements, at the close of each
quarter the portfolio may not have more than 25% of its total assets invested
in any one issuer and, with respect to 50% of its total assets, not more than
5% of its total assets invested in any one issuer.
WRL FEDERATED GROWTH & INCOME
The portfolio's sub-adviser, Federated Investment Counseling (Federated), seeks
to achieve the portfolio's objective by investing principally in:
o Common stocks
o Convertible securities
o REITs
o Fixed income securities
o Foreign securities
Federated seeks total return by investing primarily in common stocks that
provide the opportunity for capital appreciation or high dividend income.
Federated seeks capital appreciation by investing primarily in undervalued,
overlooked common stocks. These securities are generally trading at low
historical valuations relative to the market and to industry peers. To achieve
high current income, Federated seeks to invest in securities that offer higher
dividends than the overall market. Convertible stocks and bonds, real estate
investment trusts and securities issued by utility companies are generally the
types of securities that Federated may emphasize in order to enhance the
portfolio's dividend income. Federated may also invest a portion of the
portfolio's assets in securities of companies based outside the U.S. to
diversify the portfolio's holdings and to gain exposure to the foreign market.
Federated attempts to invest in securities that have defensive characteristics,
i.e., securities that appear to have a low volatility in share price relative
to the overall equity market. Federated also may emphasize investments in
equity securities that provide high dividend income, which generally are less
volatile stocks. Federated also may allocate a portion of the assets in cash or
government securities when the markets appear to be overpriced.
To identify companies for portfolio investment, Federated uses a model which
looks at a company's financial and earnings strength, management skill and
business prospects, and at the prospect of comparatively low volatility in
share price. In addition, Federated performs traditional fundamental and credit
analyses to select the most promising companies for the portfolio. Federated
may emphasize investments in certain industry sectors that offer securities
that have these attributes. To determine the timing of purchases and sales of
portfolio securities, Federated looks at recent stock price performance.
WRL AEGON BALANCED
This portfolio's sub-adviser, AEGON USA Investment Management, Inc. (AIMI),
seeks to achieve the portfolio's objective by investing principally in:
o Common stocks (primarily of domestic large cap companies)
o U.S. Treasuries
Prospectus 29
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
o Convertible securities
AIMI uses a top-down investment strategy to find stocks of medium to large
capitalization companies that fit a value criteria. The process for selecting
companies is based on fundamental analysis.
More specifically, AIMI looks at the industry structure, organizational
structure, financial structure, and business prospects of each portfolio
company. It then applies the analysis of these factors to financial forecasts
which, in turn, drives the valuation of a company's stock. AIMI uses a two
stage dividend discount model to value a company. Once AIMI initiates a
position it monitors and continually reassesses its prior analysis. When AIMI
believes the price fully reflects its independent valuation or there is a
significant change in the fundamentals of the company, the portfolio sells the
security.
/warning sign/ RISKS
The principal risks of investing in Balanced Portfolios that may adversely
affect your investment are described below. (Not all of these risks apply to
each Balanced Portfolio. See the chart below for the principal risks of your
portfolio.) Please note that there are many other circumstances that could
adversely affect your investment and prevent a portfolio from achieving its
objective, which are not described here. Please refer to the section entitled
"Explanation of Strategies and Risks," beginning on page 43 and the Fund's SAI
for more information about the risks associated with investing in Balanced
Portfolios.
PRINCIPAL RISKS
BALANCED PORTFOLIOS
<TABLE>
<CAPTION>
PORTFOLIO
---------
WRL
T. ROWE
PRICE WRL WRL WRL WRL
DIVIDEND DEAN ASSET LKCM STRATEGIC J.P. MORGAN FEDERATED WRL
RISKS GROWTH ALLOCATION TOTAL RETURN REAL ESTATE SECURITIES GROWTH & INCOME AEGON BALANCED
- - -----
<S> <C> <C> <C> <C> <C> <C>
STOCKS X X X X X X
FIXED-INCOME SECURITIES X X X
CONVERTIBLES X X X X
REAL ESTATE SECURITIES X X
STYLE RISK X
QUANTITATIVE MODELS X
FUTURES AND OPTIONS X
NON-DIVERSIFIED X
FOREIGN SECURITIES X X
DIVIDEND-PAYING COMPANIES X
</TABLE>
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the short term. These
price movements may result from factors affecting individual companies,
industries or the securities market as a whole.
Because the stocks a portfolio holds fluctuate in price, the value of your
investment in a portfolio will go up and down.
o FIXED-INCOME SECURITIES
The value of these securities may change daily based on changes in the interest
rate, and other market conditions and factors. The risks include:
o Changes in interest rates
o Length of time to maturity
o Issuers defaulting on their obligations to pay interest or return
principal
Prospectus 30
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
o FOREIGN SECURITIES
Investments in foreign securities involve risks relating to political, social
and economic developments abroad as well as risks resulting from differences in
regulations to which U.S. and foreign issuers and markets are subject. These
risks include:
o Changes in currency values
o Currency speculation
o Currency trading costs
o Different accounting and reporting practices
o Less information available to the public
o Less (or different) regulation of securities markets
o More complex business negotiations
o Less liquidity
o More fluctuations in market prices
o Delays in settling foreign securities transactions
o Higher costs for holding foreign securities (custodial fees)
o Higher transaction costs
o Vulnerability to seizure and taxes
o Political instability and small markets
o Different market trading days
o HIGH-YIELD/HIGH-RISK FIXED-INCOME SECURITIES
o Credit risk
o Greater sensitivity to interest rate movements
o More speculative than higher rated securities
o Greater vulnerability to economic changes
o Decline in market value in event of default
o Less liquidity
o CONVERTIBLES
As with all debt securities, the market value of convertibles tends to decline
as interest rates increase and, conversely, to increase as interest rates
decline.
o REAL ESTATE SECURITIES
Investments in the real estate industry are subject to risks associated with
direct investment in real estate. These risks may include:
o Declining real estate value
o Risks relating to general and local economic conditions
o Over-building
o Increased competition for assets in local and regional markets
o Increases in property taxes
o Increases in operating expenses or interest rates
o Change in neighborhood value or the appeal of properties to tenants
o Insufficient levels of occupancy
o 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 government regulations (including taxes) and social and
economic trends.
o FUTURES AND OPTIONS
Futures and options involve additional investment risks and transactional
costs, and draw upon skills and experience which are different than those
needed to pick other securities. Special risks include:
o Inaccurate market predictions
o Imperfect correlation
o Illiquidity
o Tax considerations
The portfolios are not required to hedge their investments.
o QUANTITATIVE MODELS
Securities selected using statistical models may result in incorrect asset
allocations causing overall returns to be lower than if other methods of
selection were used.
o NON-DIVERSIFIED
To the extent a portfolio invests a greater proportion of its assets in the
securities of a smaller number of issuers, it may be more susceptible to any
single economic, political or regulatory occurrence than a more widely
diversified portfolio and may be subject to greater risks of loss with respect
to its portfolio securities.
Prospectus 31
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
o STYLE RISK -- DIVIDEND-PAYING COMPANIES
(WRL T. ROWE PRICEDIVIDEND GROWTH)
Securities with different characteristics tend to shift in and out of favor
depending upon market and economic conditions as well as investor sentiment. A
portfolio may underperform other portfolios that employ a different style. A
portfolio also may employ a combination of styles that impact its risk
characteristics. Examples of different styles include growth and value
investing, as well as those focusing on large, medium, or small company
securities.
T. Rowe Price's emphasis on dividend-paying companies could result in
significant investments in large-capitalization stocks. At times, stocks such
as these may lag shares of smaller, faster-growing companies. Also, a company
may reduce or eliminate its dividend. The portfolio's efforts to buy stocks
that appear temporarily out of favor also carries the risk that a stock or
group of stocks may remain out of favor for a long time and may continue to
decline.
YOU MAY LOSE MONEY IF YOU INVEST IN ANY OF THE BALANCED PORTFOLIOS
/chess piece/ INVESTOR PROFILES
WRL T. ROWE PRICE DIVIDEND GROWTH
For the investor who wants a reasonable level of current income from equity
investments that have the potential to rise faster than inflation, and who can
tolerate significant fluctuations in the value of their investments.
WRL DEAN ASSET ALLOCATION
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.
WRL LKCM STRATEGIC TOTAL RETURN
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 portfolio that invests in both equity and
fixed-income securities.
WRL J.P. MORGAN REAL ESTATE SECURITIES
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 non-diversified portfolio invested primarily in securities of
real estate companies and their exposure to real estate markets.
WRL FEDERATED GROWTH & INCOME
For the investor who seeks high current income and moderate capital
appreciation and is willing to accept certain special risks associated with
sector investing. (A sector is a broad grouping of specific industries.)
WRL AEGON BALANCED
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.
This portfolio is not designed for investors who desire a consistent level of
income.
Prospectus 32
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
/graph/ PORTFOLIO PERFORMANCE
The bar charts and tables below give an indication of the portfolios' risks and
performance. The charts show changes in a portfolio's performance from year to
year. The performance calculations do not reflect charges or deductions under
the policies or the annuity contracts. These fees and expenses would lower
investment performance. The tables show how a portfolio's average annual
returns for the periods indicated compare to those of a broad measure of market
performance. Because the WRL T. Rowe Price Dividend Growth portfolio commenced
operations in 1999, its performance history is not included.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL DEAN ASSET ALLOCATION
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
20.09% 14.42% 16.59% 8.33% (5.64)%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1995-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 9.03 % 6/30/97
Lowest (7.87)% 9/30/99
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR (JANUARY 3, 1995)
WRL Dean Asset
Allocation (5.64)% 10.38%
S&P 500 Index 21.04 % 28.54%
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL LKCM STRATEGIC TOTAL RETURN
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
(0.53)% 24.66% 15.00% 21.85% 9.64% 12.07%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1994-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 13.06 % 6/30/97
Lowest (8.05)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (MARCH 1, 1993)
WRL LKCM Strategic
Total Return 12.07% 16.50% 13.82%
S&P 500 Index 21.04% 28.56% 21.70%
- - --------------------------------------------------------------------------------
Prospectus 33
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL J.P. MORGAN REAL ESTATE SECURITIES
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1999
----
(3.77)%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 9.17 % 6/30/99
Lowest (8.49)% 9/30/99
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR (MAY 1, 1998)
WRL J.P. Morgan
Real Estate
Securities (3.77)% (11.31)%
Morgan Stanley
REIT Index (4.55)% (10.67)%
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL FEDERATED GROWTH & INCOME
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
25.25% 11.64% 24.65% 3.05% (4.45)%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1995-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 12.15 % 6/30/99
Lowest (7.99)% 3/31/99
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEAR (MARCH 1, 1994)
WRL Federated
Growth &
Income (4.45)% 11.41% 8.82%
Russell Mid Cap
Value Index (0.11)% 18.01% 14.61%
- - --------------------------------------------------------------------------------
Prospectus 34
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL AEGON BALANCED
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
19.80% 10.72% 17.10% 6.93% 3.03%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1995-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 9.84 % 12/31/98
Lowest (7.86)% 9/30/99
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (MARCH 1, 1994)
WRL AEGON
Balanced 3.03% 11.34% 8.53%
S&P 500 Index 21.04% 28.56% 24.14%
- - --------------------------------------------------------------------------------
Prospectus 35
<PAGE>
- - --------------------------------------------------------------------------------
FIXED-INCOME PORTFOLIO(S)
- - --------------------------------------------------------------------------------
WRL AEGON BOND
THIS RISK/REWARD SUMMARY BRIEFLY DESCRIBES EACH FIXED-INCOME PORTFOLIO OF THE
FUND AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIO(S). FOR FURTHER
INFORMATION ON THE PORTFOLIO(S), PLEASE READ THE SECTION ENTITLED "EXPLANATION
OF STRATEGIES AND RISKS," BEGINNING ON PAGE 43, AND THE FUND'S SAI.
/target/ OBJECTIVES
WRL AEGON BOND
This Portfolio seeks the highest possible current income within the confines of
the primary goal of ensuring the protection of capital.
- - --------------------------------------------------------------------------------
WHAT IS A FIXED-INCOME PORTFOLIO?
Fixed-income portfolios primarily invest in debt securities that pay
interest. When the debt security is purchased, the portfolio owns "debt"
and becomes an indirect creditor to the company or government that issued
the bond.
- - --------------------------------------------------------------------------------
/chess piece/ POLICIES AND STRATEGIES
WRL AEGON BOND
The portfolio's sub-adviser, AEGON USA Investment Management, Inc. (AIMI) seeks
to achieve the portfolio's objective by investing principally in:
o U.S. government securities obligations, including Treasury and Agency
Securities
o Medium to high-quality corporate bonds
To a lesser extent AIMI may invest in:
o Mortgage-backed securities, including pass-through and Collateralized Mortgage
Obligations (CMOs)
o Asset-backed securities
o U.S. dollar-denominated foreign bonds
o Short-term securities, including agency discount notes and commercial paper
AIMI takes an approach in the daily management of the portfolio that it
considers to be conservative, striving to participate in the bond market's
advances while preserving capital on the downside.
AIMI uses its Core Fixed-Income Strategy through which it draws from all of its
organizational resources. AIMI utilizes a disciplined process to gather
information on key factors for evaluation of the market environment.
The Fixed-Income Strategy Committee then sets policy directives that reflect
AIMI's interest rate outlook and expectations for the relative performance of
the major bond market sectors.
AIMI then selects securities that are considered by it to be most appropriate
based on AIMI's findings.
/warning sign/ RISKS
The principal risks of investing in the Fixed-Income Portfolio that may
adversely affect your investment are described below. Please note that there
are many other circumstances that could adversely affect your investment and
prevent a portfolio from achieving its objective, which are not described here.
Please refer to the section entitled "Explanation of Strategies and Risks"
beginning on page 43 and the Fund's SAI for more information about the risks
associated with investing in the Fixed-Income Portfolio.
o FIXED-INCOME SECURITIES
The value of these securities may change daily based on changes in interest
rates, and other market conditions and factors. The risks include:
o Changes in interest rates
o Length of time to maturity
o Issuers defaulting on their obligations to pay interest or return
principal (Credit Risk)
Prospectus 36
<PAGE>
- - --------------------------------------------------------------------------------
FIXED-INCOME PORTFOLIO(S) (CONTINUED)
- - --------------------------------------------------------------------------------
o HIGH-YIELD/HIGH-RISK FIXED-INCOME SECURITIES
o Credit risk
o Greater sensitivity to interest rate movements than higher rated
securities
o More speculative than higher rated securities
o Greater vulnerability to economic changes
o Decline in market value in event of default
o Less liquidity
o CREDIT RISK
The price of a bond is affected by the issuer's or counterparty's credit
quality. Changes in financial condition and general economic conditions can
affect the ability to honor financial obligations and therefore credit quality.
Lower quality bonds are generally more sensitive to these changes than higher
quality bonds. Even within securities considered investment grade, differences
exist in credit quality and some investment grade debt securities may have
speculative characteristics. A security's price may be adversely affected by
the market's opinion of the security's credit quality level even if the issuer
or counterparty has suffered no degradation in ability to honor the obligation.
o INTEREST RATE RISK
Bond prices rise when interest rates decline and decline when interest rates
rise. The longer the duration of a bond, the more a change in interest rates
affects the bond's price. Short-term and long-term interest rates may not move
the same amount and may not move in the same direction, which may affect the
sub-adviser's ability to predict interest rate movements and select portfolio
investments.
o MORTGAGE- AND OTHER ASSET-BACKED SECURITIES
o Repayment sooner than stated maturity dates resulting in greater price and
yield volatility than with traditional fixed-income securities
o Prepayments resulting in lower return
o Values may change based on creditworthiness of issuers
o Interest rate risks
o PROPRIETARY RESEARCH
AIMI's proprietary forms of research may not be effective and may cause overall
returns to be lower than if other forms of research are used.
YOU MAY LOSE MONEY IF YOU INVEST IN THIS PORTFOLIO.
/chess piece/ INVESTOR PROFILE
WRL AEGON BOND
For the investor seeking current income with preservation of capital, and who
can tolerate the fluctuation in principal associated with changes in interest
rates.
Prospectus 37
<PAGE>
- - --------------------------------------------------------------------------------
FIXED-INCOME PORTFOLIO(S) (CONTINUED)
- - --------------------------------------------------------------------------------
/graph/ PORTFOLIO PERFORMANCE
The bar chart and table below gives an indication of the portfolio's risks and
performance. The chart shows changes in the portfolio's performance from year
to year. The performance calculations do not reflect charges or deductions
under the policies or the annuity contracts. These fees and expenses would
lower investment performance. The table shows how the portfolio's average
annual returns for the periods indicated compare to those of a broad measure of
market performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL AEGON BOND
- - --------------------------------------------------------------------------------
[GRAPH OMITTED]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
6.21% 18.85% 6.79% 13.38% (6.94)% 22.99% 0.14% 9.16% 9.32% (2.94)%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1990-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 8.20 % 6/30/95
Lowest (4.90)% 3/31/94
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
WRL AEGON Bond (2.94)% 7.36% 7.33%
Lehman Brothers
Government/Corporate
Bond
(LBGC) Index (2.15)% 7.60% 7.65%
- - --------------------------------------------------------------------------------
Prospectus 38
<PAGE>
- - --------------------------------------------------------------------------------
CAPITAL PRESERVATION PORTFOLIO(S)
- - --------------------------------------------------------------------------------
WRL J.P. MORGAN MONEY MARKET
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES THE CAPITAL PRESERVATION
PORTFOLIO(S) AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIO. FOR FURTHER
INFORMATION ON THE PORTFOLIOS(S), PLEASE READ THE SECTION ENTITLED "EXPLANATION
OF STRATEGIES AND RISKS," BEGINNING ON PAGE 43, AND THE FUND'S SAI.
/target/ OBJECTIVES
WRL J.P. MORGAN MONEY MARKET
This portfolio seeks to obtain maximum current income consistent with
preservation of principal and maintenance of liquidity.
- - --------------------------------------------------------------------------------
WHAT IS A MONEY MARKET PORTFOLIO?
A money market portfolio tries to maintain a share price of $1.00 while
paying income to its shareholders. A stable share price protects your
investment from loss ("preservation of principal"). If you need to sell
your shares at any time, you should receive your initial investment plus
any income that you have earned (thereby providing "liquidity"). However, a
money market portfolio does not guarantee that you will receive your money
back.
A money market portfolio must follow SEC rules as to the investment
quality, maturity, diversification and other features of the securities it
purchases and the average remaining maturity of the securities cannot be
greater than 90 days. The remaining maturity of a security is the period of
time until the principal amount must be repaid.
- - --------------------------------------------------------------------------------
/chess piece/ POLICIES AND STRATEGIES
WRL J.P. MORGAN MONEY MARKET
The portfolio's sub-adviser, J.P. Morgan Investment Management Inc. (J.P.
Morgan) seeks to achieve the portfolio's objective by investing in:
o U.S. government obligations
o Domestic and certain foreign bank obligations including time deposits,
certificates of deposit, bankers' acceptances and other bank obligations
o Asset-backed securities
o Repurchase and reverse repurchase agreements
J.P. Morgan will limit its investments to securities that present minimum
credit risks, as determined by guidelines adopted by the Fund's Board. 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.
The Fund's Board must approve or ratify any purchase of an unrated security or
a security rated by only one nationally recognized statistical rating
organization (NRSRO).
/warning sign/ RISKS
The principal risks of investing in the WRL J.P. Morgan Money Market portfolio
that may adversely affect your investment are described below. Please note that
there are circumstances which could adversely affect your investment and
prevent the portfolio from achieving its objective, which are not described
here. Please refer to the section entitled "Explanation of Strategies and
Risks," beginning on page 43 and the Fund's SAI for more information about the
risks associated with investing in the Capital Preservation Portfolio(s).
o U.S. GOVERNMENT OBLIGATIONS
The value of the U.S. government securities will fluctuate with changing
interest rates. A decrease in interest rates generally results in an increase
in the value of the securities and an increase in interest rates have the
opposite effect.
o BANK OBLIGATIONS
Banks are subject to extensive governmental regulations that may affect an
investment. The profitability of this industry is dependent on the availability
and cost of capital funds for lending under prevailing money market conditions.
Prospectus 39
<PAGE>
- - --------------------------------------------------------------------------------
CAPITAL PRESERVATION PORTFOLIO(S) (CONTINUED)
- - --------------------------------------------------------------------------------
Economic conditions and credit losses also affect this type of investment.
o ASSET-BACKED SECURITIES
o Repayment sooner than stated maturity dates resulting in greater price and
yield volatility than with traditional fixed-income securities
o Prepayments resulting in lower return
o Values may change based on creditworthiness of issuers
o Interest rate risks
o 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. Repurchase agreements not terminable within seven days are considered
illiquid securities.
Repurchase agreements involve the risk that the seller will fail to repurchase
the security, as agreed. In that case, the portfolio will bear the risk of
market value fluctuations until the security can be sold and may encounter
delays and incur costs in liquidating the security. In the event of bankruptcy
or insolvency of the seller, delays and costs are incurred.
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. 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.
Reverse repurchase agreements may expose a portfolio to greater fluctuations in
the value of its assets.
Portfolio shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. ALTHOUGH THE PORTFOLIO SEEKS TO PRESERVE THE VALUE OF YOUR
INVESTMENT AT $1.00 PER SHARE THERE IS NO GUARANTEE THAT IT WILL BE ABLE TO DO
SO. YOU MAY LOSE MONEY IF YOU INVEST IN THIS PORTFOLIO.
/chess piece/ INVESTOR PROFILES
WRL J.P. MORGAN MONEY MARKET
For the investor who seeks current income, preservation of capital and
maintenance of liquidity.
Prospectus 40
<PAGE>
- - --------------------------------------------------------------------------------
CAPITAL PRESERVATION PORTFOLIO(S) (CONTINUED)
- - --------------------------------------------------------------------------------
/graph/ PORTFOLIO PERFORMANCE
The bar chart and table below gives an indication of the portfolio's risks and
performance. The chart shows changes in the portfolio's performance from year
to year. The performance calculations do not reflect charges or deductions
under the policies or the annuity contracts. These fees and expenses would
lower investment performance. The table shows how the portfolio's average
annual return for the periods indicated compare to those of a broad measure of
market performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL J.P. MORGAN MONEY MARKET
- - --------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
7.09% 5.25% 3.03% 2.45% 3.44% 5.40% 5.03% 5.24% 5.26% 4.63%
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1990-1999)
- - --------------------------------------------------------------------------------
QUARTER ENDED
Highest 1.87% July 31, 1990
Lowest 0.56% April 30, 1993
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
WRL J.P. Morgan
Money Market 4.63% 5.11% 4.67%
- - --------------------------------------------------------------------------------
7 DAY YIELD
- - --------------------------------------------------------------------------------
As of December 31, 1999 5.15%
- - --------------------------------------------------------------------------------
Prospectus 41
<PAGE>
- - --------------------------------------------------------------------------------
RISK/REWARD INFORMATION
- - --------------------------------------------------------------------------------
BEFORE YOU CHOOSE AN INVESTMENT PORTFOLIO,
PLEASE CONSIDER . . .
All of the investment portfolios involve risk, but there is also the potential
for reward. You can lose money -- and you can make money. The Fund portfolios
are structured so that each offers a slightly different degree of risk and
reward than others.
In this prospectus, we've arranged the portfolios in order of risk/
reward from highest to lowest. Notice the scale at the right. It covers the
full spectrum of risk/reward of the portfolios described in this prospectus.
WHAT RISK/REWARD LEVEL IS FOR YOU? ASK YOURSELF THE FOLLOWING:
(1) HOW WELL DO I HANDLE FLUCTUATIONS IN MY ACCOUNT VALUE?
The higher a portfolio is on the risk/reward spectrum, the more its price
is likely to move up and down on a day to day basis. If this makes you
uncomfortable, you may prefer an investment at the lower end of the scale
that may not fluctuate in price as much.
(2) AM I LOOKING FOR A HIGHER RATE OF RETURN?
Generally, the higher the potential return, the higher the risk. If you
find the potential to make money is worth the possibility of losing more,
then a portfolio at the higher end of the spectrum may be right for you.
A final note: These portfolios are designed for long-term investment.
Each portfolio has an investment objective that it tries to achieve by
following certain investment strategies and techniques. The objective can be
changed without shareholder vote.
HIGHER
WRL VKAM EMERGING GROWTH
WRL T. ROWE PRICE SMALL CAP
WRL GOLDMAN SACHS SMALL CAP AGGRESSIVE EQUITY
WRL PILGRIM BAXTER MID CAP GROWTH
WRL ALGER AGGRESSIVE GROWTH
WRL THIRD AVENUE VALUE
WRL GE INTERNATIONAL EQUITY FOREIGN EQUITY
WRL JANUS GLOBAL
WRL JANUS GROWTH
WRL GOLDMAN SACHS GROWTH
WRL GE U.S. EQUITY
WRL SALOMON ALL CAP GROWTH EQUITY
WRL C.A.S.E. GROWTH
WRL DREYFUS MID CAP
WRL NWQ VALUE EQUITY
RISK/REWARD
WRL T. ROWE PRICE DIVIDEND GROWTH
WRL DEAN ASSET ALLOCATION
WRL LKCM STRATEGIC TOTAL RETURN
WRL J.P. MORGAN REAL BALANCED
ESTATE SECURITIES
WRL FEDERATED GROWTH & INCOME
WRL AEGON BALANCED
WRL AEGON BOND FIXED-INCOME
WRL J.P. MORGAN MONEY MARKET CAPITAL PRESERVATION
LOWER
Prospectus 42
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS
- - --------------------------------------------------------------------------------
HOW TO USE THIS SECTION
In the discussions of the individual portfolios on pages 2 through 41, you
found descriptions of the strategies and risks associated with each. In those
pages, you were referred to this section for a more complete description of the
risks. For best understanding, first read the description of the portfolio
you're interested in. Then refer to this section and read about the risks
particular to that portfolio. For even more discussions of strategies and
risks, see the SAI, which is available upon request. See the back cover of this
prospectus for information on how to order the SAI.
/chess piece/
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 WRL Salomon All Cap, WRL Third Avenue Value and
WRL J.P. Morgan Real Estate Securities) 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):
o 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.
o 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
would cause the portfolio's holdings of that issuer to amount to more than 5%
of the portfolio's total assets.
o 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.
WRL Salomon All Cap, WRL Third Avenue Value and WRL J.P. Morgan Real Estate
Securities each reserves the right to become a diversified investment company
(as defined by the 1940 Act).
/warning sign/
INVESTING IN COMMON STOCKS. Many factors cause common stocks to go up and down
in price. A major one is the financial performance of the company that issues
the stock. Other factors include the overall economy, conditions in a
particular industry, and monetary factors like interest rates. When your
portfolio holds stocks, there's a risk that some or all of them may be down in
price when you choose to sell, causing you to lose money. This is called MARKET
RISK.
/warning sign/
INVESTING IN PREFERRED STOCKS. Because these stocks come with a promise to pay
a stated dividend, their price depends more on the size of the dividend than on
the company's performance. But if a company fails to pay the dividend, its
preferred stock is likely to drop in price. Changes in interest rates can also
affect their price. (See "Investing in Bonds," below.)
/warning sign/
INVESTING IN CONVERTIBLE SECURITIES, PREFERRED STOCKS, AND BONDS. Since
preferred stocks and corporate bonds pay a stated return, their prices usually
don't depend on the price of the company's common stock. But some companies
issue preferred stocks and bonds that are CONVERTIBLE into their common stocks.
Linked to the common stock in this way, convertible securities go up and down
in price as the common stock does, adding to their market risk.
Prospectus 43
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS
- - --------------------------------------------------------------------------------
/warning sign/
VARIOUS INVESTMENT TECHNIQUES. Various investment techniques are utilized to
increase or decrease exposure to changing security prices, interest rates,
currency exchange rates, commodity prices or other factors that affect security
values. These techniques may involve derivative securities and transactions
such as buying and selling options and futures contracts, entering into
currency exchange contracts or swap agreements and purchasing indexed
securities. These techniques are designed to adjust the risk and return
characteristics of the portfolio of investment and are not used for leverage.
/warning sign/
T. ROWE PRICE RESERVE INVESTMENT FUND. The WRL T. Rowe Price Small Cap and WRL
T. Rowe Price Dividend Growth portfolios may invest in money market instruments
directly or indirectly through investment in the Reserve Investment Fund
(Reserve Fund). The Reserve Fund is advised by T. Rowe Price and charges no
advisory fees to the investment manager, but other fees may be incurred which
may result in a duplication of fees. Further information is included in the
SAI.
/warning sign/
GEI SHORT-TERM INVESTMENT FUND. The WRL GE International Equity and WRL GE U.S.
Equity portfolios may invest in money market instruments directly or indirectly
through investment in the GEI Short-Term Investment Fund (Investment Fund). The
Investment Fund is advised by GEAM; GEAM charges no advisory fee to the
Investment Fund, but other fees may be incurred which may result in a
duplication of fees. Further information is included in the SAI.
/warning sign/
VOLATILITY. The more an investment goes up and down in price, the more VOLATILE
it is. Volatility increases the market risk because even though your portfolio
may go UP more than the market in good times, it may also go DOWN more than the
market in bad times. If you decide to sell when a volatile portfolio is down,
you could lose more.
/warning sign/
INVESTING IN BONDS. Like common stocks, bonds fluctuate in value, though the
factors causing this fluctuation are different, including:
o CHANGES IN INTEREST RATES. Bond prices tend to move the opposite of interest
rates. Why? Because when interest rates on new bond issues go up, rates on
existing bonds stay the same and they become less desirable. When rates go
down, the reverse happens. This is also true for most preferred stocks and
some convertible securities.
o LENGTH OF TIME TO MATURITY. When a bond matures, the issuer must pay the owner
its face value. If the maturity date is a long way off, many things can affect
its value, so a bond is more volatile the farther it is from maturity. As that
date approaches, fluctuations usually become smaller and the price gets closer
to face value.
o DEFAULTS. All bond issuers make at least two promises: (1) to pay interest
during the bond's term and (2) to return principal when it matures. If an
issuer fails to keep one or both of these promises, the bond will probably
drop in price dramatically, and may even become worthless. Changes in
financial condition and general economic conditions can affect the ability to
honor financial obligations and therefore credit quality. A security's price
may be adversely affected by the market's opinion of the security's credit
quality level even if the issuer or counterparty has suffered no degradation
in ability to honor the obligation.
o DECLINES IN RATINGS. At the time of issue, most bonds are rated by
professional rating services, such as Moody's Investors Service, Inc.
(Moody's) and Standard & Poor's Corporation (S&P). The stronger the financial
backing behind the bond, the higher the rating. If this backing is weakened or
lost, the rating service may downgrade the bond's rating. This is virtually
certain to cause the bond to drop in price. Bonds that are rated below BBB by
S&P, and below Ba by Moody's, are considered to be below investment grade.
Moody's rates bonds in nine categories, from Aaa to C, with Aaa being the
highest with least risk. S&P rates bonds in six categories, from AAA to D,
with AAA being the highest.
o LOW RATING. High-yield/high-risk fixed-income securities (commonly known as
"junk bonds") have
Prospectus 44
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS (CONTINUED)
- - --------------------------------------------------------------------------------
greater credit risk, are more sensitive to interest rate movements, are
considered more speculative than higher rated bonds, have a greater
vulnerability to economic changes and are less liquid. The market for such
securities may be less active than for higher rated securities, which can
adversely affect the price at which these securities may be sold and may
diminish a portfolio's ability to obtain accurate market quotations when
valuing the portfolio securities and calculating the portfolio's net asset
value.
o LACK OF RATING. Some bonds are considered speculative, or for other reasons
are not rated. Such bonds must pay a higher interest rate in order to attract
investors. They're considered riskier because of the higher possibility of
default or loss of liquidity.
o LOSS OF LIQUIDITY. If a bond is downgraded, or for other reasons drops in
price, the market demand for it may "dry up". In that case, the bond may be
hard to sell or "liquidate" (convert to cash).
/warning sign/
INVESTING IN FOREIGN SECURITIES. These are investments offered by foreign
companies, governments and government agencies. They involve risks not usually
associated with U.S. securities, including:
o CHANGES IN CURRENCY VALUES. Foreign securities are sold in currencies other
than U.S. dollars. If a currency's value drops, the value of the securities
held by a portfolio could drop too, even if the securities are strong. In
turn, the value of the shares of the portfolio could also drop. Dividend and
interest payments may be lower. Factors affecting exchange rates are:
differing interest rates among countries; balances of trade; amount of a
country's overseas investments; and any currency manipulation by banks.
o CURRENCY SPECULATION. The foreign currency market is largely unregulated and
subject to speculation.
o ADRS/ADSS. Some portfolios also invest in American Depositary Receipts (ADRs)
and American Depositary Shares (ADSs). They represent securities of foreign
companies traded on U.S. exchanges, and their values are expressed in U.S.
dollars. Changes in the value of the underlying foreign currency will change
the value of the ADR or ADS. A portfolio incurs costs when it converts other
currencies into dollars, and vice-versa.
o EURO CONVERSION. On January 1, 1999, certain participating countries in the
European Economic Monetary Union adopted the "Euro" as their official
currency. Other EU member countries may convert to the Euro at a later date.
As of January 1, 1999, governments in participating countries issued new debt
and redenominated existing debt in Euros; corporations chose to issue stocks
or bonds in Euros or national currency. The new European Central Bank (the
"ECB") will assume responsibility for a uniform monetary policy in
participating countries. Euro conversion risks that could affect a portfolio's
foreign investments include: (1) the readiness of Euro payment, clearing, and
other operational systems; (2) the legal treatment of debt instruments and
financial contracts in existing national currencies rather than the Euro; (3)
exchange-rate fluctuations between the Euro and non-Euro currencies during the
transition period of January 1, 1999 through December 31, 2002 and beyond; (4)
potential U.S. tax issues with respect to portfolio securities; and (5) the
ECB's abilities to manage monetary policies among the participating countries;
and (6) the ability of financial institution systems to process Euro
transactions. o DIFFERENT ACCOUNTING AND REPORTING PRACTICES. Foreign tax laws
are different, as are laws, practices and standards for accounting, auditing
and reporting data to investors. o LESS INFORMATION AVAILABLE TO THE PUBLIC.
Foreign companies usually make less information available to the public. o
LESS REGULATION. Securities regulations in many foreign countries are more lax
than in the U.S.
o MORE COMPLEX NEGOTIATIONS. Because of differing business and legal procedures,
a portfolio may find it hard to enforce obligations or negotiate favorable
brokerage commission rates.
o LESS LIQUIDITY/MORE VOLATILITY. Some foreign securities are harder to convert
to cash than U.S. securities, and their prices may fluctuate more
dramatically.
o SETTLEMENT DELAYS. "Settlement" is the process of completing a securities
transaction. In many countries, this process takes longer than it does in the
U.S.
o HIGHER CUSTODIAL CHARGES. Fees charged by the Fund's custodian for holding
shares are higher for foreign securities than that of domestic securities.
Prospectus 45
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS (CONTINUED)
- - --------------------------------------------------------------------------------
o HIGHER TRANSACTION COSTS. Fees charged by securities brokers are often higher
for transactions involving foreign securities than domestic securities. Higher
expenses, such as brokerage fees, may reduce the return a portfolio might
otherwise achieve.
o VULNERABILITY TO SEIZURE AND TAXES. Some governments can seize assets. They
may also limit movement of assets from the country. A portfolio's interest,
dividends and capital gains may be subject to foreign withholding taxes.
o POLITICAL INSTABILITY AND SMALL EMERGING MARKETS. Developing countries can be
politically unstable. Economies can be dominated by a few industries, and
markets may trade a small number of securities. Regulations of banks and
capital markets can be weak.
o DIFFERENT MARKET TRADING DAYS. Foreign markets may not be open for trading
when U.S. markets are and asset values can change before your transaction
occurs.
o HEDGING. A portfolio may, but will not necessarily, enter into forward
currency contracts to hedge against declines in the value of securities
denominated in, or whose value is tied to, a currency other than the U.S.
dollar or to reduce the impact of currency fluctuation on purchases, and sales
of such securities.
/warning sign/
INVESTING IN FUTURES, OPTIONS AND DERIVATIVES. Besides conventional securities,
your portfolio may seek to increase returns by investing in financial contracts
related to its primary investments. Such contracts involve additional risks and
costs. Risks include:
o INACCURATE MARKET PREDICTIONS. If the sub-adviser is wrong in its expectation,
for example, with respect to interest rates, securities prices or currency
markets, the contracts could produce losses instead of gains.
o PRICES MAY NOT MATCH. Movements in the price of the financial contracts may be
used to offset movements in the price of other securities you own. If those
prices don't correlate or match closely, the benefits of the transaction might
be diminished.
o ILLIQUID MARKETS. If there's no market for the contracts, the portfolio may
not be able to control losses.
o TAX CONSEQUENCES. Sometimes the possibility of incurring high taxes on a
transaction may delay closing out a position and limit the gains it would have
produced.
/warning sign/
INVESTING IN SPECIAL SITUATIONS. Each portfolio may invest in "special
situations" from time to time. Special situations arise when, in the opinion of
a portfolio manager, a company's securities may be undervalued, then increase
considerably in price, due to:
o A NEW PRODUCT OR PROCESS
o A MANAGEMENT CHANGE
o A TECHNOLOGICAL BREAKTHROUGH
o AN EXTRAORDINARY CORPORATE EVENT
o A TEMPORARY IMBALANCE IN THE SUPPLY OF, AND DEMAND FOR, THE SECURITIES OF AN
ISSUER
Investing in a special situation carries an additional risk of loss if the
expected development does not happen or does not attract the expected
attention. The impact of special situation investing to a portfolio will depend
on the size of a portfolio's investment in a situation.
/chess piece/
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 short-term debt securities that
are considered cash equivalents. This may be done as a temporary 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 decrease.
/question mark/
PORTFOLIO TURNOVER
A portfolio turnover rate is, in general, the percentage calculated by taking
the lesser of purchases or sales of portfolio securities (excluding short-term
securities) for
Prospectus 46
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS (CONTINUED)
- - --------------------------------------------------------------------------------
a year and dividing it by the monthly average of the market value of such
securities during the year.
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 unforeseen developments.
The rate of portfolio turnover will not be a limiting factor when short-term
investing is considered appropriate. Increased turnover rates result in higher
brokerage costs and other transaction based expenses for a portfolio. These
charges are ultimately borne by the policyholders.
/chess piece/
SHORT SALES
A 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 convertible into, or exchangeable without
further consideration for, securities of the same issue as the securities sold
short.
/question mark/ INVESTMENT STRATEGIES
A portfolio is permitted to use other securities and investment strategies in
pursuit of its investment objective, subject to limits established by the
Fund's Board of Directors. No portfolio is under any obligation to use any of
the techniques or strategies at any given time or under any particular economic
condition. Certain instruments and investment strategies may expose the
portfolios to other risks and considerations, which are discussed in the Fund's
SAI.
Prospectus 47
<PAGE>
- - --------------------------------------------------------------------------------
HOW THE FUND IS MANAGED AND ORGANIZED
- - --------------------------------------------------------------------------------
/question mark/
HOW THE FUND IS MANAGED AND ORGANIZED
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.
WRL Investment Management, Inc. (WRL Management) located at 570 Carillon
Parkway, St. Petersburg, Florida 33716, has served as the Fund's investment
adviser since 1997. (Prior to this date, Western Reserve served as investment
adviser to the Fund). The investment adviser is a direct, wholly-owned
subsidiary of Western Reserve Life Assurance Co. of Ohio (Western Reserve),
which is wholly-owned by First AUSA Life Insurance Company, a stock life
insurance company, which is wholly-owned by AEGON USA, Inc. AEGON USA, Inc. is
a financial services holding company whose primary emphasis is on life and
health insurance and annuity and investment products. AEGON USA, Inc. is a
wholly-owned indirect subsidiary of AEGON N.V., a Netherlands corporation which
is a publicly traded international insurance group. The investment adviser had
no prior experience as an adviser.
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.
The Fund has received an order from the Securities and Exchange Commission that
will permit the Fund and the investment adviser, subject to certain conditions,
and without the approval of shareholders to: (1) employ a new unaffiliated
sub-adviser for a portfolio pursuant to the terms of a new investment
sub-advisory agreement, either as a replacement for an existing sub-adviser or
as an additional sub-adviser; (2) materially change the terms of any
sub-advisory agreement; and (3) continue the employment of an existing
sub-adviser on the same sub-advisory contract terms where a contract has been
assigned because of a change in control of the sub-adviser. In such
circumstances, shareholders would receive notice and information about the new
sub-adviser within ninety (90) days after the hiring of any new sub-adviser.
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 advisory fees for each portfolio are:
ADVISORY
PORTFOLIO FEE
WRL Janus Growth* 0.80%
WRL AEGON Bond 0.45%
WRL Janus Global** 0.80%
WRL J.P. Morgan Money Market 0.40%
WRL AEGON Balanced 0.80%
WRL GE International Equity 1.00%
WRL Third Avenue Value 0.80%
WRL VKAM Emerging Growth 0.80%
WRL LKCM Strategic
Total Return 0.80%
WRL Alger Aggressive Growth 0.80%
WRL Federated Growth
& Income 0.75%
WRL Dean Asset Allocation 0.80%
WRL C.A.S.E. Growth 0.80%
WRL NWQ Value Equity 0.80%
WRL GE U.S. Equity 0.80%
WRL J.P. Morgan Real
Estate Securities 0.80%
* WRL Management currently waives 0.025% of its advisory fee for the first $3
billion of the portfolio's average daily net assets (net fee -- 0.775%); and
0.05% of assets above $3 billion (net fee -- 0.75%). This waiver will terminate
on June 25, 2000.
** WRL Management currently waives 0.025% of its advisory fee for the
portfolio's average daily net assets above $2 billion (net fee -- 0.775%.) This
waiver will terminate on June 25, 2000.
Prospectus 48
<PAGE>
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HOW THE FUND IS MANAGED AND ORGANIZED (CONTINUED)
- - --------------------------------------------------------------------------------
ADVISORY
PORTFOLIO FEE
WRL Salomon All Cap 0.90% up to $100 million
0.80% over $100 million
WRL T. Rowe Price 0.90% up to $100 million
Dividend Growth 0.80% over $100 million
WRL T. Rowe Price 0.75%
Small Cap
WRL Dreyfus Mid Cap 0.85% up to $100 million
0.80% over $100 million
WRL Pilgrim Baxter 0.90% up to $100 million
Mid Cap Growth 0.80% over $100 million
WRL Goldman Sachs Small Cap 0.90%
WRL Goldman Sachs Growth 0.90% up to $100 million
0.80% over $100 million
EXPENSE REIMBURSEMENT
WRL Management has entered into an expense limitation agreement with the Fund
on behalf of each applicable portfolio, pursuant to which WRL Management has
agreed to reimburse a portfolio for certain operating expenses so that the
total annual operating expenses of each applicable portfolio do not exceed the
total operating expenses specified for that portfolio (expense cap) in the
portfolio's then-current SAI. The Fund, on behalf of an applicable portfolio,
will at a later date reimburse WRL Management for operation expenses previously
paid on behalf of such portfolio during the previous 36 months, but only if,
after such reimbursement, the portfolio's expense ratio does not exceed the
expense cap. The agreement has an initial term through April 30, 2001, and will
automatically renew for one-year terms unless WRL Management provides written
notice to the Fund at least 30 days prior to the end of the then-current term.
In addition, the agreement will terminate upon termination of the Investment
Advisory Agreement, or may be terminated by the Fund, without payment of any
penalty, upon ninety (90) days' prior written notice to WRL Management.
SUB-ADVISERS
Here is a listing of the sub-advisers and the portfolios they manage:
SUB-ADVISER PORTFOLIO
Alger WRL Alger Aggressive Growth
GEAM WRL GE International Equity
WRL GE U.S. Equity
Janus WRL Janus Global
WRL Janus Growth
C.A.S.E. WRL C.A.S.E. Growth
NWQ WRL NWQ Value Equity
Dean WRL Dean Asset Allocation
AIMI WRL AEGON Bond
WRL AEGON Balanced
T. Rowe Price WRL T. Rowe Price Dividend Growth
WRL T. Rowe Price Small Cap
SBAM WRL Salomon All Cap
GSAM WRL Goldman Sachs Growth
WRL Goldman Sachs Small Cap
Pilgrim Baxter WRL Pilgrim Baxter Mid Cap Growth
VKAM WRL VKAM Emerging Growth
EQSF WRL Third Avenue Value
LKCM WRL LKCM Strategic Total Return
J.P. Morgan WRL J.P. Morgan Real Estate Securities
WRL J.P. Morgan Money Market
Federated WRL Federated Growth & Income
Dreyfus WRL Dreyfus Mid Cap
Prospectus 49
<PAGE>
- - --------------------------------------------------------------------------------
HOW THE FUND IS MANAGED AND ORGANIZED (CONTINUED)
DAY-TO-DAY MANAGEMENT OF THE INVESTMENTS IN EACH PORTFOLIO IS THE
RESPONSIBILITY OF THE PORTFOLIO MANAGER. THE PORTFOLIO MANAGERS OF THE FUND
ARE:
WRL VKAM EMERGING GROWTH
GARY M. LEWIS leads an investment team and is primarily responsible for the day
to day management of this portfolio. Mr. Lewis has been senior vice president
of VKAM since October, 1995. Previously, he has served as vice
president/portfolio manager of VKAM from 1989 to October 1995.
WRL T. ROWE PRICE SMALL CAP
RICHARD T. WHITNEY, CFA has managed this portfolio since inception and heads
the Investment Team for this portfolio. He joined T. Rowe Price in 1985.
WRL GOLDMAN SACHS SMALL CAP
ROBERT C. JONES, MANAGING DIRECTOR, has served as the head of an investment
team that has managed the portfolio since its inception. Mr. Jones joined GSAM
as a portfolio manager in 1989.
WRL PILGRIM BAXTER MID CAP GROWTH
JEFFREY A. WRONA, CFA has managed this portfolio since inception. Prior to
joining Pilgrim Baxter, he was a senior portfolio manager at Munder Capital
Management.
WRL ALGER AGGRESSIVE GROWTH
DAVID D. ALGER has been employed by Alger since 1971 and has served as
president since 1995. He has managed this portfolio since inception.
DAVID HYUN has served as co-manager of this portfolio since February 1998. He
has been employed by Alger as a senior research analyst since 1991, as a
portfolio manager since 1997 and as a senior vice president since 1998.
WRL THIRD AVENUE VALUE
MARTIN J. WHITMAN has served as portfolio manager of this portfolio since its
inception. He is Chairman, President and Chief Executive Officer of the sub-
WRL GE INTERNATIONAL EQUITY
RALPH R. LAYMAN has served as the head of a team of portfolio managers that has
managed a portion of the portfolio's assets since its inception. Prior to May
1, 2000, GEAM was sub-adviser for one half of the portfolio's assets. Mr.
Layman joined GEAM in 1991 as an executive vice president for international
investments.
WRL JANUS GLOBAL
HELEN YOUNG HAYES, CFA and LAURENCE CHANG, CFA have served as co-portfolio
managers of this portfolio since January 2000. Ms. Hayes previously served as
manager of this portfolio since its inception. She has been employed by Janus
since 1987.
Mr. Chang has been employed by Janus since 1993. Before joining Janus, Mr.
Chang was a project director at the National Security Archive.
WRL SALOMON ALL CAP
ROSS S. MARGOLIES has managed this portfolio since inception. Mr. Margolies
joined Salomon in 1992.
ROBERT M. DONAHUE, JR. assists in the day-to-day management of the portfolio.
Prior to joining SBAM in 1997, Mr. Donahue worked as an equity analyst at
Gabelli & Company.
WRL JANUS GROWTH
EDWARD KEELY has served as manager of this portfolio since January 2000. He
previously served as co-portfolio manager of this portfolio since January 1999.
Prior to joining Janus in 1998, Mr. Keely was a senior vice president of
investments at Founders.
Prospectus 50
<PAGE>
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HOW THE FUND IS MANAGED AND ORGANIZED (CONTINUED)
- - --------------------------------------------------------------------------------
WRL GOLDMAN SACHS GROWTH
HERBERT E. EHLERS has served as head of a thirteen person investment team that
has managed the portfolio since inception. Prior to joining GSAM in 1997, he
was chief investment officer at Liberty Investment Management, Inc. from
1994-1997.
WRL C.A.S.E GROWTH
This portfolio is managed by a team of professionals, called the Portfolio
Management Committee. WILLIAM E. LANGE is the head manager of this Committee.
He has been president of C.A.S.E. since 1984.
WRL GE U.S. EQUITY
EUGENE K. BOLTON leads a team of portfolio managers for this portfolio. He has
served in that capacity since the portfolio's inception. Mr. Bolton joined GEAM
in 1984 as Chief Financial Officer and has been a portfolio manager since 1986.
WRL DREYFUS MID CAP
JOHN O'TOOLE has served as portfolio manager since inception and has been
employed by Dreyfus as portfolio manager since 1994. Mr. O'Toole is a senior
vice president and portfolio manager for Mellon Equity Associates. He has been
employed by Mellon Bank since 1979.
WRL NWQ VALUE EQUITY
EDWARD C. FRIEDEL has been the senior manager of this portfolio since
inception. He has been a managing director and investment strategist with NWQ
since 1983.
WRL T. ROWE PRICE DIVIDEND GROWTH
THOMAS HUBER, CFA, has served as manager of this portfolio since March 2000.
Mr. Huber is a Vice President of T. Rowe Price Associates. Within the Equity
Division, he covers consumer products, leisure and gaming, apparel, drugstores
and supermarkets. Before joining the firm in 1994, he worked for NationsBank as
a Corporate Banking Officer.
WRL DEAN ASSET ALLOCATION
JOHN C. RIAZZI, CFA serves as portfolio manager of this portfolio.
Previously, Mr. Riazzi served as co-portfolio manager of the portfolio. He
joined Dean in 1989 and has served as a manager of the portfolio since its
inception.
WRL LKCM STRATEGIC TOTAL RETURN
LUTHER KING, JR., CFA and SCOT C. HOLLMANN, CFA have co-managed this portfolio
since inception.
Mr. King has been the president of Luther King since 1979.
Mr. Hollmann has been a vice president of Luther King since 1983.
WRL J.P. MORGAN REAL ESTATE SECURITIES
DANIEL P. O'CONNOR serves as portfolio manager of this portfolio.
Mr. O'Conner has served as the sole manager of this portfolio since its
inception. Prior to joining J.P. Morgan in 1996, Mr. O'Connor served two years
as Director of Real Estate Securities at INVESCO.
WRL FEDERATED GROWTH & INCOME
STEVEN J. LEHMAN, CFA and LINDA A. DUESSEL, CFA serve as co-portfolio managers
of this portfolio.
Mr. Lehman has served as co-portfolio manager since 1997. He joined Federated
in 1997. From 1985 to 1997, he served as portfolio manager, vice president and
senior portfolio manager at First Chicago NBD.
Ms. Duessel, senior vice president, has been employed by Federated since 1991
and has been a portfolio manager of this portfolio since 1996.
Prospectus 51
<PAGE>
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HOW THE FUND IS MANAGED AND ORGANIZED (CONTINUED)
- - --------------------------------------------------------------------------------
WRL AEGON BALANCED
MICHAEL VAN METER has served as the senior portfolio manager of this portfolio
since inception. Mr. Van Meter has been employed by VMF Capital, LLC (VMF)
since July, 1998. Prior to joining VMF, Mr. Van Meter was employed by AIMI.
WRL AEGON BOND
CLIFFORD A. SHEETS, CFA and DAVID R. HALFPAP, CFA have served as co-portfolio
managers of this portfolio since January 2000. Mr. Sheets previously served as
co-portfolio manager of this portfolio since 1998. Mr. Sheets joined AIMI in
1990.
Mr. Halfpap has been employed by AIMI since 1975 and is currently a senior vice
president.
WRL J.P. MORGAN MONEY MARKET
JOHN T. DONAHUE and MARK SETTLES have served as co-portfolio managers of this
portfolio since January 2000. Mr. Donohue has been employed by J.P. Morgan
since 1997 and is a portfolio manager in the Fixed Income Group. He previously
served as senior money market trader. Mr. Donohue was a portfolio manager at
Goldman Sachs for 10 years prior to his employment at J.P. Morgan.
MR. SETTLES is a product portfolio manager in the Short Term Fixed Income Group
at J.P. Morgan. Previously, he spent five years trading dollar and euro-
denominated fixed income products on J.P. Morgan's New York and London trading
desks.
Prospectus 52
<PAGE>
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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 information for the separate
accounts, policies or annuity contracts.
YIELD
Yield quotations for the WRL AEGON 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.
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.
SIMILAR 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. Each portfolio's future performance may be
greater or less than the historical performance of the corresponding Similar
Sub-Adviser Fund. There can be no assurance, and no representation is made,
that the investment results of any portfolio will be comparable to the results
of any of the Similar Sub-Adviser Funds or any other fund managed by WRL
Management or any sub-adviser.
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,
1999. 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.
Prospectus 53
<PAGE>
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PERFORMANCE INFORMATION (CONTINUED)
- - --------------------------------------------------------------------------------
SIMILAR SUB-ADVISER FUND PERFORMANCE
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(WITH SALES LOADS)
-------------------------------
SIMILAR 10 YEARS
SUB-ADVISER INCEPTION TOTAL OR SINCE
WRL PORTFOLIO FUND DATE ASSETS 1 YEAR 5 YEARS INCEPTION
- - -------------------------- -------------------------------- ----------- -------------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
WRL Janus Global Janus Worldwide(1) 5/15/91 $ 33,802.9M 64.37% 30.88% 25.10%
WRL Alger Aggressive The Alger Fund Class A $ 226.6M 65.74% N/A 40.59%
Growth Capital Appreciation Portfolio 12/31/96 (Net)
Class A Shares(2)
WRL VKAM Emerging Van Kampen Class A $113,175,800,000 92.01% 39.86% 27.16%
Growth Emerging Growth(3) 10/2/70
WRL Third Avenue Value Third Avenue 11/1/90 $ 1,372,960,198 12.82% 18.45% 19.26%
Value Fund(1)
WRL Dreyfus Mid Cap Dreyfus Premier Midcap Class A $ 28,320,316 4.30% 21.74% 17.43%
Stock Fund(7) 4/6/94
WRL Goldman Sachs Goldman Sachs Capital Class A $ 3,285,584,250 20.24% 27.15% 19.81%
Growth Growth Fund(4) 4/20/90
WRL Goldman Sachs Small Goldman Sachs CORE Class A $ 61,240,964 20.20% N/A 4.85%
Cap Small Cap Equity Fund(5) 8/15/97
WRL T. Rowe Price T. Rowe Price Dividend 12/30/92 $ 1,027,968,177 (2.09)% 20.32% 17.75%
Dividend Growth Growth Fund(1)
WRL T. Rowe Price Small T. Rowe Price Diversified 6/30/97 $ 74,803,935 29.27% N/A 16.36%
Cap Small-Cap Growth Fund(1)(8)
WRL Pilgrim Baxter PBHG Growth II Portfolio(1) 4/30/97 $ 178.6M 98.19% N/A 36.70%
Mid Cap Growth
WRL Salomon All Cap Salomon Brothers Class O $ 215,308,000 23.44% 28.36% 16.11%
Capital Fund(6) 8/23/76
</TABLE>
(1) The Janus Worldwide Fund, T. Rowe Price Dividend Growth, Third Avenue
Value, PBHG Growth II, and T. Rowe Price Diversified Small Cap Growth
Funds do not have sales loads.
(2) Total returns are for Class A shares of The Alger Fund Capital Appreciation
Portfolio and reflect a deduction of a 4.75% front-end sales load. The
Portfolio also offers Class B and Class C shares with different sales
loads. Calculating total return with those sales loads may have resulted
in lower total returns. The inception dates for Class A, B and C shares
are 12/31/96, 10/29/93 and 8/1/97, respectively.
(3) Total returns are for Class A shares of the Van Kampen Emerging Growth Fund
and reflect a deduction of a 5.75% front end sales load and an annual
12b-1 fee of up to 0.25%. The fund also has Class B and Class C shares
with different sales loads and annual 12b-1 fees. Calculating total return
with those sales loads may have resulted in lower total returns. The
Fund's performance during the one-year period ended December 31, 1999 is
largely attributable to investments in the technology sector, which
performed favorably for the period. This performance was achieved during a
rising market, and there is no guarantee that this performance record or
the circumstances leading to it can be replicated in the future. As the
Fund expects to have a substantial portion of its assets invested in
equity securities of emerging growth companies, the Fund will be subject
to more volatility and erratic movements than the market in general.
(4) Total returns are for Class A shares of the Goldman Sachs Capital Growth
Fund and reflects a deduction of a 5.5% front-end sales load. The Fund
also offers Class B and Class C shares with different sales loads.
Calculating total return with those sales loads may have resulted in lower
total returns.
(5) Total returns are for Class A shares of the Goldman Sachs CORE Small Cap
Equity Fund and reflects a deduction of a 5.5% front-end sales load. The
fund also offers Class B and Class C shares with different sales loads.
Calculating total returns with those sales loads may have resulted in lower
total returns.
(6) Total returns are for Class O shares of the Salomon Brothers Capital Fund.
Class O shares are sold without any sales charge to the fund. The fund
also offers Class A, Class B and Class 2 shares. Since May 1, 1990, the
Fund has been managed by Salomon Brothers Asset Management Inc. Prior
hereto, it was managed by Lehman Management Co.
(7) Total returns are for Class A of the Dreyfus Premier Mid Cap Stock Fund and
reflect the deduction of a 5.75% front-end sales load. The Fund also
offers Class B, Class C and Class T shares with different sales loads.
Calculating total returns with those sales loads may have resulted in
lower total returns.
(8) Total returns for the T. Rowe Price Diversified Small-Cap Growth Fund
reflect past and present expense limitations, which increased the fund's
total return.
Prospectus 54
<PAGE>
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PERFORMANCE INFORMATION (CONTINUED)
- - --------------------------------------------------------------------------------
SIMILAR SUB-ADVISER FUND PERFORMANCE
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(WITHOUT SALES LOADS)
--------------------------------
SIMILAR 10 YEARS
SUB-ADVISER INCEPTION TOTAL OR SINCE
WRL PORTFOLIO FUND DATE ASSETS 1 YEAR 5 YEARS INCEPTION
- - ------------------------------ -------------------------------- ----------- -------------------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
WRL Janus Global Janus Worldwide(3) 5/15/91 $ 33,802.9M 64.37% 30.88% 25.10%
WRL Alger Aggressive Growth The Alger Fund(1) Class A $ 266.6M 74.01% N/A 42.89%
Capital Appreciation Portfolio 12/31/96 (Net)
WRL VKAM Emerging Growth Van Kampen Class A $113,175,800,000 103.72% 41.53% 27.92%
Emerging Growth(1)(2) 10/2/70
WRL Third Avenue Value Third Avenue 11/1/90 $ 1,372,960,198 12.82% 18.45% 19.26%
Value Fund(3)
WRL Dreyfus Mid Cap Dreyfus Premier Midcap Class R $ 28,320,316 10.84% 23.50% 17.63%
Stock Fund(6) 11/12/93
WRL Goldman Sachs Growth Goldman Sachs Capital Class A $ 3,285,584,250 27.23% 28.58% 20.51%
Growth Fund(1) 4/20/90
WRL Goldman Sachs Small Cap Goldman Sachs CORE Class A $ 61,240,964 16.63% N/A 7.36%
Small Cap Equity Fund(1) 8/15/97
WRL T. Rowe Price Dividend T. Rowe Price Dividend 12/30/92 $ 1,027,968,177 (2.09)% 20.32% 17.75%
Growth Growth Fund(3)
WRL T. Rowe Price Small Cap T. Rowe Price Diversified 6/30/97 $ 74,803,935 29.27% N/A 16.36%
Small-Cap Growth Fund(3)(5)
WRL Pilgrim Baxter Mid Cap PBHG Growth II Portfolio(3) 4/30/97 $ 178.6M 98.19% N/A 36.70%
Growth
WRL Salomon All Cap Salomon Brothers Class O $ 215,308,000 23.44% 28.36% 16.11%
Capital Fund(4) 8/23/76
</TABLE>
(1) The fund offers Class B and Class C shares as well. Returns for those
classes may differ from those of Class A shares due to differing fee
structures.
(2) The Fund's performance during the one-year period ended December 31, 1999
is largely attributable to investments in the technology sector, which
performed favorably for the period. This performance was achieved during a
rising market, and there is no guarantee that this performance record or
the circumstances leading to it can be replicated in the future. As the
Fund expects to have a substantial portion of its assets invested in
equity securities of emerging growth companies, the Fund will be subject
to more volatility and erratic movements than the market in general.
(3) The T. Rowe Price Dividend Growth, Janus Worldwide, Third Avenue Value,
PBHG Growth II, and T. Rowe Price Diversified Small-Cap Growth Funds do
not have sales loads.
(4) The Salomon Brothers Capital Fund Class O shares does not have a sales
load. Since May 1, 1990, the Fund has been managed by Salomon Brothers
Asset Management Inc. Prior hereto, it was managed by Lehman Management
Co.
(5) Total returns for the T. Rowe Price Diversified Small-Cap Growth Fund
reflect past and present expense limitations, which increased the fund's
total return.
(6) The fund offers Class B, Class C and Class T shares as well Returns for
those classes may differ from those of Class A shares due to differing fee
structures.
THE PERFORMANCE OF SIMILAR SUB-ADVISER FUNDS DOES NOT REFLECT ANY OF THE
CHARGES, FEES, AND EXPENSES IMPOSED UNDER THE POLICIES OR 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-ADVISERS FUNDS AS "SIMILAR SUB-ADVISED FUNDS.")
(See the SAI for more information about the portfolios' performance.)
Prospectus 55
<PAGE>
- - --------------------------------------------------------------------------------
OTHER INFORMATION
- - --------------------------------------------------------------------------------
/question mark/ PURCHASE AND REDEMPTION OF SHARES
As described earlier in the prospectus, shares of the portfolios are sold
exclusively to certain separate accounts of Western Reserve Life Assurance Co.
of Ohio, PFL Life Insurance Company, AUSA Life Insurance Company, Inc., Peoples
Benefit Life Insurance Company and Transamerica Occidental Life Insurance
Company are not offered to the public. Shares are sold and redeemed at their
net asset value without the imposition of any sales commission or redemption
charge. (However, certain sales or other charges may apply to the policies or
annuity contracts, as described in the product prospectus.)
/question mark/ 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 (NYSE) (usually 4:00 p.m., Eastern Time), on each day the exchange is
open.
Net asset value (NAV) 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. Share prices for any transaction are those next calculated after
receipt of an order.
- - --------------------------------------------------------------------------------
WHAT IS NET ASSET VALUE?
The 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 WRL J.P. Morgan Money Market) are valued at
market value. If market values are not readily available, securities are valued
at fair value as determined by the Fund's Valuation Committee under the
supervision of the Fund's Board.
Money market instruments maturing in 60 days or less, and all securities held
in the WRL J.P. Morgan Money Market, are valued on the amortized cost basis.
Under this method, the NAV of the money market 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 NAV. (See the SAI for details.)
/question mark/ 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.
/question mark/ TAXES
Each portfolio has either qualified and expects to continue to qualify or will
qualify in its initial year as a regulated investment company under Subchapter
M of the Internal Revenue Code of 1986, as amended ("Code"). As qualified, a
portfolio is not subject to federal income tax on that part of its taxable
income that it distributes to you. Taxable income consists generally of net
investment income, and any capital gains. It is each portfolio's intention to
distribute all such income and gains.
Shares of each portfolio are offered only to the separate accounts of Western
Reserve and its affiliates. Separate accounts 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 Income Tax Considerations" included in the respective prospectuses for
the policies and the annuity contracts.
Section 817(h) of the Code and the regulations thereunder impose
"diversification" requirements on each portfolio. Each portfolio intends to
comply with the diversification requirements. These requirements
Prospectus 56
<PAGE>
- - --------------------------------------------------------------------------------
OTHER INFORMATION
- - --------------------------------------------------------------------------------
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. Specifically, the regulations provide that,
except as permitted by "safe harbor," rules described below, as of the end of
each calendar quarter or within 30 days thereafter, no more than 55% of the
portfolio's total assets may be represented by any one investment, no more than
70% by any two investments, no more than 80% by any three investments, and no
more than 90% by any four investments.
Section 817(h) also 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, 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. If a portfolio does
not satisfy the section 817(h) requirements, the separate accounts, the
insurance companies, the policies and the annuity contracts may be taxable. See
the prospectuses for the policies and annuity contracts.
The foregoing is only a summary of some of the important federal income tax
considerations generally affecting a portfolio and you; see the SAI for a more
detailed discussion. You are urged to consult your tax advisors.
/question mark/ REPORT TO POLICYHOLDERS
The fiscal year of each portfolio ends on December 31 of each year. The Fund
will send to you, at least semi-annually, reports which show the portfolios'
composition and other information. An annual report, with audited financial
information, will be sent to you each year.
/question mark/ DISTRIBUTION AND SERVICE PLANS
The Fund has adopted a plan pursuant to Rule 12b-1 under the 1940 Act (the
"Plan") and pursuant to the Plan, entered into a Distribution Agreement with
AFSG Securities Corporation (AFSG) located at 4333 Edgewood Road NE, Cedar
Rapids, Iowa 52499. AFSG is an affiliate of the investment adviser, and serves
as principal underwriter for the Fund. The Plan permits the use of Fund assets
to help finance the distribution of the shares of the portfolios. Under the
Plan, the Fund, on behalf of the portfolios, is permitted to pay to various
service providers up to 0.15% of the average daily net assets of each portfolio
as payment for actual expenses incurred in connection with the distribution of
the shares of the portfolios. Because these fees are paid out of Fund assets on
an on-going basis, over time these costs will increase the cost of your
investment and may cost you more than other types of sales charges.
As of the date of this prospectus, the Fund has not paid any distribution fees
under the Plan and does not intend to do so before April 30, 2001. You will
receive written notice prior to the payment of any fees under the Plan.
Prospectus 57
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
THE FINANCIAL HIGHLIGHTS TABLE IS INTENDED TO HELP YOU UNDERSTAND A PORTFOLIO'S
FINANCIAL PERFORMANCE FOR THE PAST 5 YEARS (OR, IF SHORTER, THE PERIOD OF THE
PORTFOLIO'S OPERATIONS). CERTAIN INFORMATION REFLECTS FINANCIAL RESULTS FOR A
SINGLE PORTFOLIO SHARE. THE TOTAL RETURNS IN THE TABLE REPRESENT THE RATE AN
INVESTOR WOULD HAVE EARNED (OR LOST) ON AN INVESTMENT IN EACH PORTFOLIO
(ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS). THIS INFORMATION HAS BEEN DERIVED
FROM FINANCIAL STATEMENTS AUDITED BY PRICEWATERHOUSECOOPERS LLP, INDEPENDENT
ACCOUNTANTS, WHOSE REPORT, ALONG WITH THE FUND'S FINANCIAL STATEMENTS, IS
INCLUDED IN THE FUND'S ANNUAL REPORT, WHICH IS AVAILABLE UPON REQUEST BY
CALLING THE FUND AT 1-800-851-9777.
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL J.P. MORGAN MONEY MARKET
=======================================================
DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from operations:
Net investment income (loss) ....................................... 0.05 0.05 0.05 0.05 0.05
Net realized and unrealized gain (loss) on investments ............. 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- -------
Net income (loss) from operations ................................. 0.05 0.05 0.05 0.05 0.05
-------- -------- -------- -------- -------
Distributions:
Dividends from net investment income ............................... (0.05) (0.05) (0.05) (0.05) (0.05)
Dividends in excess of net investment income ....................... 0.00 0.00 0.00 0.00 0.00
Distributions from net realized gains on investments ............... 0.00 0.00 0.00 0.00 0.00
Distributions in excess of net realized gains on investments ....... 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- -------
Total distributions ............................................... (0.05) (0.05) (0.05) (0.05) (0.05)
-------- -------- -------- -------- -------
Net asset value, end of year ......................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== =======
Total return ......................................................... 4.63 % 5.26 % 5.24 % 5.03 % 5.40 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................... $429,811 $169,731 $119,708 $ 122,114 $80,544
Ratio of expenses to average net assets ............................ 0.44 % 0.46 % 0.48 % 0.52 % 0.56 %
Ratio of net investment income (loss) to average net assets ........ 4.81 % 5.24 % 5.32 % 5.03 % 5.30 %
Portfolio turnover rate ............................................ n/a n/a n/a n/a n/a
</TABLE>
<TABLE>
<CAPTION>
WRL AEGON BOND
==========================================================
DECEMBER 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year .................................. $ 11.59 $ 11.14 $ 10.71 $ 11.35 $ 9.80
Income from operations:
Net investment income (loss) ...................................... 0.64 0.64 0.65 0.64 0.69
Net realized and unrealized gain (loss) on investments ............ (0.97) 0.40 0.32 (0.64) 1.55
-------- -------- -------- -------- --------
Net income (loss) from operations ................................ (0.33) 1.04 0.97 0.00 2.24
-------- -------- -------- -------- --------
Distributions:
Dividends from net investment income .............................. (0.65) (0.59) (0.54) (0.64) (0.69)
Dividends in excess of net investment income ...................... 0.00 0.00 0.00 0.00 0.00
Distributions from net realized gains on investments .............. 0.00 0.00 0.00 0.00 0.00
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- --------
Total distributions .............................................. (0.65) (0.59) (0.54) (0.64) (0.69)
-------- -------- -------- -------- --------
Net asset value, end of year ........................................ $ 10.61 $ 11.59 $ 11.14 $ 10.71 $ 11.35
======== ======== ======== ======== ========
Total return ........................................................ (2.94)% 9.32 % 9.16 % 0.14 % 22.99 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $153,885 $170,744 $129,654 $ 95,759 $96,972
Ratio of expenses to average net assets ........................... 0.53 % 0.54 % 0.64 % 0.64 % 0.61 %
Ratio of net investment income (loss) to average net assets ....... 5.67 % 5.54 % 5.90 % 5.96 % 6.45 %
Portfolio turnover rate ........................................... 26.40 % 51.60 % 213.03 % 187.72 % 120.54 %
</TABLE>
Prospectus 58
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL JANUS GROWTH
===============================================================
DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ............................. $ 59.94 $ 36.84 $ 35.00 $ 31.66 $ 23.81
Income from operations:
Net investment income (loss) ................................. (0.04) 0.12 0.31 0.34 0.26
Net realized and unrealized gain (loss) on investments ....... 34.02 23.49 5.88 5.35 10.97
---------- ---------- ---------- ---------- ----------
Net income (loss) from operations ........................... 33.98 23.61 6.19 5.69 11.23
---------- ---------- ---------- ---------- ----------
Distributions:
Dividends from net investment income ......................... 0.00 (0.09) (0.26) (0.35) (0.24)
Dividends in excess of net investment income ................. (1.17) 0.00 0.00 (0.01) 0.00
Distributions from net realized gains on investments ......... (14.75) (0.42) (4.09) (1.99) (3.14)
Distributions in excess of net realized gains on investments . 0.00 0.00 0.00 0.00 0.00
---------- ---------- ---------- ---------- ----------
Total distributions ......................................... (15.92) (0.51) (4.35) (2.35) (3.38)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ................................... $ 78.00 $ 59.94 $ 36.84 $ 35.00 $ 31.66
========== ========== ========== ========== ==========
Total return ................................................... 59.67 % 64.47 % 17.54 % 17.96 % 47.12 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ..................... $4,141,240 $3,086,057 $1,839,453 $1,527,409 $1,195,174
Ratio of expenses to average net assets ...................... 0.82 % 0.83 % 0.87 % 0.88 % 0.86 %
Ratio of net investment income (loss) to average net assets .. (0.05)% 0.25 % 0.80 % 0.98 % 0.90 %
Portfolio turnover rate ...................................... 70.95 % 35.29 % 85.88 % 45.21 % 130.48 %
</TABLE>
<TABLE>
<CAPTION>
WRL JANUS GLOBAL
============================================================
DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................................ $ 23.71 $ 19.04 $ 18.12 $ 15.52 $ 13.12
Income from operations:
Net investment income (loss) .................................... (0.04) 0.05 0.08 0.08 0.10
Net realized and unrealized gain (loss) on investments .......... 16.42 5.61 3.32 4.20 2.91
---------- ---------- -------- -------- --------
Net income (loss) from operations .............................. 16.38 5.66 3.40 4.28 3.01
---------- ---------- -------- -------- --------
Distributions:
Dividends from net investment income ............................ 0.00 (0.13) (0.13) (0.04) 0.00
Dividends in excess of net investment income .................... 0.00 0.00 (1.01) (0.17) 0.00
Distributions from net realized gains on investments ............ (2.63) (0.80) (1.34) (1.47) (0.61)
Distributions in excess of net realized gains on investments .... 0.00 (0.06) 0.00 0.00 0.00
---------- ---------- -------- -------- --------
Total distributions ............................................ (2.63) (0.99) (2.48) (1.68) (0.61)
---------- ---------- -------- -------- --------
Net asset value, end of year ...................................... $ 37.46 $ 23.71 $ 19.04 $ 18.12 $ 15.52
========== ========== ======== ======== ========
Total return ...................................................... 71.10 % 30.01 % 18.75 % 27.74 % 23.06 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................ $1,926,210 $1,069,765 $785,966 $ 534,820 $289,506
Ratio of expenses to average net assets ......................... 0.92 % 0.95 % 1.00 % 0.99 % 0.99 %
Ratio of net investment income (loss) to average net assets ..... (0.14)% 0.23 % 0.41 % 0.46 % 0.75 %
Portfolio turnover rate ......................................... 68.10 % 87.36 % 97.54 % 88.31 % 130.60 %
</TABLE>
Prospectus 59
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL LKCM STRATEGIC TOTAL RETURN
==========================================================
DECEMBER 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year .................................. $ 16.40 $ 15.62 $ 13.97 $ 12.86 $ 10.90
Income from operations:
Net investment income (loss) ...................................... 0.34 0.39 0.37 0.37 0.37
Net realized and unrealized gain (loss) on investments ............ 1.59 1.09 2.68 1.56 2.33
-------- -------- -------- -------- --------
Net income (loss) from operations ................................ 1.93 1.48 3.05 1.93 2.70
-------- -------- -------- -------- --------
Distributions:
Dividends from net investment income .............................. (0.35) (0.38) (0.35) (0.32) (0.37)
Dividends in excess of net investment income ...................... 0.00 0.00 (0.03) 0.00 0.00
Distributions from net realized gains on investments .............. (1.13) (0.32) (1.02) (0.50) (0.37)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- --------
Total distributions .............................................. (1.48) (0.70) (1.40) (0.82) (0.74)
-------- -------- -------- -------- --------
Net asset value, end of year ........................................ $ 16.85 $ 16.40 $ 15.62 $ 13.97 $ 12.86
======== ======== ======== ======== ========
Total return ........................................................ 12.07 % 9.64 % 21.85 % 15.00 % 24.66 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $624,416 $592,312 $526,577 $ 390,141 $256,806
Ratio of expenses to average net assets ........................... 0.86 % 0.86 % 0.88 % 0.91 % 0.87 %
Ratio of net investment income (loss) to average net assets ....... 2.02 % 2.43 % 2.43 % 2.72 % 3.07 %
Portfolio turnover rate ........................................... 45.42 % 49.20 % 48.20 % 49.32 % 52.59 %
</TABLE>
<TABLE>
<CAPTION>
WRL VKAM EMERGING GROWTH
============================================================
DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................................ $ 26.92 $ 20.37 $ 18.46 $ 16.25 $ 11.55
Income from operations:
Net investment income (loss) .................................... (0.15) (0.08) (0.05) (0.04) 0.01
Net realized and unrealized gain (loss) on investments .......... 26.83 7.56 4.03 3.10 5.42
---------- -------- -------- -------- --------
Net income (loss) from operations .............................. 26.68 7.48 3.98 3.06 5.43
---------- -------- -------- -------- --------
Distributions: ...................................................
Dividends from net investment income ............................ 0.00 0.00 0.00 0.00 0.00
Dividends in excess of net investment income .................... (0.21) 0.00 0.00 0.00 0.00
Distributions from net realized gains on investments ............ (7.38) (0.93) (2.07) (0.85) (0.73)
Distributions in excess of net realized gains on investments .... 0.00 0.00 0.00 0.00 0.00
---------- -------- -------- -------- --------
Total distributions ............................................ (7.59) (0.93) (2.07) (0.85) (0.73)
---------- -------- -------- -------- --------
Net asset value, end of year ...................................... $ 46.01 $ 26.92 $ 20.37 $ 18.46 $ 16.25
========== ======== ======== ======== ========
Total return ...................................................... 105.16 % 37.33 % 21.45 % 18.88 % 46.79 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................ $1,916,025 $853,440 $592,003 $ 431,454 $288,519
Ratio of expenses to average net assets ......................... 0.87 % 0.89 % 0.93 % 0.94 % 0.91 %
Ratio of net investment income (loss) to average net assets ..... (0.44)% (0.36)% (0.27)% (0.24)% 0.03 %
Portfolio turnover rate ......................................... 117.72 % 99.50 % 99.78 % 80.02 % 124.13 %
</TABLE>
Prospectus 60
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL ALGER AGGRESSIVE GROWTH
============================================================
DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................................ $ 22.44 $ 16.04 $ 14.18 $ 13.25 $ 9.86
Income from operations:
Net investment income (loss) .................................... (0.15) (0.04) (0.01) (0.01) (0.06)
Net realized and unrealized gain (loss) on investments .......... 14.95 7.68 3.44 1.38 3.96
---------- -------- -------- -------- --------
Net income (loss) from operations .............................. 14.80 7.64 3.43 1.37 3.90
---------- -------- -------- -------- --------
Distributions:
Dividends from net investment income ............................ (0.16) 0.00 0.00 0.00 0.00
Dividends in excess of net investment income .................... (1.38) (0.05) (0.42) (0.19) 0.00
Distributions from net realized gains on investments ............ (2.42) (1.19) (1.15) (0.25) (0.51)
Distributions in excess of net realized gains on investments .... 0.00 0.00 0.00 0.00 0.00
---------- -------- -------- -------- --------
Total distributions ............................................ (3.96) (1.24) (1.57) (0.44) (0.51)
---------- -------- -------- -------- --------
Net asset value, end of year ...................................... $ 33.28 $ 22.44 $ 16.04 $ 14.18 $ 13.25
========== ======== ======== ======== ========
Total return ...................................................... 69.02 % 48.69 % 24.25 % 10.45 % 38.02 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................ $1,117,511 $574,164 $336,166 $220,552 $158,534
Ratio of expenses to average net assets ......................... 0.89 % 0.91 % 0.96 % 0.98 % 1.07 %
Ratio of net investment income (loss) to average net assets ..... (0.56)% (0.21)% (0.06)% (0.10)% (0.48)%
Portfolio turnover rate ......................................... 101.71 % 117.44 % 136.18 % 101.28 % 108.04 %
</TABLE>
<TABLE>
<CAPTION>
WRL AEGON BALANCED
=======================================================
DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................................... $ 12.54 $ 12.01 $ 11.39 $ 10.63 $ 9.24
Income from operations:
Net investment income (loss) ....................................... 0.26 0.35 0.38 0.34 0.44
Net realized and unrealized gain (loss) on investments ............. 0.12 0.47 1.56 0.80 1.38
-------- ------- ------- ------- -------
Net income (loss) from operations ................................. 0.38 0.82 1.94 1.14 1.82
-------- ------- ------- ------- -------
Distributions:
Dividends from net investment income ............................... (0.26) (0.28) (0.36) (0.28) (0.43)
Dividends in excess of net investment income ....................... 0.00 0.00 (0.30) 0.00 0.00
Distributions from net realized gains on investments ............... 0.00 0.00 (0.66) (0.10) 0.00
Distributions in excess of net realized gains on investments ....... 0.00 (0.01) 0.00 0.00 0.00
-------- ------- ------- ------- -------
Total distributions ............................................... (0.26) (0.29) (1.32) (0.38) (0.43)
-------- ------- ------- ------- -------
Net asset value, end of year ......................................... $ 12.66 $ 12.54 $ 12.01 $ 11.39 $ 10.63
======== ======= ======= ======= =======
Total return ......................................................... 3.03 % 6.93 % 17.10 % 10.72 % 19.80 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................... $108,473 $95,000 $73,451 $49,331 $31,114
Ratio of expenses to average net assets ............................ 0.89 % 0.91 % 0.94 % 0.97 % 0.97 %
Ratio of net investment income (loss) to average net assets ........ 2.06 % 2.89 % 3.13 % 3.14 % 4.38 %
Portfolio turnover rate ............................................ 74.88 % 83.94 % 77.06 % 76.90 % 98.55 %
</TABLE>
Prospectus 61
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL FEDERATED GROWTH & INCOME
=========================================================
DECEMBER 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year .................................. $ 12.28 $ 12.56 $ 11.76 $ 11.12 $ 9.30
Income from operations:
Net investment income (loss) ...................................... 0.48 0.53 0.49 0.42 0.46
Net realized and unrealized gain (loss) on investments ............ (1.00) (0.16) 2.35 0.87 1.93
-------- ------- -------- ------- -------
Net income (loss) from operations ................................ (0.52) 0.37 2.84 1.29 2.39
-------- ------- -------- ------- -------
Distributions:
Dividends from net investment income .............................. (0.73) (0.55) (0.43) (0.33) (0.46)
Dividends in excess of net investment income ...................... (0.02) 0.00 (0.59) 0.00 0.00
Distributions from net realized gains on investments .............. (0.10) (0.10) (1.02) (0.32) (0.11)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00 0.00 0.00
-------- ------- -------- ------- -------
Total distributions .............................................. (0.85) (0.65) (2.04) (0.65) (0.57)
-------- ------- -------- ------- -------
Net asset value, end of year ........................................ $ 10.91 $ 12.28 $ 12.56 $ 11.76 $ 11.12
======== ======= ======== ======= =======
Total return ........................................................ (4.45)% 3.05 % 24.65 % 11.64 % 25.25 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 76,280 $87,616 $60,492 $38,115 $24,607
Ratio of expenses to average net assets ........................... 0.89 % 0.90 % 0.96 % 1.00 % 1.00 %
Ratio of net investment income (loss) to average net assets ....... 4.01 % 4.35 % 3.84 % 3.73 % 4.56 %
Portfolio turnover rate ........................................... 17.14 % 97.17 % 155.77 % 68.53 % 78.34 %
</TABLE>
<TABLE>
<CAPTION>
WRL DEAN ASSET ALLOCATION
==========================================================
DECEMBER 31,
----------------------------------------------------------
1999 1998 1997 1996 1995(a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year .................................. $ 13.35 $ 13.61 $ 12.61 $ 11.49 $ 10.00
Income from operations:
Net investment income (loss) ...................................... 0.39 0.41 0.36 0.33 0.41
Net realized and unrealized gain (loss) on investments ............ (1.14) 0.71 1.72 1.33 1.93
-------- -------- -------- -------- --------
Net income (loss) from operations ................................ (0.75) 1.12 2.08 1.66 2.34
-------- -------- -------- -------- --------
Distributions:
Dividends from net investment income .............................. (0.41) (0.39) (0.33) (0.30) (0.41)
Dividends in excess of net investment income ...................... 0.00 0.00 (0.19) 0.00 0.00
Distributions from net realized gains on investments .............. (0.04) (0.99) (0.56) (0.24) (0.44)
Distributions in excess of net realized gains on investments ...... (0.02) 0.00 0.00 0.00 0.00
-------- -------- -------- -------- --------
Total distributions .............................................. (0.47) (1.38) (1.08) (0.54) (0.85)
-------- -------- -------- -------- --------
Net asset value, end of year ........................................ $ 12.13 $ 13.35 $ 13.61 $ 12.61 $ 11.49
======== ======== ======== ======== ========
Total return ........................................................ (5.64)% 8.33 % 16.59 % 14.42 % 20.09 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $261,707 $365,738 $302,745 $206,172 $120,531
Ratio of expenses to average net assets ........................... 0.87 % 0.86 % 0.87 % 0.90 % 0.93 %
Ratio of net investment income (loss) to average net assets ....... 2.99 % 2.93 % 2.65 % 2.78 % 3.76 %
Portfolio turnover rate ........................................... 88.78 % 76.62 % 63.76 % 98.97 % 38.68 %
</TABLE>
Prospectus 62
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL C.A.S.E. GROWTH
=========================================================
DECEMBER 31,
---------------------------------------------------------
1999 1998 1997 1996 1995(b)
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year .................................. $ 12.99 $ 14.01 $ 13.42 $ 11.66 $ 10.00
Income from operations:
Net investment income (loss) ...................................... (0.05) 0.02 0.04 0.12 0.12
Net realized and unrealized gain (loss) on investments ............ 4.38 0.31 1.95 1.92 2.49
-------- -------- -------- -------- ---------
Net income (loss) from operations ................................ 4.33 0.33 1.99 2.04 2.61
-------- -------- -------- -------- ---------
Distributions:
Dividends from net investment income .............................. (0.66) (0.36) (0.03) (0.05) (0.12)
Dividends in excess of net investment income ...................... (0.96) (0.90) (1.23) 0.00 0.00
Distributions from net realized gains on investments .............. 0.00 (0.09) (0.14) (0.23) (0.83)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- ---------
Total distributions .............................................. (1.62) (1.35) (1.40) (0.28) (0.95)
-------- -------- -------- -------- ---------
Net asset value, end of year ........................................ $ 15.70 $ 12.99 $ 14.01 $ 13.42 $ 11.66
======== ======== ======== ======== =========
Total return ........................................................ 33.84 % 2.47 % 15.03 % 17.50 % 20.65 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 93,608 $ 69,401 $ 60,596 $ 26,559 $ 2,578
Ratio of expenses to average net assets ........................... 1.00 % 1.00 % 1.00 % 1.00 % 1.00 %
Ratio of net investment income (loss) to average net assets ....... (0.36)% 0.14 % 0.25 % 0.94 % 1.02 %
Portfolio turnover rate ........................................... 143.52 % 205.28 % 196.50 % 160.27 % 121.62 %
</TABLE>
<TABLE>
<CAPTION>
WRL NWQ VALUE EQUITY
===================================================
DECEMBER 31,
---------------------------------------------------
1999 1998 1997 1996(c)
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ................................... $ 12.12 $ 13.90 $ 11.27 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 0.10 0.12 0.12 0.10
Net realized and unrealized gain (loss) on investments ............. 0.85 (0.78) 2.69 1.23
-------- -------- -------- -------
Net income (loss) from operations ................................. 0.95 (0.66) 2.81 1.33
-------- -------- -------- -------
Distributions:
Dividends from net investment income ............................... (0.10) (0.13) (0.09) (0.04)
Dividends in excess of net investment income ....................... 0.00 (0.12) (0.07) 0.00
Distributions from net realized gains on investments ............... 0.00 (0.62) (0.02) (0.02)
Distributions in excess of net realized gains on investments ....... (0.20) (0.25) 0.00 0.00
-------- -------- -------- -------
Total distributions ............................................... (0.30) (1.12) (0.18) (0.06)
-------- -------- -------- -------
Net asset value, end of year ......................................... $ 12.77 $ 12.12 $ 13.90 $ 11.27
======== ======== ======== =======
Total return ......................................................... 7.95 % (4.78)% 25.04 % 13.19 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................... $137,158 $157,157 $173,435 $49,394
Ratio of expenses to average net assets ............................ 0.90 % 0.89 % 0.89 % 1.00 %
Ratio of net investment income (loss) to average net assets ........ 0.77 % 0.89 % 0.90 % 0.89 %
Portfolio turnover rate ............................................ 34.19 % 43.60 % 17.28 % 7.93 %
</TABLE>
Prospectus 63
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL GE/SCOTTISH
EQUITABLE INTERNATIONAL EQUITY
======================================
DECEMBER 31,
--------------------------------------
1999 1998 1997(d)
------- ------- -------
<S> <C> <C> <C>
Net asset value, beginning of year ................................... $ 12.07 $ 10.70 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 0.04 0.03 0.02
Net realized and unrealized gain (loss) on investments ............. 2.90 1.35 0.73
------- ------- -------
Net income (loss) from operations ................................. 2.94 1.38 0.75
------- ------- -------
Distributions:
Dividends from net investment income ............................... (0.05) (0.01) (0.01)
Dividends in excess of net investment income ....................... 0.00 0.00 (0.04)
Distributions from net realized gains on investments ............... (0.68) 0.00 0.00
Distributions in excess of net realized gains on investments ....... 0.00 0.00 0.00
------- ------- -------
Total distributions ............................................... (0.73) (0.01) (0.05)
------- ------- -------
Net asset value, end of year ......................................... $ 14.28 $ 12.07 $ 10.70
======= ======= =======
Total return ......................................................... 24.95 % 12.85 % 7.50 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................... $33,579 $32,149 $19,795
Ratio of expenses to average net assets ............................ 1.50 % 1.50 % 1.50 %
Ratio of net investment income (loss) to average net assets ........ 0.31 % 0.30 % 0.18 %
Portfolio turnover rate ............................................ 99.77 % 71.74 % 54.33 %
</TABLE>
<TABLE>
<CAPTION>
WRL GE U.S. EQUITY
==============================================
DECEMBER 31,
----------------------------------------
1999 1998 1997(d)
-------- -------- -------
<S> <C> <C> <C>
Net asset value, beginning of year ................................... $ 14.42 $ 12.23 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 0.07 0.09 0.09
Net realized and unrealized gain (loss) on investments ............. 2.55 2.69 2.60
-------- -------- -------
Net income (loss) from operations ................................. 2.62 2.78 2.69
-------- -------- -------
Distributions:
Dividends from net investment income ............................... (0.18) (0.15) (0.04)
Dividends in excess of net investment income ....................... (0.33) (0.33) (0.38)
Distributions from net realized gains on investments ............... (0.74) (0.11) (0.04)
Distributions in excess of net realized gains on investments ....... 0.00 0.00 0.00
-------- -------- -------
Total distributions ............................................... (1.25) (0.59) (0.46)
-------- -------- -------
Net asset value, end of year ......................................... $ 15.79 $ 14.42 $ 12.23
======== ======== =======
Total return ......................................................... 18.41 % 22.87 % 27.01 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................... $179,267 $110,803 $42,951
Ratio of expenses to average net assets ............................ 0.93 % 1.05 % 1.30 %
Ratio of net investment income (loss) to average net assets ........ 0.46 % 0.67 % 0.75 %
Portfolio turnover rate ............................................ 44.01 % 63.08 % 92.35 %
</TABLE>
Prospectus 64
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL THIRD AVENUE WRL J.P. MORGAN
VALUE REAL ESTATE SECURITIES
===================== =====================
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
1999 1998(e) 1999 1998(f)
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ................................... $ 9.29 $ 10.00 $ 8.51 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 0.16 0.06 0.49 0.36
Net realized and unrealized gain (loss) on investments ............. 1.28 (0.74) (0.79) (1.85)
------- ------- -------- --------
Net income (loss) from operations ................................. 1.44 (0.68) (0.30) (1.49)
------- ------- -------- --------
Distributions:
Dividends from net investment income ............................... (0.28) (0.03) (0.15) 0.00
Dividends in excess of net investment income ....................... 0.00 0.00 0.00 0.00
Distributions from net realized gains on investments ............... 0.00 0.00 0.00 0.00
Distributions in excess of net realized gains on investments ....... 0.00 0.00 0.00 0.00
------- ------- -------- --------
Total distributions ............................................... (0.28) (0.03) (0.15) 0.00
------- ------- -------- --------
Net asset value, end of year ......................................... $ 10.45 $ 9.29 $ 8.06 $ 8.51
======= ======= ======== ========
Total return ......................................................... 15.72 % (6.84)% (3.77)% (14.93)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................... $19,217 $18,206 $ 3,199 $ 2,414
Ratio of expenses to average net assets ............................ 1.00 % 1.00 % 1.00 % 1.00 %
Ratio of net investment income (loss) to average net assets ........ 1.76 % 0.63 % 5.91 % 6.03 %
Portfolio turnover rate ............................................ 9.56 % 4.35 % 189.80 % 100.80 %
</TABLE>
<TABLE>
<CAPTION>
WRL WRL
GOLDMAN SACHS GOLDMAN SACHS
GROWTH SMALL CAP
============ ============
DECEMBER 31, DECEMBER 31,
------------ ------------
1999(g) 1999(g)
------------ ------------
<S> <C> <C>
Net asset value, beginning of year ................................. $ 10.00 $ 10.00
Income from operations:
Net investment income (loss) ..................................... 0.01 0.03
Net realized and unrealized gain (loss) on investments ........... 1.74 1.74
-------- ---------
Net income (loss) from operations ............................... 1.75 1.77
-------- ---------
Distributions:
Dividends from net investment income ............................. 0.00 (0.04)
Dividends in excess of net investment income ..................... 0.00 (0.48)
Distributions from net realized gains on investments ............. 0.00 0.00
Distributions in excess of net realized gains on investments ..... 0.00 0.00
-------- ---------
Total distributions ............................................. 0.00 (0.52)
-------- ---------
Net asset value, end of year ....................................... $ 11.75 $ 11.25
======== =========
Total return ....................................................... 17.50 % 17.82 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ......................... $ 8,204 $ 2,783
Ratio of expenses to average net assets .......................... 1.00 % 1.00 %
Ratio of net investment income (loss) to average net assets ...... 0.12 % 0.50 %
Portfolio turnover rate .......................................... 40.46 % 340.66 %
<CAPTION>
WRL WRL
T. ROWE PRICE T. ROWE PRICE
DIVIDEND GROWTH SMALL CAP
================= ==============
DECEMBER 31, DECEMBER 31,
----------------- --------------
1999(g) 1999(g)
----------------- --------------
<S> <C> <C>
Net asset value, beginning of year ................................. $ 10.00 $ 10.00
Income from operations:
Net investment income (loss) ..................................... 0.11 (0.03)
Net realized and unrealized gain (loss) on investments ........... (0.85) 3.87
------- ---------
Net income (loss) from operations ............................... (0.74) 3.84
------- ---------
Distributions:
Dividends from net investment income ............................. 0.00 0.00
Dividends in excess of net investment income ..................... 0.00 (0.43)
Distributions from net realized gains on investments ............. 0.00 0.00
Distributions in excess of net realized gains on investments ..... 0.00 0.00
------- ---------
Total distributions ............................................. 0.00 (0.43)
------- ---------
Net asset value, end of year ....................................... $ 9.26 $ 13.41
======= =========
Total return ....................................................... (7.40)% 38.49 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ......................... $ 8,730 $ 9,824
Ratio of expenses to average net assets .......................... 1.00 % 1.00 %
Ratio of net investment income (loss) to average net assets ...... 1.75 % (0.44)%
Portfolio turnover rate .......................................... 43.76 % 159.02 %
</TABLE>
Prospectus 65
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL WRL WRL
SALOMON PILGRIM BAXTER DREYFUS
ALL CAP MID CAP GROWTH MID CAP
============== ================ =============
DECEMBER 31, DECEMBER 31, DECEMBER 31,
-------------- ---------------- -------------
1999(g) 1999(g) 1999(g)
-------------- ---------------- -------------
<S> <C> <C> <C>
Net asset value, beginning of year ................................... $ 10.00 $ 10.00 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 0.08 (0.03) 0.04
Net realized and unrealized gain (loss) on investments ............. 1.48 7.83 0.68
-------- -------- --------
Net income (loss) from operations ................................. 1.56 7.80 0.72
-------- -------- --------
Distributions:
Dividends from net investment income ............................... (0.06) 0.00 0.00
Dividends in excess of net investment income ....................... (0.32) (0.05) 0.00
Distributions from net realized gains on investments ............... 0.00 0.00 0.00
Distributions in excess of net realized gains on investments ....... 0.00 0.00 0.00
-------- -------- --------
Total distributions ............................................... (0.38) (0.05) 0.00
-------- -------- --------
Net asset value, end of year ......................................... $ 11.18 $ 17.75 $ 10.72
======== ======== ========
Total return ......................................................... 15.57 % 78.00 % 7.20 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................... $ 6,686 $ 37,201 $ 3,384
Ratio of expenses to average net assets ............................ 1.00 % 1.00 % 1.00 %
Ratio of net investment income (loss) to average net assets ........ 1.09 % (0.30)% 0.58 %
Portfolio turnover rate ............................................ 216.29 % 155.71 % 94.19 %
</TABLE>
Prospectus 66
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS
Per share information has been computed using average shares outstanding
throughout each period. Total return reflects all Portfolio expenses and
includes reinvestment of dividends and capital gains; it does not reflect the
charges and deductions under the policies or annuity contracts. Total return
and portfolio turnover rate are not annualized for periods of less than one
year. Ratio of expenses and ratio of net investment income (loss) to average
net assets are annualized for periods of less than one year. For the year ended
December 31, 1999, ratio of expenses to average net assets is net of the
advisory fee waiver. For the years prior to 1999, ratio of expenses to average
net assets is net of the advisory fee waiver and fees paid indirectly. Without
the advisory fee waived by WRL Management and the fees paid indirectly, ratio
of expenses to average net assets for each period presented would be as follows
(ratios are annualized for periods of less than one year):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
PORTFOLIO 1999 1998 1997 1996 1995
- - --------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
WRL J.P. Morgan Money Market ........................... * * * * *
WRL AEGON Bond ......................................... * * * * *
WRL Janus Growth ....................................... 0.82 % * * * *
WRL Janus Global ....................................... * * * * *
WRL LKCM Strategic Total Return ........................ * * * * *
WRL VKAM Emerging Growth ............................... * * * * *
WRL Alger Aggressive Growth ............................ * * * * *
WRL AEGON Balanced ..................................... * * * * *
WRL Federated Growth & Income .......................... * * * * 1.08 %
WRL Dean Asset Allocation .............................. * * * * *
WRL C.A.S.E. Growth .................................... * * 1.14 % 1.70 % 4.17 %
WRL NWQ Value Equity ................................... * * * 1.10 % **
WRL GE/Scottish Equitable International Equity ......... 1.84 % 1.96 % 3.14 % ** **
WRL GE U.S. Equity ..................................... * * 1.54 % ** **
WRL Third Avenue Value ................................. 1.06 % 1.13 % ** ** **
WRL J.P. Morgan Real Estate Securities ................. 2.69 % 3.34 % ** ** **
WRL Goldman Sachs Growth ............................... 2.68 % ** ** ** **
WRL Goldman Sachs Small Cap ............................ 5.57 % ** ** ** **
WRL T. Rowe Price Dividend Growth ...................... 2.35 % ** ** ** **
WRL T. Rowe Price Small Cap ............................ 2.46 % ** ** ** **
WRL Salomon All Cap .................................... 2.87 % ** ** ** **
WRL Pilgrim Baxter Mid Cap Growth ...................... 1.40 % ** ** ** **
WRL Dreyfus Mid Cap .................................... 4.89 % ** ** ** **
</TABLE>
* Ratio difference less than 0.01%.
** Portfolio was not in existence during this period.
(a) The inception date of this portfolio was January 3, 1995.
(b) The inception date of this portfolio was May 1, 1995.
(c) The inception date of this portfolio was May 1, 1996.
(d) The inception date of this portfolio was January 2, 1997.
(e) The inception date of this portfolio was January 2, 1998.
(f) The inception date of this portfolio was May 1, 1998.
(g) The inception date of this portfolio was May 1, 1999.
Prospectus 67
<PAGE>
- - --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT THESE PORTFOLIOS IS CONTAINED IN THE
FUND'S ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, DATED MAY 1, 2000, WHICH IS
INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. IN THE FUND'S
ANNUAL REPORT, YOU WILL FIND A DISCUSSION OF THE MARKET CONDITIONS
AND INVESTMENT STRATEGIES THAT SIGNIFICANTLY AFFECTED THE FUND'S
PERFORMANCE DURING THE LAST FISCAL YEAR.
YOU MAY ALSO CALL 1-800-851-9777 TO REQUEST THIS ADDITIONAL
INFORMATION ABOUT THE FUND WITHOUT CHARGE OR TO MAKE SHAREHOLDER
INQUIRIES.
OTHER INFORMATION ABOUT THESE PORTFOLIOS HAS BEEN FILED WITH AND
IS AVAILABLE FROM THE U.S. SECURITIES AND EXCHANGE COMMISSION.
INFORMATION ABOUT THE FUND (INCLUDING THE SAI) CAN BE REVIEWED AND
COPIED AT THE SECURITIES AND EXCHANGE COMMISSION'S PUBLIC
REFERENCE ROOM IN WASHINGTON, D.C. INFORMATION ON THE OPERATION OF
THE PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE
COMMISSION AT 202-942-8090. INFORMATION MAY BE OBTAINED, UPON
PAYMENT OF A DUPLICATING FEE BY WRITING THE PUBLIC REFERENCE
SECTION OF THE COMMISSION, WASHINGTON, D.C. 20549-6009.
REPORTS AND OTHER INFORMATION ABOUT THE FUND ARE ALSO AVAILABLE ON
THE COMMISSION'S INTERNET SITE AT HTTP://WWW.SEC.GOV.
(WRL SERIES FUND FILE NO. 811-4419.)
FOR MORE INFORMATION ABOUT THESE PORTFOLIOS, YOU MAY OBTAIN A COPY
OF THE SAI OR THE ANNUAL OR SEMI-ANNUAL REPORTS WITHOUT CHARGE, OR
TO MAKE OTHER INQUIRIES ABOUT THIS FUND, CALL THE NUMBER LISTED
ABOVE.
(WRL SERIES FUND FILE NO. 811-4419.)
- - --------------------------------------------------------------------------------
<PAGE>
WRL SERIES FUND, INC.
AGGRESSIVE EQUITY PORTFOLIOS
o WRL VKAM EMERGING GROWTH
o WRL ALGER AGGRESSIVE GROWTH
o WRL THIRD AVENUE VALUE
FOREIGN EQUITY PORTFOLIOS
o WRL GE INTERNATIONAL EQUITY
o WRL JANUS GLOBAL
GROWTH EQUITY PORTFOLIOS
o WRL JANUS GROWTH
o WRL GE U.S. EQUITY
o WRL C.A.S.E. GROWTH
o WRL NWQ VALUE EQUITY
BALANCED PORTFOLIOS
o WRL DEAN ASSET ALLOCATION
o WRL LKCM STRATEGIC TOTAL RETURN
o WRL FEDERATED GROWTH & INCOME
o WRL AEGON BALANCED
FIXED-INCOME PORTFOLIOS
o WRL AEGON BOND
CAPITAL PRESERVATION PORTFOLIOS
o WRL J.P. MORGAN MONEY MARKET
PROSPECTUS
The Securities and Exchange Commission
has not approved or disapproved these
securities or passed upon
the adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
May 1, 2000
<PAGE>
- - --------------------------------------------------------------------------------
TABLE OF CONTENTS
- - --------------------------------------------------------------------------------
INVESTOR INFORMATION .......................... 1
ALL ABOUT THE FUND
AGGRESSIVE EQUITY PORTFOLIOS
WRL VKAM Emerging Growth ................... 2
WRL Alger Aggressive Growth ................ 3
WRL Third Avenue Value .................... 3
FOREIGN EQUITY PORTFOLIOS
WRL GE International Equity ................ 9
WRL Janus Global ........................... 10
GROWTH EQUITY PORTFOLIOS
WRL Janus Growth ........................... 14
WRL GE U.S. Equity ......................... 15
WRL C.A.S.E. Growth ........................ 15
WRL NWQ Value Equity ....................... 16
BALANCED PORTFOLIOS
WRL Dean Asset Allocation .................. 21
WRL LKCM Strategic Total Return ............ 22
WRL Federated Growth & Income .............. 22
WRL AEGON Balanced ......................... 23
FIXED-INCOME PORTFOLIOS
WRL AEGON Bond ............................. 28
CAPITAL PRESERVATION PORTFOLIOS
WRL J.P. Morgan Money Market .............. 31
RISK/REWARD INFORMATION ....................... 34
EXPLANATION OF STRATEGIES AND RISKS ........... 35
HOW THE FUND IS MANAGED AND ORGANIZED ......... 40
PERFORMANCE INFORMATION ....................... 43
OTHER INFORMATION ............................. 45
FINANCIAL HIGHLIGHTS .......................... 47
WRL Series Fund, Inc. (Fund) currently offers twenty-six separate series
or investment portfolios. This prospectus includes fifteen of those
portfolios. The Fund is an open-end management investment company, more
commonly known as a mutual fund.
Shares of these portfolios are currently only sold to separate accounts of
Western Reserve Life Assurance Co. of Ohio, PFL Life Insurance Company,
AUSA Life Insurance Company, Peoples Benefit Life Insurance Company and
Transamerica Occidental Life Insurance Company to fund the benefits under
certain individual flexible premium variable life insurance policies and
individual and group variable annuity contracts.
A particular portfolio of the Fund may not be available under the policy
or annuity contract you have chosen. The prospectus or disclosure document
for your policy or annuity contract shows the portfolios available to you.
Please read this prospectus carefully before selecting a portfolio. It
provides information to assist you in your decision. If you would like
additional information about a portfolio, please request a copy of the
Statement of Additional Information (SAI) (see back cover). The SAI is
incorporated by reference into this prospectus.
Prospectus
<PAGE>
- - --------------------------------------------------------------------------------
INVESTOR INFORMATION
- - --------------------------------------------------------------------------------
TO HELP YOU UNDERSTAND . . .
In this prospectus, you will see the symbols below.
These are "icons" which serve as tools to direct you to the type of information
that is included in the accompanying paragraphs.
The icons are for your convenience and to assist you as you read this
prospectus.
/BULLSEYE/ The target directs you to a portfolio's goal or
objective.
/ROOK/ The chess piece indicates discussion about a
portfolio's strategies.
/WARNING SIGN/ The warning sign indicates the risks of investing
in a portfolio.
/GRAPH/ The graph indicates investment performance.
/QUESTION MARK/ The question mark provides additional
information about the Fund or may direct you on how to obtain
further information.
SHARES OF A PORTFOLIO ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY
BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT.
Prospectus 1
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS
- - --------------------------------------------------------------------------------
WRL VKAM EMERGING GROWTH
WRL ALGER AGGRESSIVE GROWTH
WRL THIRD AVENUE VALUE
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES EACH AGGRESSIVE EQUITY PORTFOLIO OF
THE FUND AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIOS. FOR FURTHER
INFORMATION ON THESE PORTFOLIOS, PLEASE READ THE SECTION ENTITLED "EXPLANATION
OF STRATEGIES AND RISKS," BEGINNING ON PAGE 35, AND THE FUND'S SAI.
/BULLSEYE/ OBJECTIVES
WRL VKAM EMERGING GROWTH
This portfolio seeks capital appreciation by investing primarily in common
stocks of small and medium-sized companies.
WRL ALGER AGGRESSIVE GROWTH
This portfolio seeks long-term capital appreciation.
WRL THIRD AVENUE VALUE
This portfolio seeks long-term capital appreciation.
- - --------------------------------------------------------------------------------
WHAT IS AN AGGRESSIVE EQUITY PORTFOLIO?
Aggressive Equity Portfolios are those that seek maximum capital
appreciation (a rise in the share price/value). Current income is not a
significant factor. Some portfolios that are included in this category may
invest in out-of-the main-stream stocks, such as those of fledging or
struggling companies, or those in new or currently out-of-favor industries.
Some portfolios in this category may also use specialized investment
techniques such as options or short-term investing. For these reasons,
these portfolios usually entail greater risk than the overall equity
portfolio category.
- - --------------------------------------------------------------------------------
/ROOK/ POLICIES AND STRATEGIES
WRL VKAM EMERGING GROWTH
The portfolio's sub-adviser, Van Kampen Asset Management Inc. (VKAM), seeks to
achieve the portfolio's objective by investing:
o At least 65% of the portfolio's total assets in common stocks of
emerging growth companies. Emerging growth companies are those companies
in the early stages of their life cycles that the portfolio's sub-adviser
believes have the potential to become major enterprises.
o Options
o Futures
Prospectus 2
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
VKAM invests at least 65% of the portfolio's assets (under normal market
conditions) in common stocks of companies that are in the early stages of their
life cycle, and are believed by VKAM to have the potential to become major
enterprises. Some securities may have above average price volatility. VKAM
attempts to reduce overall exposure to risk from declines in the security
prices by spreading the portfolio's investments over many different companies
in a variety of industries.
VKAM will utilize options on securities, futures contracts and options thereon
in several different ways, depending upon the status of the portfolio's
investment portfolio and its expectations concerning the securities market.
VKAM will invest up to 20% of the portfolio's total assets in securities of
foreign issuers.
In times of stable or rising stock prices, the portfolio generally seeks to be
fully invested. Even when the portfolio is fully invested, VKAM believes that
at least a small portfolio of assets will be held as cash or cash equivalents
to honor redemption requests and for other short-term needs.
The amount of portfolio assets 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 seek to "equalize" the cash portion of its assets
and obtain performance that is equivalent to investing 100% in equity
securities.
The portfolio may take a temporary defensive position when the securities
trading markets or the economy are experiencing volatility or a prolonged
general decline, or other adverse conditions exist. This may be inconsistent
with the portfolio's principal investment strategies. Under these conditions,
the portfolio will be unable to achieve its investment objective.
- - --------------------------------------------------------------------------------
WHAT IS A TOP-DOWN APPROACH?
When using a "top-down" approach, the portfolio manager looks first at
broad market factors, and on the basis of those market factors, chooses
certain sectors, or industries within the overall market. The manager then
looks at individual companies within those sectors or industries.
- - --------------------------------------------------------------------------------
WRL ALGER AGGRESSIVE GROWTH
The portfolio's sub-adviser, Fred Alger Management, Inc. (Alger), seeks to
achieve the portfolio's objective by investing principally in:
o Equity securities such as common or preferred stocks
o Convertible securities (convertible securities are securities which can be
exchanged or converted into common stock of such companies)
To a lesser extent, the sub-adviser may invest portfolio assets in:
o U.S. dollar denominated securities of foreign issuers (American Depositary
Receipts (ADRs))
o Money market instruments
o Repurchase agreements
Under normal market conditions, the portfolio invests at least 85% of its
assets in common stocks, which may include stocks of developing companies, of
older companies that are entering a new stage of growth, and of companies whose
products or services have a high unit volume growth rate.
The portfolio may also use leveraging, a technique that involves borrowing
money to invest in an effort to enhance shareholder returns.
The portfolio's manager may take a temporary defensive position when the
securities trading markets or the economy are experiencing excessive volatility
or a prolonged general decline, or other adverse conditions exist. This may be
inconsistent with the portfolio's principal investment strategies. During this
time, the portfolio may invest up to 100% of its assets in money market
instruments and cash equivalents. Under these circumstances, the portfolio will
be unable to pursue its investment objective.
WRL THIRD AVENUE VALUE
The portfolio's sub-adviser, EQSF Advisers, Inc. (EQSF), seeks to achieve the
portfolio's investment objective by investing principally in:
o Common stocks
o Debt securities
Prospectus 3
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
o High-yield/high-risk fixed-income securities
o Foreign securities
The portfolio invests to a lesser extent, in trade claims and engages in
foreign currency transactions for hedging purposes. (Trade claims are interests
in amounts owed to suppliers or services and are purchased from creditors of
companies in financial difficulty.)
EQSF seeks to achieve the portfolio's objective by seeking to acquire common
stocks of well-financed companies at a substantial discount for what EQSF
believes is their value as a private business or as a take over candidate. It
also seeks to acquire senior securities, such as preferred stock and debt
instruments, that have strong covenant protections and above-average yields.
EQSF seeks portfolio securities whose prices are low enough at the time of
acquisition so both the risk is lowered and appreciation potential is enhanced.
EQSF believes that value is created more by past corporate prosperity than by
bear markets.
To choose such securities, EQSF uses a "bottom-up" approach. EQSF believes the
knowledge it obtains through extensive research of individual companies reduces
risk more than does diversification so the portfolio is non-diversified.
The portfolio's classification as "non-diversified" under the Investment
Company Act of 1940 (1940 Act) means that the portfolio has the ability to take
larger positions in a smaller number of issuers.
However, to meet federal tax requirements, at the close of each quarter the
portfolio may not have more than 25% of its total assets invested in any one
issuer and, with respect to 50% of its total assets, not more than 5% of its
total assets invested in any one issuer.
The portfolio may take a temporary defensive position when the securities
trading markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist. This may be
inconsistent with the portfolio's principal investment strategies. Under these
conditions, the portfolio may be unable to achieve its investment objective.
/WARNING SIGN/ RISKS OF INVESTING IN
AGGRESSIVE EQUITY PORTFOLIOS
The principal risks of investing in Aggressive Equity Portfolios that may
adversely affect your investment are described below. (Not all of these risks
apply to each Aggressive Equity Portfolio. See the chart below for the
principal risks of your portfolio.) Please note that there are many other
circumstances which could adversely affect your investment and prevent a
portfolio from achieving its objective, which are not described here. Please
refer to the section entitled "Explanation of Strategies and Risks" beginning
on page 35 and the Fund's SAI for more information about the risks of investing
in the Aggressive Equity Portfolios.
Prospectus 4
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
PRINCIPAL RISKS
AGGRESSIVE EQUITY PORTFOLIOS
PORTFOLIO
----------------------------------------------------
WRL WRL WRL
RISKS VKAM EMERGING ALGER AGGRESSIVE THIRD AVENUE
- - ------------------------ GROWTH GROWTH VALUE
STOCKS X X X
INVESTING AGGRESSIVELY X X X
QUANTITATIVE MODELS
NON-DIVERSIFICATION X
FUTURES & OPTIONS X
FOREIGN SECURITIES X X
DEPOSITARY RECEIPTS X X
CONVERTIBLES X
LEVERAGING X
VALUE INVESTING X X
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the short term. These
price movements may result from factors affecting individual companies, certain
industries or the securities market as a whole.
Because the stocks a portfolio holds fluctuate in price, the value of your
investment in the portfolio will go up and down.
o INVESTING AGGRESSIVELY
o The value of developing-company stocks may be very volatile, and
can drop significantly in a short period of time
o Rights, options and futures contracts may not be exercised and
may expire worthless
o Warrants and rights may be less liquid than stocks
o Use of futures and other derivatives may make the portfolio more
volatile
o NON-DIVERSIFICATION
To the extent a portfolio invests a greater proportion of its assets in the
securities of a smaller number of issuers, it may be more susceptible to any
single economic, political or regulatory occurrence than a more widely
diversified portfolio and may be subject to greater risk of loss with respect
to its portfolio securities.
o FUTURES AND OPTIONS
Futures and options involve additional investment risks and transactional
costs, and draw upon skills and experience which are different than those
needed to pick other securities. Special risks include:
o Inaccurate market predictions
o Imperfect correlation
o Illiquidity
o Tax considerations
The portfolios are not required to hedge their investments.
o FOREIGN SECURITIES
Investments in foreign securities involve risks relating to political, social
and economic developments abroad as well as risks resulting from differences in
regulations to which U.S. and foreign issuers and markets are subject. To the
extent a portfolio invests in emerging markets, these risks would be greater.
These risks include:
o Changes in currency values
o Currency speculation
o Currency trading costs
o Different accounting and reporting practices
o Less information available to the public
o Less (or different) regulation of securities markets
o More complex business negotiations
Prospectus 5
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
o Less liquidity
o More fluctuations in market prices
o Delays in settling foreign securities transactions
o Higher transaction costs
o Higher costs for holding foreign securities (custodial fees)
o Vulnerability to seizure and taxes
o Political instability and small markets
o Different market trading days
o ADRS
Many securities of foreign issuers are represented by American Depositary
Receipts (ADRs). While ADRs principally are traded on domestic securities
exchanges, investing in ADRs involves many of the same risks associated with
foreign securities in general. These risks include:
o Changes in currency value
o Currency speculation
o Currency trading costs
o More fluctuations in market prices
o Less information available
o CONVERTIBLES
As with all debt securities, the market value of convertibles tends to decline
as interest rates increase and, conversely, to increase as interest rates
decline.
o VALUE INVESTING RISK
Undervalued stocks may not realize their perceived value for extended periods
of time. Value stocks may respond differently to market and other developments
than other types of stocks. Value oriented funds will typically underperform
when growth investing is in favor.
o LEVERAGING
Leveraging by a portfolio involves special risks:
o Leveraging practices may make a portfolio more volatile
o Leveraging may exaggerate the effect on net asset value of any
increase or decrease in the market value of the portfolio's securities
o Money borrowed for leveraging is subject to interest costs
o Minimum average balances may need to be maintained or a line of
credit in connection with borrowing may be necessary resulting in an
increase in the cost of borrowing over the stated interest rate.
/ROOK/ INVESTOR PROFILES
WRL VKAM EMERGING GROWTH
May be appropriate for the investor who seeks capital appreciation over the
long term; is willing to take on the increased risks of investing in smaller
and medium-sized, less established companies, in exchange for potentially
higher capital appreciation; can withstand substantial volatility in the value
of their shares of the portfolio; and wish to add to their personal holdings a
portfolio that invests primarily in common stocks of emerging growth companies.
WRL ALGER AGGRESSIVE GROWTH
For the investor who seeks capital growth aggressively, and can tolerate wide
swings in the value of their investment.
WRL THIRD AVENUE VALUE
For the investor who is willing to hold shares through periods of market
fluctuations and the accompanying changes in share prices.
Prospectus 6
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
/GRAPH/ PORTFOLIO PERFORMANCE
The bar charts and tables below give an indication of the portfolios' risks and
performance. The charts show changes in a portfolio's performance from year to
year. The performance calculations do not reflect charges or deductions under
the policies or the annuity contracts. These fees and expenses would lower
investment performance. The tables show how a portfolio's average annual
returns for the periods indicated compare to those of a broad measure of market
performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL VKAM EMERGING GROWTH
- - --------------------------------------------------------------------------------
TOTAL RETURN
(PER CALENDAR YEAR)
(7.36)% 46.79% 18.88% 21.45% 37.33% 105.16%
1994 1995 1996 1997 1998 1999
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(QUARTERLY 1994-1999)
- - -------------------------------------------
QUARTER ENDED
Highest 62.73 % 12/31/99
Lowest (12.53)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 1999)
- - -----------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (MARCH 1, 1993)
WRL VKAM
Emerging Growth 105.16% 42.96% 32.64%
S&P 500 Index 21.04% 28.56% 21.70%
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL ALGER AGGRESSIVE GROWTH
- - --------------------------------------------------------------------------------
TOTAL RETURN
(PER CALENDAR YEAR)
32.02% 10.45% 24.25% 48.69% 69.02%
1995 1996 1997 1998 1999
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(QUARTERLY 1995-1999)
- - ------------------------------------------
QUARTER ENDED
Highest 44.67 % 12/31/99
Lowest (9.72)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 1999)
- - ----------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (MARCH 1, 1994)
WRL Alger
Aggressive Growth 69.02% 36.62% 30.35%
S&P 500 Index 21.04% 28.56% 24.15%
- - --------------------------------------------------------------------------------
Prospectus 7
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
WRL THIRD AVENUE VALUE
TOTAL RETURN
(PER CALENDAR YEAR)
(6.84)% 15.72%
1998 1999
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(QUARTERLY 1998-1999)
- - -------------------------------------------
QUARTER ENDED
Highest 17.85 % 12/31/98
Lowest (17.57)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 1999)
- - -----------------------------------------------------------
SINCE
INCEPTION
ONE YEAR (JANUARY 2, 1998)
WRL Third Avenue Value 15.72% 3.84%
S&P 500 Index 21.04% 24.75%
- - --------------------------------------------------------------------------------
Prospectus 8
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIOS
- - --------------------------------------------------------------------------------
WRL GE INTERNATIONAL EQUITY (FORMERLY GE/SCOTTISH EQUITABLE INTERNATIONAL
EQUITY PORTFOLIO)
WRL JANUS GLOBAL
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES EACH FOREIGN EQUITY PORTFOLIO OF THE
FUND AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIOS. FOR FURTHER
INFORMATION ON THESE PORTFOLIOS, PLEASE READ THE SECTION ENTITLED "EXPLANATION
OF STRATEGIES AND RISKS," BEGINNING ON PAGE 35, AND THE FUND'S SAI.
/BULLSEYE/ OBJECTIVES
WRL GE INTERNATIONAL EQUITY
This Portfolio seeks long-term growth of capital.
WRL JANUS GLOBAL
This Portfolio seeks long-term growth of capital in a manner consistent with
the preservation of capital.
- - --------------------------------------------------------------------------------
WHAT IS A FOREIGN EQUITY PORTFOLIO?
This type of portfolio principally invests in equity securities of
companies located outside the U.S.
- - --------------------------------------------------------------------------------
/ROOK/ POLICIES AND STRATEGIES
WRL GE INTERNATIONAL EQUITY
(FORMERLY WRL GE/SCOTTISH EQUITABLE INTERNATIONAL EQUITY)
The portfolio's sub-adviser, GE Asset Management Incorporated (GEAM) seeks to
achieve the portfolio's investment objective by investing principally in:
o Common stocks of companies located in developed and developing
countries other than the United States
GEAM focuses on companies that it expects will grow faster than relevant
markets and whose security price does not, in GEAM's view, fully reflect their
potential for growth. Under normal circumstances, the portfolio's assets are
invested in foreign securities of companies representing at least three
different countries.
GEAM determines the country represented by an issuer by reference to the
country in which the issuer is organized; derives at least 50% of its revenues
or profits from goods produced or sold, investments made or services performed;
has at least 50% of its assets situated; or has the principal trading market
for its securities.
GEAM seeks to identify securities of growth companies with characteristics such
as:
o low prices relative to their long-term cash earnings potential
o potential for significant improvement in the company's business
o financial strength
o sufficient liquidity
The portfolio invests, not only in the larger markets of Europe and Japan, but
also, may invest in the smaller markets of Asia, emerging Europe, Latin
America, and other emerging markets.
Overseas economies often do not move in the same direction and operate
differently. This creates situations the portfolio aims to take advantage of
through asset allocation among international markets.
The portfolio may, to a lesser extent, invest in equity securities other than
common stocks (including preferred securities, depositary receipts such as
ADRs, EDRs and GDRs, convertible securities, and rights and warrants),
securities of companies located in the United States, debt securities or other
securities.
The portfolio also may use various investment techniques to adjust the
portfolio's investment exposure, but there is no guarantee that these
techniques will work.
Prior to May 1, 2000, Scottish Equitable Investment Management Limited served
as co-manager of this portfolio, and was responsible for managing a discrete
portion of its assets.
Prospectus 9
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIOS
- - --------------------------------------------------------------------------------
WRL JANUS GLOBAL
The portfolio's sub-adviser, Janus Capital Corporation (Janus) seeks to achieve
the portfolio's investment objective by investing principally in:
o Common stocks of foreign and domestic issuers
o Depositary receipts including ADRs, GDRs and EDRs
The portfolio may also use forward foreign currency contracts for hedging.
Janus' main strategy is to use a "bottom up" approach to build the portfolio's
portfolio. They seek to identify individual companies with earnings growth
potential that may not be recognized by the market at large.
Foreign securities are generally selected on a stock-by-stock basis without
regard to defined allocation among countries or geographic regions.
When evaluating foreign investments, Janus (in addition to looking at
individual companies) considers such factors as:
o Expected levels of inflation in various countries
o Government policies that might affect business conditions
o The outlook for currency relationships
o Prospects for economic growth among countries, regions or
geographic areas
- - --------------------------------------------------------------------------------
WHAT IS A "BOTTOM-UP" APPROACH?
When portfolio managers use a "bottom-up" approach, they look primarily at
individual companies against the context of broader market factors.
- - --------------------------------------------------------------------------------
/WARNING SIGN/ RISKS OF INVESTING IN FOREIGN
EQUITY PORTFOLIOS
The principal risks of investing in Foreign Equity Portfolios that may
adversely affect your investment are described below. (Not all of these risks
apply to each Foreign Equity Portfolio. See the chart below for the principal
risks of your portfolio.) Please note that there are many other circumstances
which could adversely affect your investment and prevent a portfolio from
achieving its objective, which are not described here. Please refer to the
section entitled "Explanation of Strategies and Risks" beginning on page 35,
and the Fund's SAI for more information about the risks associated with
investing in the Foreign Equity Portfolios.
PRINCIPAL RISKS
FOREIGN EQUITY PORTFOLIOS
PORTFOLIO
-------------------------
WRL
GE WRL
RISKS INTERNATIONAL JANUS
- - ------------------------- EQUITY GLOBAL
STOCKS X X
FOREIGN SECURITIES X X
EMERGING MARKETS RISK X X
FORWARD FOREIGN CURRENCY
CONTRACTS X X
DEPOSITARY RECEIPTS X X
WARRANTS & RIGHTS X
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
certain industries or the securities market as a whole.
Because the stocks the portfolio holds fluctuate in price, the value of your
investment in the portfolio will go up and down.
o FOREIGN SECURITIES
Investments in foreign securities involve risks relating to political, social
and economic developments abroad as well as risks resulting from differences in
regulations to which U.S. and foreign issuers and markets are subject. To the
extent a portfolio invests in emerging markets, these risks would be greater.
These risks include:
o Changes in currency values
o Currency speculation
o Currency trading costs
o Different accounting and reporting practices
o Less information available to the public
o Less (or different) regulation of securities markets
Prospectus 10
<PAGE>
FOREIGN EQUITY PORTFOLIOS
o Greater complex business negotiations
o Less liquidity
o More fluctuations in prices
o Delays in settling foreign securities transactions
o Higher costs for holding shares (custodial fees)
o Higher transaction costs
o Vulnerability to seizure and taxes
o Political instability and small markets
o Different market trading days
o Forward foreign currency contracts for hedging
o EMERGING MARKETS RISK
Investing in the securities of issuers located in or principally doing business
in emerging markets bear foreign risks as discussed above. In addition, the
risks associated with investing in emerging markets are often greater than
investing in developed foreign markets. Specifically, the economic structures
in emerging markets countries are less diverse and mature than those in
developed countries, and their political systems are less stable. Investments
in emerging markets countries may be affected by national policies that
restrict foreign investments. Emerging market countries may have less developed
legal structures, and the small size of their securities markets and low
trading volumes can make investments illiquid and more volatile than
investments in developed countries. As a result, a portfolio investing in
emerging market countries may be required to establish special custody or other
arrangements before investing.
o FORWARD FOREIGN CURRENCY CONTRACTS
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of portfolio securities decline.
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 the portfolio's
limitation on investing in illiquid securities.
If the portfolio manager's judgment of markets proves incorrect or the strategy
does not correlate well with a portfolio's investment, the use of such hedging
transactions could result in a loss regardless of whether the intent was to
reduce risk or increase return and may increase a portfolio's volatility. In
addition, in the event that non-exchange traded forward currency contracts are
used, such transactions could result in a loss if the counterparty to the
transaction does not perform as promised.
o CONVERTIBLES
As with all debt securities, the market value of convertibles tends to decline
as interest rates increase and, conversely, to increase as the interest rates
decline.
o WARRANTS AND RIGHTS
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.
o DEPOSITARY RECEIPTS
Depositary receipts represent interests in an account at a bank or trust
company which holds equity securities. They are subject to some of the same
risks as direct investments in foreign securities, including currency risk. The
regulatory requirements with respect to depositary receipts that are issued in
sponsored and unsponsored programs are generally similar, but the issuers of
unsponsored depositary receipts 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 depositary receipts.
Prospectus 11
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIOS
- - --------------------------------------------------------------------------------
o GROWTH INVESTING RISK
Securities with different characteristics tend to shift in and out of favor
depending upon market and economic conditions as well as investor sentiment. A
portfolio may underperform other portfolios that employ a different style.
Growth stocks may be more volatile than other stocks because they are more
sensitive to investor perceptions of the issuing company's growth potential.
Growth-oriented funds typically will underperform when value investing is in
favor.
YOU MAY LOSE MONEY IF YOU INVEST IN EITHER OF THE FOREIGN EQUITY PORTFOLIOS.
/ROOK/ INVESTOR PROFILES
WRL GE INTERNATIONAL EQUITY
For the investor who seeks long-term capital growth through foreign
investments, and who is able to tolerate the significant risks in such
investments.
WRL JANUS GLOBAL
For the investor who seeks capital growth without being limited to investments
in U.S. securities, and who can tolerate the significant risks associated with
foreign investing.
Prospectus 12
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIOS
- - --------------------------------------------------------------------------------
/GRAPH/ PORTFOLIO PERFORMANCE
The bar charts and tables below give an indication of the portfolios' risks and
performance. The charts show changes in a portfolio's performance from year to
year. The performance calculations do not reflect charges or deductions under
the policies or the annuity contracts. These fees and expenses would lower
investment performance. The tables show how a portfolio's average annual
returns for the periods indicated compare to those of a broad measure of market
performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL GE INTERNATIONAL EQUITY
- - --------------------------------------------------------------------------------
TOTAL RETURN
(PER CALENDAR YEAR)
7.50% 12.85% 24.95%
1997 1998 1999
- - --------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(QUARTERLY 1997-1999)
- - --------------------------------------------
QUARTER ENDED
Highest 22.87 % 12/31/99
Lowest (17.69)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 1999)
- - -------------------------------------------------------------
SINCE
INCEPTION
1 YEAR (JANUARY 2, 1997)
WRL GE International Equity 24.95% 14.90%
Morgan Stanley Capital
International-Europe,
Asia & Far East
(MSCI-EAFE) 28.24% 13.18%
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL JANUS GLOBAL
- - --------------------------------------------------------------------------------
TOTAL RETURN
(PER CALENDAR YEAR)
35.05% 0.25% 23.06% 27.74% 18.75% 30.01% 71.10%
1993 1994 1995 1996 1997 1998 1999
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(QUARTERLY 1993-1999)
- - --------------------------------------------
QUARTER ENDED
Highest 46.11 % 12/31/99
Lowest (16.52)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 1999)
- - ---------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (DECEMBER 3, 1992)
WRL Janus Global 71.10% 32.94% 27.91%
Morgan Stanley
Capital
International
World Index 24.93% 20.08% 18.23%
- - --------------------------------------------------------------------------------
Prospectus 13
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS
- - --------------------------------------------------------------------------------
WRL JANUS GROWTH
WRL GE U.S. EQUITY
WRL C.A.S.E. GROWTH
WRL NWQ VALUE EQUITY
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES EACH GROWTH EQUITY PORTFOLIO OF THE
FUND AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIOS. FOR FURTHER
INFORMATION ON THESE PORTFOLIOS, PLEASE READ THE SECTION ENTITLED "EXPLANATION
OF STRATEGIES AND RISKS," BEGINNING ON PAGE 35, AND THE FUND'S SAI.
/BULLSEYE/ OBJECTIVES
WRL JANUS GROWTH
This portfolio seeks growth of capital.
WRL GE U.S. EQUITY
This portfolio seeks long-term growth of capital.
WRL C.A.S.E. GROWTH
This portfolio 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.
WRL NWQ VALUE EQUITY
This portfolio seeks to achieve maximum, consistent total return with minimum
risk to principal.
- - --------------------------------------------------------------------------------
WHAT IS A GROWTH EQUITY PORTFOLIO?
Each growth equity portfolio invests in the common stock of companies that
offer potentially rising share prices. These portfolios primarily aim to
provide capital appreciation (a rise in share price) rather than steady
income.
- - --------------------------------------------------------------------------------
/ROOK/ POLICIES AND STRATEGIES
WRL JANUS GROWTH
The Portfolio's sub-adviser, Janus Capital Corporation (Janus), seeks to
achieve the portfolio's objective by investing principally in:
o Common stocks
The portfolio's strategy is to invest almost all of its assets in common stock
at times when Janus believes the market environment favors such investing.
Janus generally takes a "bottom-up" approach to building the stock portfolio.
In other words, Janus seeks to identify individual companies with earnings
growth potential that may not be recognized by the stock market at large.
Although themes may emerge in the portfolio, securities are generally selected
without regard to any defined industry sector or other similarly defined
selection procedure. Realization of income is not a significant investment
consideration for the portfolio and any income realized on the portfolio's
investments is incidental to its objective.
Janus may take a temporary defensive position when the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse market conditions exist. This may be
inconsistent with the portfolio's principal
Prospectus 14
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
investment strategies. Under these circumstances, the portfolio may be unable
to achieve its investment objective.
WRL GE U.S. EQUITY
The portfolio's sub-adviser, GE Asset Management Incorporated (GEAM), seeks to
meet the portfolio's investment objective by investing primarily in:
o Common stocks of U.S. Companies
GEAM uses a Multi-Style/registered trademark/ investment strategy that combines
growth and value investment management styles. As a result, the portfolio has
characteristics similar to the Standard & Poor's 500 Composite Stock Index,
including capital appreciation and income potential. Stock selection is key to
the performance of the portfolio.
Through fundamental company research, the portfolio managers seek to identify
securities of large companies with characteristics such as: attractive
valuations, financial strength and high quality management focused on
generating shareholder value.
The portfolio may, to a lesser extent, invest in equity securities other than
common stocks (including preferred securities, depositary receipts such as
ADRs, EDRs and GDRs, convertible securities, and rights and warrants), foreign
securities, debt securities or other securities, and use various investment
techniques and investment strategies in pursuit of its investment objective.
WRL C.A.S.E. GROWTH
The portfolio's sub-adviser, C.A.S.E. Management, Inc. (C.A.S.E.), seeks to
achieve the portfolio's investment objective by investing principally in:
o Common stocks
o Preferred stocks
o Convertible stocks
Using proprietary forms of research, C.A.S.E. selects companies after
evaluating the current economic cycle, and identifying potentially attractive
sectors, industries and company-specific circumstances.
C.A.S.E. invests in common, preferred and convertible stocks of companies that
it believes show below-market risk, supported by below-market multiples, along
with above-average fundamentals. These fundamentals include return on equity,
price-to-earnings ratio and other balance sheet factors that contribute to
long-term capital growth.
The portfolio's assets are invested in companies whose stocks are traded on
national exchanges or over-the-counter markets. C.A.S.E. focuses on companies
that are fundamentally strong compared to other companies in the same industry,
the same sector and the broad market.
C.A.S.E. applies its proprietary forms of research to companies that exhibit
superior products and above-average growth rates along with sound management
and financials.
Each company selected for the portfolio is monitored against more than two
dozen measures of financial strength, including:
o insiders' activity
o market style leadership
o earnings surprise
o analysts' change in earnings projections
o return on equity
o 5-year earnings-per-share growth rate
o price-earnings ratio
o price-to-book ratio
o price-to-cash flow
o institutional activity and holdings
o relative strength price change
o price-to-200-day moving average
o price-to-historical rising inflation
o price-to-declining U.S. dollar
o earnings projected change
o quarterly earnings per-share growth rate
Stocks are sold when C.A.S.E. views them as overvalued, or when C.A.S.E. feels
the stocks have lost their strong fundamentals.
Prospectus 15
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
In seeking to achieve the investment objective of the portfolio, C.A.S.E. will
make investment decisions without giving consideration to the turnover rate of
the portfolio. As a result, the turnover rate of the portfolio may be higher
than other comparable portfolios. Consequently, the portfolio may incur higher
transaction related expenses than portfolios that do not engage in frequent
trading.
WRL NWQ VALUE EQUITY
The portfolio's sub-adviser, NWQ Investment Management Company, Inc. (NWQ),
seeks to achieve its objective by investing principally in:
o Common stocks
To a lesser extent, NWQ may invest portfolio assets in:
o Money market and short-term instruments (Treasury Bills)
o ADRs and exchange listed foreign stocks
NWQ employs a value-oriented approach to investing, combining top-down and
bottom-up disciplines.
NWQ will use statistical measures to look for above-average stock valuations,
screening for below-average price-to-earnings and price-to-book ratios,
above-average dividend yields and strong financial stability.
NWQ also identifies those market sectors believed to benefit from long-term
positive fundamentals, and focuses on the companies within these sectors which
represent above-average statistical value and are undervalued when purchased.
The portfolio consists primarily of mid-capitalization to large capitalization
companies. NWQ considers the following when making a security selection:
o below-average price-to-earnings ratios
o below-average price-to-book
o strong financial stability
o industries/sectors with strong long-term fundamentals
o leading/strong market positions
o uses earnings averaged over both strong and weak periods in evaluating
cyclical companies
/WARNING SIGN/ RISKS
The principal risks of investing in Growth Equity Portfolios that may adversely
affect your investment are described below. (Not all of these risks apply to
each Growth Equity Portfolio. See the chart below for the principal risks of
your portfolio.) Please note that there are many other circumstances which
could adversely affect your investment and prevent a portfolio from achieving
its objective, which are not described here. Please refer to the section
entitled "Explanation of Strategies and Risks," beginning on page 35, and the
Fund's SAI for more information about the risks associated with investing in
the Growth Equity Portfolios.
Prospectus 16
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
PRINCIPAL RISKS
GROWTH EQUITY PORTFOLIOS
PORTFOLIO
-------------------------------------------
WRL
WRL WRL WRL NWQ
RISKS JANUS GE U.S. C.A.S.E. VALUE
- - ------------------------ GROWTH EQUITY GROWTH EQUITY
NON-DIVERSIFICATION
STOCKS X X X X
MEDIUM SIZED COMPANIES
FOREIGN SECURITIES X X
EMERGING MARKETS RISK X
CONVERTIBLES X
PROPRIETARY RESEARCH X
STYLE RISK X X X X
DEPOSITARY RECEIPTS X
o NON-DIVERSIFICATION
To the extent a portfolio invests a greater proportion of its assets in the
securities of a smaller number of issuers, it may be more susceptible to any
single economic, political or regulatory occurrence than a more widely
diversified portfolio and may be subject to greater risk of loss with respect
to its portfolio securities.
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
industries, or the securities market as a whole.
Because the stocks the portfolio holds fluctuate in price, the value of your
investment in the portfolio go up and down.
o MEDIUM-SIZED COMPANIES
These companies present additional risks because their earnings may be less
predictable, their share price more volatile, and their securities less liquid
than larger more established companies.
o FOREIGN SECURITIES
Investments in foreign securities involve risks relating to political, social
and economic developments abroad as well as risks resulting from differences in
regulations to which U.S. and foreign issuers and markets are subject. These
risks include:
o Changes in currency values
o Currency speculation
o Currency trading costs
o Different accounting and reporting practices
o Less information available to the public
o Less (or different) regulation of securities markets
o More complex business negotiations
o Less liquidity
o More fluctuations in market prices
o Delays in settling foreign securities transactions
o Higher costs for holding foreign securities (custodial fees)
o Higher transaction costs
o Vulnerability to seizure and taxes
o Political instability and small markets
o Different market trading days
o EMERGING MARKETS RISK
Investing in the securities of issuers located in or principally doing business
in emerging markets bear foreign risks as discussed above. In addition, the
risks associated with investing in emerging markets are often greater than
investing in developed foreign markets. Specifically, the economic structures
in emerging markets countries are less diverse and mature than
Prospectus 17
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
those in developed countries, and their political systems are less stable.
Investments in emerging markets countries may be affected by national policies
that restrict foreign investments. Emerging market countries may have less
developed legal structures, and the small size of their securities markets and
low trading volumes can make investments illiquid and more volatile than
investments in developed countries. As a result, a portfolio investing in
emerging market countries may be required to establish special custody or other
arrangements before investing.
o CONVERTIBLES
As with all debt securities, the market value of convertibles tends to decline
as interest rates increase and, conversely, increase as interest rates decline.
However, when the market price of the common stock underlying a convertible
security exceeds the conversion price of the convertible security, the
convertible security tends to reflect the market price of the underlying common
stock.
o PROPRIETARY RESEARCH
Proprietary forms of research may not be effective and may cause overall
returns to be lower than if other forms of research are used.
o STYLE RISK
Securities with different characteristics tend to shift in and out of favor
depending upon market and economic conditions as well as investor sentiment. A
portfolio may underperform other portfolios that employ a different style. A
portfolio also may employ a combination of styles that impact its risk
characteristics. Examples of different styles include growth and value
investing, as well as those focusing on large, medium, or small company
securities.
o GROWTH INVESTING RISK
Growth stocks may be more volatile than other stocks because they are
more sensitive to investor perceptions of the issuing company's growth
potential. Growth oriented funds will typically underperform when value
investing is in favor.
o DEPOSITARY RECEIPTS
Depositary receipts represent interests in an account at a bank or trust
company which holds equity securities. They are subject to some of the same
risks as direct investments in foreign securities, including currency risk. The
regulatory requirements with respect to depositary receipts that are issued in
sponsored and unsponsored programs are generally similar, but the issuers of
unsponsored depositary receipts 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 depositary receipts.
YOU MAY LOSE MONEY IF YOU INVEST IN ANY OF THE GROWTH EQUITY PORTFOLIOS.
/ROOK/ INVESTOR PROFILES
WRL JANUS GROWTH
For the investor who wants capital growth in a broadly diversified stock
portfolio, and who can tolerate significant fluctuations in value.
WRL GE U.S. EQUITY
For the investor who seeks long-term growth from a diversified portfolio that
combines "value" and "growth" investment management styles. As a result, the
portfolio will have characteristics similar to the S&P 500. The investor should
be comfortable with the price fluctuations of a stock portfolio and be willing
to accept higher short-term risk for potential long-term returns.
WRL C.A.S.E. GROWTH
For the investor who seeks growth 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.
WRL NWQ VALUE EQUITY
For the investor who seeks both capital preservation and long-term capital
appreciation and who can tolerate fluctuations inherent in stock investing.
Prospectus 18
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
/GRAPH/ PORTFOLIO PERFORMANCE
The bar charts and tables below give an indication of the portfolios' risks and
performance. The charts show changes in a portfolio's performance from year to
year. The performance calculations do not reflect charges or deductions under
the policies or the annuity contracts. These fees and expenses would lower
investment performance. The tables show how a portfolio's average annual
returns for the periods indicated compare to those of a broad measure of market
performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL JANUS GROWTH
- - --------------------------------------------------------------------------------
TOTAL RETURN
(PER CALENDAR YEAR)
(0.22)% 59.79% 2.35% 3.97% (8.31)% 47.12% 17.96% 17.54% 64.47% 59.67%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(QUARTERLY 1990-1999)
- - -------------------------------------------
QUARTER ENDED
Highest 33.08 % 12/31/99
Lowest (16.60)% 9/30/90
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 1998)
- - -----------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
WRL Janus Growth 59.67% 39.89% 23.62%
S&P 500 Index 21.04% 28.56% 18.21%
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL GE U.S. EQUITY
- - --------------------------------------------------------------------------------
TOTAL RETURN
(PER CALENDAR YEAR)
27.01% 22.87% 18.41%
1997 1998 1999
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(QUARTERLY 1997-1999)
- - -------------------------------------------
QUARTER ENDED
Highest 19.59 % 12/31/98
Lowest (10.14)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 1999)
- - ----------------------------------------------------
SINCE
INCEPTION
1 YEAR (JANUARY 2, 1997)
WRL GE U.S. Equity 18.41% 22.76%
S&P 500 Index 21.04% 27.56%
- - --------------------------------------------------------------------------------
Prospectus 19
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL C.A.S.E. GROWTH
- - --------------------------------------------------------------------------------
TOTAL RETURN
(PER CALENDAR YEAR)
17.50% 15.03% 2.47%
1996 1997 1998
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(QUARTERLY 1996-1999)
- - -------------------------------------------
QUARTER ENDED
Highest 26.60 % 12/31/98
Lowest (22.50)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 1999)
- - -------------------------------------------------
SINCE
INCEPTION
1 YEAR (MAY 1, 1995)
WRL C.A.S.E. Growth 33.84% 18.80%
Wilshire 5000 Index 22.05% 24.06%
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL NWQ VALUE EQUITY
- - --------------------------------------------------------------------------------
TOTAL RETURN
(PER CALENDAR YEAR)
25.04% (4.78)% 7.95%
1997 1998 1999
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(QUARTERLY 1997-1999)
- - ---------------------------------------------
QUARTER ENDED
Highest 16.23 % 6/30/99
Lowest (17.95))% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 1999)
- - ---------------------------------------------
SINCE
INCEPTION
1 YEAR (MAY 1, 1996)
WRL NWQ Value
Equity 7.95% 10.76%
S&P 500 Index 21.04% 26.74%
- - --------------------------------------------------------------------------------
Prospectus 20
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS
- - --------------------------------------------------------------------------------
WRL DEAN ASSET ALLOCATION
WRL LKCM STRATEGIC TOTAL RETURN
WRL FEDERATED GROWTH & INCOME
WRL AEGON BALANCED
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES EACH BALANCED PORTFOLIO OF THE FUND
AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIOS. FOR FURTHER INFORMATION
ON THESE PORTFOLIOS, PLEASE READ THE SECTION ENTITLED "EXPLANATION OF
STRATEGIES AND RISKS," BEGINNING ON PAGE 35, AND THE FUND'S SAI.
/BULLSEYE/ OBJECTIVES
WRL DEAN ASSET ALLOCATION
The objective of this portfolio is to seek preservation of capital and
competitive investment returns.
WRL LKCM STRATEGIC
TOTAL RETURN
The objective of this portfolio is to provide current income, long-term growth
of income and capital appreciation.
WRL FEDERATED GROWTH & INCOME
This portfolio seeks total return by investing in securities that have
defensive characteristics. (These are securities that appear to have a low
probability of significant price decline relative to the overall equity market.
They also will, in the sub-adviser's view, generally have a comparatively low
volatility in share price relative to the overall equity market.)
WRL AEGON BALANCED
This portfolio seeks preservation of capital, reduced volatility, and superior
long-term risk-adjusted returns.
- - --------------------------------------------------------------------------------
WHAT IS A BALANCED PORTFOLIO?
A balanced portfolio generally tries to balance three different objectives:
moderate long-term growth of capital, moderate income, and moderate
stability in an investor's principal. To reach these goals, balanced
portfolios invest in a mixture of stocks, bonds and money market
instruments.
- - --------------------------------------------------------------------------------
/ROOK/ POLICIES AND STRATEGIES
WRL DEAN ASSET ALLOCATION
The portfolio's sub-adviser, Dean Investment Associates (Dean), seeks to
achieve the portfolio's investment objective by investing principally in:
o Income-producing common and preferred stocks
o Debt obligations of U.S. issuers, some of which will be convertible into
common stocks
o U.S. Treasury bonds, notes and bills
o Money market funds
In selecting stocks, Dean focuses on high-quality, liquid, large capitalization
stocks, using a bottom-up screening process to identify stocks that are
statistically
Prospectus 21
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
undervalued. Dean's ultimate goal is to choose stocks whose price has been
driven down by a market that has over-reacted to perceived risks. With this
approach, the portfolio seeks to achieve a dividend income yield higher than
that of the Russell 1000 Index, a widely recognized unmanaged index of market
performance which measures the performance of the 1,000 largest companies in
the Russell 3000 Index, which represents approximately 89% of the total market
capitalization of the Russell 3000 Index. As of the latest reconstitution, the
average market capitalization was approximately $9.9 billion; the median market
capitalization was approximately $3.7 billion. The smallest company in the
index had an approximate market capitalization of $1,404.7 million.
Dean employs an investment technique called "asset allocation," which shifts
assets from one class of investment to another (such as from equity to debt)
when it anticipates changes in market direction.
Dean will seek to enhance returns in rising stock markets by increasing its
allocation to equity, then protect itself in falling stock markets by reducing
equity exposure and shifting into fixed-income investments, as well as into
money market funds (up to 10% of total assets).
Dean has developed forecasting models to predict movements in the stock market
for both short (12 to 18-month) and long (3 to 5-year) time periods. These
models help compare the risks and rewards Dean anticipates in holding stocks
versus debt instruments and money market funds. Such techniques may result in
increased portfolio expenses such as brokerage fees.
Thus, the models determine when Dean is to "tactically" adjust the portfolio's
asset allocation among stocks, bonds, U.S. debt obligations and money market
funds.
WRL LKCM STRATEGIC
TOTAL RETURN
The portfolio's sub-adviser, Luther King Capital Management Corporation (LKCM),
seeks to achieve the portfolio's investment objective by investing primarily
in:
o Common stocks
o Corporate bonds
o Convertible preferred stocks
o Corporate convertible bonds
o U.S. Treasury Notes
The portfolio seeks to invest in a blend of equity and fixed-income securities
to achieve a balance of capital appreciation and investment income while
limiting volatility. The portfolio will also invest in convertible securities,
which have both equity and fixed-income characteristics. In choosing such
securities, LKCM looks for companies with strong fundamental characteristics.
It considers factors such as:
o balance sheet quality
o cash flow generation
o earnings and dividend growth record and outlook
o profitability levels
In some cases, LKCM bases its selections on other factors. For example, some
securities may be bought at an apparent discount to their appropriate value,
with the anticipation that they'll increase in value over time.
The portfolio seeks to achieve an income yield greater than the average yield
of the stocks in the S&P 500.
The portfolio invests mainly in the stocks and bonds of companies with
established operating histories and strong fundamental characteristics. The
majority of the stocks the portfolio buys will be listed on a national exchange
or traded on NASDAQ or domestic over-the-counter markets.
LKCM closely analyzes a company's financial status and a security's valuation
in an effort to control risk at the individual level. In addition, the growth
elements of the portfolio's equity investments drive capital appreciation.
As part of its income-oriented strategy, LKCM expects to invest about 25% of
the portfolio's assets in fixed-income securities, some of which will be
convertible into common stocks, and no more than 20% of its assets in stocks
that don't pay a dividend.
WRL FEDERATED GROWTH & INCOME
The portfolio's sub-adviser, Federated Investment Counseling (Federated), seeks
to achieve the portfolio's objective by investing principally in:
o Common stocks
Prospectus 22
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
o Convertible securities
o REITs
o Fixed income securities
o Foreign securities
Federated seeks total return by investing primarily in common stocks that
provide the opportunity for capital appreciation or high dividend income.
Federated seeks capital appreciation by investing primarily in undervalued,
overlooked common stocks. These securities are generally trading at low
historical valuations relative to the market and to industry peers. To achieve
high current income, Federated seeks to invest in securities that offer higher
dividends than the overall market. Convertible stocks and bonds, real estate
investment trusts and securities issued by utility companies are generally the
types of securities that Federated may emphasize in order to enhance the
portfolio's dividend income. Federated may also invest a portion of the
portfolio's assets in securities of companies based outside the U.S. to
diversify the portfolio's holdings and to gain exposure to the foreign market.
Federated attempts to invest in securities that have defensive characteristics,
i.e., securities that appear to have a low volatility in share price relative
to the overall equity market. Federated also may emphasize investments in
equity securities that provide high dividend income, which generally are less
volatile stocks. Federated also may allocate a portion of the portfolio's
assets in cash or government securities when the markets appear to be
overpriced.
To identify companies for portfolio investment, Federated uses a model which
looks at a company's financial and earnings strength, management skill and
business prospects, and at the prospect of comparatively low volatility in
share price. In addition, Federated performs traditional fundamental and credit
analyses to select the most promising companies for the portfolio. Federated
may emphasize investments in certain industry sectors that offer securities
that have these attributes. To determine the timing of purchases and sales of
portfolio securities, Federated looks at recent stock price performance.
WRL AEGON BALANCED
This portfolio's sub-adviser, AEGON USA Investment Management, Inc. (AIMI),
seeks to achieve the portfolio's objective by investing principally in:
o Common stocks (primarily of domestic large cap companies)
o U.S. Treasuries
o Convertible securities
AIMI uses a top-down investment strategy to find stocks of medium to large
capitalization companies that fit a value criteria. The process for selecting
companies is based on fundamental analysis.
More specifically, AIMI looks at the industry structure, organizational
structure, financial structure, and business prospects of each portfolio
company. It then applies the analysis of these factors to financial forecasts
which, in turn, drives the valuation of a company's stock. AIMI uses a two
stage dividend discount model to value a company. Once AIMI initiates a
position it monitors and continually reassesses its prior analysis. When AIMI
believes the price fully reflects its independent valuation or there is a
significant change in the fundamentals of the company, the portfolio sells the
security.
/WARNING SIGN/ RISKS
The principal risks of investing in Balanced Portfolios that may adversely
affect your investment are described below. (Not all of these risks apply to
each Balanced Portfolio. See the chart below for the principal risks of your
portfolio.) Please note that there are many other circumstances that could
adversely affect your investment and prevent a portfolio from achieving its
objective, which are not described here. Please refer to the section entitled
"Explanation of Strategies and Risks," beginning on page 35 and the Fund's SAI
for more information about the risks associated with investing in Balanced
Portfolios.
Prospectus 23
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
PRINCIPAL RISKS
BALANCED PORTFOLIOS
<TABLE>
<CAPTION>
PORTFOLIO
------------
WRL WRL WRL
RISKS DEAN ASSET LKCM STRATEGIC FEDERATED WRL
- - ------------------------- ALLOCATION TOTAL RETURN GROWTH & INCOME AEGON BALANCED
<S> <C> <C> <C> <C>
STOCKS X X X X
FIXED-INCOME SECURITIES X X X
CONVERTIBLES X X X
QUANTITATIVE MODELS X
FOREIGN SECURITIES X
</TABLE>
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the short term. These
price movements may result from factors affecting individual companies,
industries or the securities market as a whole.
Because the stocks a portfolio holds fluctuate in price, the value of your
investment in a portfolio will go up and down.
o FIXED-INCOME SECURITIES
The value of these securities may change daily based on changes in the interest
rate, and other market conditions and factors. The risks include:
o Changes in interest rates
o Length of time to maturity
o Issuers defaulting on their obligations to pay interest or return
principal
o HIGH-YIELD/HIGH-RISK FIXED-INCOME SECURITIES
o Credit risk
o Greater sensitivity to interest rate movements
o More speculative than higher rated securities
o Greater vulnerability to economic changes
o Decline in market value in event of default
o Less liquidity
o FOREIGN SECURITIES
Investments in foreign securities involve risks relating to political, social
and economic developments abroad as well as risks resulting from differences in
regulations to which U.S. and foreign issuers and markets are subject. These
risks include:
o Changes in currency values
o Currency speculation
o Currency trading costs
o Different accounting and reporting practices
o Less information available to the public
o Less (or different) regulation of securities markets
o More complex business negotiations
o Less liquidity
o More fluctuations in market prices
o Delays in settling foreign securities transactions
o Higher costs for holding foreign securities (custodial fees)
o Higher transaction costs
o Vulnerability to seizure and taxes
o Political instability and small markets
o Different market trading days
o QUANTITATIVE MODELS
Securities selected using statistical models may result in incorrect asset
allocations causing overall returns to be lower than if other methods of
selection were used.
Prospectus 24
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
YOU MAY LOSE MONEY IF YOU INVEST IN ANY OF THE BALANCED PORTFOLIOS.
/ROOK/ INVESTOR PROFILES
WRL DEAN ASSET ALLOCATION
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.
WRL LKCM STRATEGIC
TOTAL RETURN
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 portfolio that invests in both equity and
fixed-income securities.
WRL FEDERATED GROWTH & INCOME
For the investor who seeks high current income and moderate capital
appreciation and is willing to accept certain special risks associated with
sector investing. (A sector is a broad grouping of specific industries.)
WRL AEGON BALANCED
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.
This portfolio is not designed for investors who desire a consistent level of
income.
Prospectus 25
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
/GRAPH/ PORTFOLIO PERFORMANCE
The bar charts and tables below give an indication of the portfolios' risks and
performance. The charts show changes in a portfolio's performance from year to
year. The performance calculations do not reflect charges or deductions under
the policies or the annuity contracts. These fees and expenses would lower
investment performance. The tables show how a portfolio's average annual
returns for the periods indicated compare to those of a broad measure of market
performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL DEAN ASSET ALLOCATION
- - --------------------------------------------------------------------------------
TOTAL RETURN
(PER CALENDAR YEAR)
20.09% 14.42% 16.59% 8.33% (5.64)%
1995 1996 1997 1998 1999
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(QUARTERLY 1995-1999)
- - -------------------------------------------
QUARTER ENDED
Highest 9.03 % 6/30/97
Lowest (7.87)% 9/30/99
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 1999)
- - ----------------------------------------------------
SINCE
INCEPTION
1 YEAR (JANUARY 3, 1995)
WRL Dean Asset
Allocation (5.64)% 10.38%
S&P 500 Index 21.04 % 28.54%
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL LKCM STRATEGIC TOTAL RETURN
- - --------------------------------------------------------------------------------
TOTAL RETURN
(PER CALENDAR YEAR)
(0.53)% 24.66% 15.00% 21.85% 9.64% 12.07%
1994 1995 1996 1997 1998 1999
- - --------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(QUARTERLY 1994-1999)
- - -------------------------------------------
QUARTER ENDED
Highest 13.06 % 6/30/97
Lowest (8.05)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 1999)
- - -------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (MARCH 1, 1993)
WRL LKCM Strategic
Total Return 12.07% 16.50% 13.82%
S&P 500 Index 21.04% 28.56% 21.70%
- - --------------------------------------------------------------------------------
Prospectus 26
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL FEDERATED GROWTH & INCOME
- - --------------------------------------------------------------------------------
TOTAL RETURN
(PER CALENDAR YEAR)
19.80% 10.72% 17.10% 6.93% 3.03%
1995 1996 1997 1998 1999
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(QUARTERLY 1995-1999)
- - ------------------------------------------
QUARTER ENDED
Highest 12.15 % 6/30/99
Lowest (7.99)% 3/31/99
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 1999)
- - -------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (MARCH 1, 1994)
WRL Federated
Growth & Income (4.45)% 11.41% 8.82%
Russell Mid Cap
Index (0.11)% 18.01% 14.61%
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL AEGON BALANCED
- - --------------------------------------------------------------------------------
TOTAL RETURN
(PER CALENDAR YEAR)
19.80% 10.72% 17.10% 6.93% 3.03%
1995 1996 1997 1998 1999
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(QUARTERLY 1995-1999)
- - -------------------------------------------
QUARTER ENDED
Highest 9.84 % 12/31/98
Lowest (7.86)% 9/30/99
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 1999)
- - -----------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (MARCH 1, 1994)
WRL AEGON
Balanced 3.03% 11.34 8.53%
S&P 500 Index 21.04% 28.56 24.14%
- - --------------------------------------------------------------------------------
Prospectus 27
<PAGE>
- - --------------------------------------------------------------------------------
FIXED-INCOME PORTFOLIO(S)
- - --------------------------------------------------------------------------------
WRL AEGON BOND (FORMERLY BOND PORTFOLIO)
THIS RISK/REWARD SUMMARY BRIEFLY DESCRIBES EACH FIXED-INCOME PORTFOLIO OF THE
FUND AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIO(S). FOR FURTHER
INFORMATION ON THE PORTFOLIO(S), PLEASE READ THE SECTION ENTITLED "EXPLANATION
OF STRATEGIES AND RISKS," BEGINNING ON PAGE 35, AND THE FUND'S SAI.
/BULLSEYE/ OBJECTIVES
WRL AEGON BOND
This Portfolio seeks the highest possible current income within the confines of
the primary goal of ensuring the protection of capital.
- - --------------------------------------------------------------------------------
WHAT IS A FIXED-INCOME PORTFOLIO?
Fixed-income portfolios primarily invest in debt securities that pay
interest. When the debt security is purchased, the portfolio owns "debt"
and becomes an indirect creditor to the company or government that issued
the bond.
- - --------------------------------------------------------------------------------
/ROOK/ POLICIES AND STRATEGIES
WRL AEGON BOND
The portfolio's sub-adviser, AEGON USA Investment Management, Inc. (AIMI) seeks
to achieve the portfolio's objective by investing principally in:
o U.S. government securities obligations, including Treasury and Agency
Securities
o Medium to high-quality corporate bonds
To a lesser extent AIMI may invest in:
o Mortgage-backed securities, including pass-through and Collateralized
Mortgage Obligations (CMOs)
o Asset-backed securities
o U.S. dollar-denominated foreign bonds
o Short-term securities, including agency discount notes and commercial paper
AIMI takes an approach in the daily management of the portfolio that it
considers to be conservative, striving to participate in the bond market's
advances while preserving capital on the downside.
AIMI uses its Core Fixed-Income Strategy through which it draws from all of its
organizational resources. AIMI utilizes a disciplined process to gather
information on key factors for evaluation of the market environment.
The Fixed-Income Strategy Committee then sets policy directives that reflect
AIMI's interest rate outlook and expectations for the relative performance of
the major bond market sectors.
AIMI then selects securities that are considered by it to be most appropriate
based on AIMI's findings.
/WARNING SIGN/ RISKS
The principal risks of investing in the Fixed-Income Portfolio that may
adversely affect your investment are described below. Please note that there
are many other circumstances that could adversely affect your investment and
prevent a portfolio from achieving its objective, which are not described here.
Please refer to the section entitled "Explanation of Strategies and Risks"
beginning on page 35 and the Fund's SAI for more information about the risks
associated with investing in the Fixed-Income Portfolio.
o FIXED-INCOME SECURITIES
The value of these securities may change daily based on changes in interest
rates, and other market conditions and factors. The risks include:
o Changes in interest rates
o Length of time to maturity
o Issuers defaulting on their obligations to pay interest or return
principal (Credit Risk)
Prospectus 28
<PAGE>
- - --------------------------------------------------------------------------------
FIXED-INCOME PORTFOLIO(S) (CONTINUED)
- - --------------------------------------------------------------------------------
o HIGH-YIELD/HIGH-RISK FIXED-INCOME SECURITIES
o Credit risk
o Greater sensitivity to interest rate movements than higher rated
securities
o More speculative than higher rated securities
o Greater vulnerability to economic changes
o Decline in market value in event of default
o Less liquidity
o CREDIT RISK
The price of a bond is affected by the issuer's or counterparty's credit
quality. Changes in financial condition and general economic conditions can
affect the ability to honor financial obligations and therefore credit quality.
Lower quality bonds are generally more sensitive to these changes than higher
quality bonds. Even within securities considered investment grade, differences
exist in credit quality and some investment grade debt securities may have
speculative characteristics. A security's price may be adversely affected by
the market's opinion of the security's credit quality level even if the issuer
or counterparty has suffered no degradation in ability to honor the obligation.
o INTEREST RATE RISK
Bond prices rise when interest rates decline and decline when interest rates
rise. The longer the duration of a bond, the more a change in interest rates
affects the bond's price. Short-term and long-term interest rates may not move
the same amount and may not move in the same direction, which may affect the
sub-adviser's ability to predict interest rate movements and select portfolio
investments.
o MORTGAGE- AND OTHER ASSET-BACKED SECURITIES
o Repayment sooner than stated maturity dates resulting in greater
price and yield volatility than with traditional fixed-income securities
o Prepayments resulting in lower return
o Values may change based on creditworthiness of issuers
o Interest rate risks
o PROPRIETARY RESEARCH
AIMI's proprietary forms of research may not be effective and may cause overall
returns to be lower than if other forms of research are used.
YOU MAY LOSE MONEY IF YOU INVEST IN THIS PORTFOLIO.
/ROOK/ INVESTOR PROFILE
WRL AEGON BOND
For the investor seeking current income with preservation of capital, and who
can tolerate the fluctuation in principal associated with changes in interest
rates.
Prospectus 29
<PAGE>
- - --------------------------------------------------------------------------------
FIXED-INCOME PORTFOLIO(S) (CONTINUED)
- - --------------------------------------------------------------------------------
/GRAPH/ PORTFOLIO PERFORMANCE
The bar chart and table below gives an indication of the portfolio's risks and
performance. The chart shows changes in the portfolio's performance from year
to year. The performance calculations do not reflect charges or deductions
under the policies or the annuity contracts. These fees and expenses would
lower investment performance. The table shows how the portfolio's average
annual returns for the periods indicated compare to those of a broad measure of
market performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL AEGON BOND
- - --------------------------------------------------------------------------------
TOTAL RETURN
(PER CALENDAR YEAR)
6.21% 18.85% 6.79% 13.38% (6.94)% 22.99% 0.14% 9.16% 9.32% (2.94)%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(QUARTERLY 1990-1999)
- - ------------------------------------------
QUARTER ENDED
Highest 8.20 % 6/30/95
Lowest (4.90)% 3/31/94
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - ----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
WRL AEGON Bond (2.94)% 7.36% 7.33%
Lehman Brothers
Government/Corporate
Bond
(LBGC) Index (2.15)% 7.60% 7.65%
- - --------------------------------------------------------------------------------
Prospectus 30
<PAGE>
- - --------------------------------------------------------------------------------
CAPITAL PRESERVATION PORTFOLIO(S)
- - --------------------------------------------------------------------------------
WRL J.P. MORGAN MONEY MARKET
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES THE CAPITAL PRESERVATION
PORTFOLIO(S) AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIO. FOR FURTHER
INFORMATION ON THE PORTFOLIO(S), PLEASE READ THE SECTION ENTITLED "EXPLANATION
OF STRATEGIES AND RISKS," BEGINNING ON PAGE 35, AND THE FUND'S SAI.
/BULLSEYE/ OBJECTIVES
WRL J.P. MORGAN MONEY MARKET
This portfolio seeks to obtain maximum current income consistent with
preservation of principal and maintenance of liquidity.
- - --------------------------------------------------------------------------------
WHAT IS A MONEY MARKET PORTFOLIO?
A money market portfolio tries to maintain a share price of $1.00 while
paying income to its shareholders. A stable share price protects your
investment from loss ("preservation of principal"). If you need to sell
your shares at any time, you should receive your initial investment plus
any income that you have earned (thereby providing "liquidity"). However, a
money market portfolio does not guarantee that you will receive your money
back.
A money market portfolio must follow SEC rules as to the investment
quality, maturity, diversification and other features of the securities it
purchases and the average remaining maturity of the securities cannot be
greater than 90 days. The remaining maturity of a security is the period of
time until the principal amount must be repaid.
- - --------------------------------------------------------------------------------
/ROOK/ POLICIES AND STRATEGIES
WRL J.P. MORGAN MONEY MARKET
The portfolio's sub-adviser, J.P. Morgan Investment Management Inc. (J.P.
Morgan) seeks to achieve the portfolio's objective by investing in:
o U.S. government obligations
o Domestic and certain foreign bank obligations including time deposits,
certificates of deposit, bankers' acceptances and other bank obligations
o Asset-backed securities
o Repurchase and reverse repurchase agreements
J.P. Morgan will limit its investments to securities that present minimum
credit risks, as determined by guidelines adopted by the Fund's Board. 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.
The Fund's Board must approve or ratify any purchase of an unrated security or
a security rated by only one nationally recognized statistical rating
organization (NRSRO).
/WARNING SIGN/ RISKS
The principal risks of investing in the WRL J.P. Morgan Money Market portfolio
that may adversely affect your investment are described below. Please note that
there are circumstances which could adversely affect your investment and
prevent the portfolio from achieving its objective, which are not described
here. Please refer to the section entitled "Explanation of Strategies and
Risks," beginning on page 35 and the Fund's SAI for more information about the
risks associated with investing in the Capital Preservation Portfolio(s).
o U.S. GOVERNMENT OBLIGATIONS
The value of the U.S. government securities will fluctuate with changing
interest rates. A decrease in interest rates generally results in an increase
in the value of the securities and an increase in interest rates have the
opposite effect.
o BANK OBLIGATIONS
Banks are subject to extensive governmental regulations that may affect an
investment. The profitability of this industry is dependent on the availability
and cost of capital funds for lending under prevailing money market conditions.
Prospectus 31
<PAGE>
- - --------------------------------------------------------------------------------
CAPITAL PRESERVATION PORTFOLIO(S) (CONTINUED)
- - --------------------------------------------------------------------------------
Economic conditions and credit losses also affect this type of investment.
o ASSET-BACKED SECURITIES
o Repayment sooner than stated maturity dates resulting in greater
price and yield volatility than with traditional fixed-income securities
o Prepayments resulting in lower return
o Values may change based on creditworthiness of issuers
o Interest rate risks
o 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. Repurchase agreements not terminable within seven days are considered
illiquid securities.
Repurchase agreements involve the risk that the seller will fail to repurchase
the security, as agreed. In that case, the portfolio will bear the risk of
market value fluctuations until the security can be sold and may encounter
delays and incur costs in liquidating the security. In the event of bankruptcy
or insolvency of the seller, delays and costs are incurred.
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. 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.
Reverse repurchase agreements may expose a portfolio to greater fluctuations in
the value of its assets.
Portfolio shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. ALTHOUGH THE PORTFOLIO SEEKS TO PRESERVE THE VALUE OF YOUR
INVESTMENT AT $1.00 PER SHARE THERE IS NO GUARANTEE THAT IT WILL BE ABLE TO DO
SO. YOU MAY LOSE MONEY IF YOU INVEST IN THIS PORTFOLIO.
/ROOK/ INVESTOR PROFILES
WRL J.P. MORGAN MONEY MARKET
For the investor who seeks current income, preservation of capital and
maintenance of liquidity.
Prospectus 32
<PAGE>
- - --------------------------------------------------------------------------------
CAPITAL PRESERVATION PORTFOLIO(S) (CONTINUED)
- - --------------------------------------------------------------------------------
/GRAPH/ PORTFOLIO PERFORMANCE
The bar chart and table below gives an indication of the portfolio's risks and
performance. The chart shows changes in the portfolio's performance from year
to year. The performance calculations do not reflect charges or deductions
under the policies or the annuity contracts. These fees and expenses would
lower investment performance. The table shows how the portfolio's average
annual return for the periods indicated compare to those of a broad measure of
market performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL J.P. MORGAN MONEY MARKET
- - --------------------------------------------------------------------------------
TOTAL RETURN
(PER CALENDAR YEAR)
7.09% 5.25% 3.03% 2.45% 3.44% 5.40% 5.03% 5.24% 5.26% 4.63%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(QUARTERLY 1990-1999)
- - -------------------------------------
QUARTER ENDED
Highest 1.87% May 31, 1990
Lowest 0.56% April 30, 1993
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 1999)
- - --------------------------------------
1 YEAR 5 YEARS 10 YEARS
WRL J.P. Morgan
Money Market 4.63% 5.11% 4.67%
- - --------------------------------------------------------------------------------
7 DAY YIELD
- - --------------------------------------------------------------------------------
As of December 31, 1999 5.15%
- - --------------------------------------------------------------------------------
Prospectus 33
<PAGE>
- - --------------------------------------------------------------------------------
RISK/REWARD INFORMATION
- - --------------------------------------------------------------------------------
BEFORE YOU CHOOSE AN INVESTMENT PORTFOLIO,
PLEASE CONSIDER . . .
All of the investment portfolios involve risk, but there is also the potential
for reward. You can lose money -- and you can make money. The Fund portfolios
are structured so that each offers a slightly different degree of risk and
reward than others.
In this prospectus, we've arranged the portfolios in order of risk/
reward from highest to lowest. Notice the scale at the right. It covers the
full spectrum of risk/reward of the portfolios described in this prospectus.
WHAT RISK/REWARD LEVEL IS FOR YOU? ASK YOURSELF THE FOLLOWING:
(1) HOW WELL DO I HANDLE FLUCTUATIONS IN MY ACCOUNT VALUE?
The higher a portfolio is on the risk/reward spectrum, the more its
price is likely to move up and down on a day to day basis. If this makes
you uncomfortable, you may prefer an investment at the lower end of the
scale that may not fluctuate in price as much.
(2) AM I LOOKING FOR A HIGHER RATE OF RETURN?
Generally, the higher the potential return, the higher the risk. If you
find the potential to make money is worth the possibility of losing
more, then a portfolio at the higher end of the spectrum may be right
for you.
A final note: These portfolios are designed for long-term investment.
Each portfolio has an investment objective that it tries to achieve by
following certain investment strategies and techniques. The objective can be
changed without shareholder vote.
HIGHER
WRL VKAM EMERGING GROWTH
WRL ALGER AGGRESSIVE GROWTH AGGRESSIVE EQUITY
WRL THIRD AVENUE VALUE
WRL GE INTERNATIONAL EQUITY FOREIGN EQUITY
WRL JANUS GLOBAL
WRL JANUS GROWTH
WRL GE U.S. EQUITY GROWTH EQUITY
WRL C.A.S.E. GROWTH
WRL NWQ VALUE EQUITY
RISK/REWARD
WRL DEAN ASSET ALLOCATION
WRL LKCM STRATEGIC TOTAL RETURN BALANCED
WRL FEDERATED GROWTH & INCOME
WRL AEGON BALANCED
WRL AEGON BOND FIXED-INCOME
WRL J.P. MORGAN MONEY MARKET CAPITAL PRESERVATION
LOWER
Prospectus 34
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS
- - --------------------------------------------------------------------------------
HOW TO USE THIS SECTION
In the discussions of the individual portfolios on pages 2 through 33, you
found descriptions of the strategies and risks associated with each. In those
pages, you were referred to this section for a more complete description of the
risks. For best understanding, first read the description of the portfolio
you're interested in. Then refer to this section and read about the risks
particular to that portfolio. For even more discussions of strategies and
risks, see the SAI, which is available upon request. See the back cover of this
prospectus for information on how to order the SAI.
/ROOK/
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 WRL Third Avenue Value) 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):
o 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.
o 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
would cause the portfolio's holdings of that issuer to amount to more than
5% of the portfolio's total assets.
o 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.
Third Avenue Value reserves the right to become a diversified investment
company (as defined by the 1940 Act).
/WARNING SIGN/
INVESTING IN COMMON STOCKS. Many factors cause common stocks to go up and down
in price. A major one is the financial performance of the company that issues
the stock. Other factors include the overall economy, conditions in a
particular industry, and monetary factors like interest rates. When your
portfolio holds stocks, there's a risk that some or all of them may be down in
price when you choose to sell, causing you to lose money. This is called MARKET
RISK.
/WARNING SIGN/
INVESTING IN PREFERRED STOCKS. Because these stocks come with a promise to pay
a stated dividend, their price depends more on the size of the dividend than on
the company's performance. But if a company fails to pay the dividend, its
preferred stock is likely to drop in price. Changes in interest rates can also
affect their price. (See "Investing in Bonds," below.)
/WARNING SIGN/
INVESTING IN CONVERTIBLE SECURITIES, PREFERRED STOCKS, AND BONDS. Since
preferred stocks and corporate bonds pay a stated return, their prices usually
don't depend on the price of the company's common stock. But some companies
issue preferred stocks and bonds that are CONVERTIBLE into their common stocks.
Linked to the common stock in this way, convertible securities go up and down
in price as the common stock does, adding to their market risk.
Prospectus 35
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS
- - --------------------------------------------------------------------------------
/WARNING SIGN/
VARIOUS INVESTMENT TECHNIQUES. Various investment techniques are utilized to
increase or decrease exposure to changing security prices, interest rates,
currency exchange rates, commodity prices or other factors that affect security
values. These techniques may involve derivative securities and transactions
such as buying and selling options and futures contracts, entering into
currency exchange contracts or swap agreements and purchasing indexed
securities. These techniques are designed to adjust the risk and return
characteristics of the portfolio of investment and are not used for leverage.
/WARNING SIGN/
GEI SHORT-TERM INVESTMENT FUND. The WRL GE International Equity and WRL GE U.S.
Equity portfolios may invest in money market instruments directly or indirectly
through investment in the GEI Short-Term Investment Fund (Investment Fund). The
Investment Fund is advised by GEAM; GEAM charges no advisory fee to the
Investment Fund, but other fees may be incurred which may result in a
duplication of fees. Further information is included in the SAI.
/WARNING SIGN/
VOLATILITY. The more an investment goes up and down in price, the more VOLATILE
it is. Volatility increases the market risk because even though your portfolio
may go UP more than the market in good times, it may also go DOWN more than the
market in bad times. If you decide to sell when a volatile portfolio is down,
you could lose more.
/WARNING SIGN/
INVESTING IN BONDS. Like common stocks, bonds fluctuate in value, though the
factors causing this fluctuation are different, including:
o CHANGES IN INTEREST RATES. Bond prices tend to move the opposite of
interest rates. Why? Because when interest rates on new bond issues go up,
rates on existing bonds stay the same and they become less desirable. When
rates go down, the reverse happens. This is also true for most preferred
stocks and some convertible securities.
o LENGTH OF TIME TO MATURITY. When a bond matures, the issuer must pay the
owner its face value. If the maturity date is a long way off, many things
can affect its value, so a bond is more volatile the farther it is from
maturity. As that date approaches, fluctuations usually become smaller and
the price gets closer to face value.
o DEFAULTS. All bond issuers make at least two promises: (1) to pay interest
during the bond's term and (2) to return principal when it matures. If an
issuer fails to keep one or both of these promises, the bond will probably
drop in price dramatically, and may even become worthless. Changes in
financial condition and general economic conditions can affect the ability
to honor financial obligations and therefore credit quality. A security's
price may be adversely affected by the market's opinion of the security's
credit quality level even if the issuer or counterparty has suffered no
degradation in ability to honor the obligation.
o DECLINES IN RATINGS. At the time of issue, most bonds are rated by
professional rating services, such as Moody's Investors Service, Inc.
(Moody's) and Standard & Poor's Corporation (S&P). The stronger the
financial backing behind the bond, the higher the rating. If this backing
is weakened or lost, the rating service may downgrade the bond's rating.
This is virtually certain to cause the bond to drop in price. Bonds that
are rated below BBB by S&P, and below Ba by Moody's, are considered to be
below investment grade. Moody's rates bonds in nine categories, from Aaa to
C, with Aaa being the highest with least risk. S&P rates bonds in six
categories, from AAA to D, with AAA being the highest.
o LOW RATING. High-yield/high-risk fixed-income securities (commonly known as
"junk bonds") have greater credit risk, are more sensitive to interest rate
movements, are considered more speculative than higher rated bonds, have a
greater vulnerability to economic changes and are less liquid. The market
for such securities may be less active than for higher rated securities,
which can adversely affect the price at which these securities may be sold
and may diminish a portfolio's ability to obtain accurate market quotations
when valuing the portfolio securities and calculating the portfolio's net
asset value.
o LACK OF RATING. Some bonds are considered speculative, or for other reasons
are not rated. Such
Prospectus 36
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS (CONTINUED)
- - --------------------------------------------------------------------------------
bonds must pay a higher interest rate in order to attract investors.
They're considered riskier because of the higher possibility of default or
loss of liquidity.
o LOSS OF LIQUIDITY. If a bond is downgraded, or for other reasons drops in
price, the market demand for it may "dry up". In that case, the bond may be
hard to sell or "liquidate" (convert to cash).
/WARNING SIGN/
INVESTING IN FOREIGN SECURITIES. These are investments offered by foreign
companies, governments and government agencies. They involve risks not usually
associated with U.S. securities, including:
o CHANGES IN CURRENCY VALUES. Foreign securities are sold in currencies other
than U.S. dollars. If a currency's value drops, the value of the securities
held by a portfolio could drop too, even if the securities are strong. In
turn, the value of the shares of the portfolio could also drop. Dividend
and interest payments may be lower. Factors affecting exchange rates are:
differing interest rates among countries; balances of trade; amount of a
country's overseas investments; and any currency manipulation by banks.
o CURRENCY SPECULATION. The foreign currency market is largely unregulated
and subject to speculation.
o ADRS/ADSS. Some portfolios also invest in American Depositary Receipts
(ADRs) and American Depositary Shares (ADSs). They represent securities of
foreign companies traded on U.S. exchanges, and their values are expressed
in U.S. dollars. Changes in the value of the underlying foreign currency
will change the value of the ADR or ADS. A portfolio incurs costs when it
converts other currencies into dollars, and vice-versa.
o EURO CONVERSION. On January 1, 1999, certain participating countries in the
European Economic Monetary Union adopted the "Euro" as their official
currency. Other EU member countries may convert to the Euro at a later
date. As of January 1, 1999, governments in participating countries issued
new debt and redenominated existing debt in Euros; corporations chose to
issue stocks or bonds in Euros or national currency. The new European
Central Bank (the "ECB") will assume responsibility for a uniform monetary
policy in participating countries. Euro conversion risks that could affect
a portfolio's foreign investments include: (1) the readiness of Euro
payment, clearing, and other operational systems; (2) the legal treatment
of debt instruments and financial contracts in existing national currencies
rather than the Euro; (3) exchange-rate fluctuations between the Euro and
non-Euro currencies during the transition period of January 1, 1999 through
December 31, 2002 and beyond; (4) potential U.S. tax issues with respect to
portfolio securities; and (5) the ECB's abilities to manage monetary
policies among the participating countries; and (6) the ability of
financial institution systems to process Euro transactions.
o DIFFERENT ACCOUNTING AND REPORTING PRACTICES. Foreign tax laws are
different, as are laws, practices and standards for accounting, auditing
and reporting data to investors.
o LESS INFORMATION AVAILABLE TO THE PUBLIC. Foreign companies usually make
less information available to the public.
o LESS REGULATION. Securities regulations in many foreign countries are more
lax than in the U.S.
o MORE COMPLEX NEGOTIATIONS. Because of differing business and legal
procedures, a portfolio may find it hard to enforce obligations or
negotiate favorable brokerage commission rates.
o LESS LIQUIDITY/MORE VOLATILITY. Some foreign securities are harder to
convert to cash than U.S. securities, and their prices may fluctuate more
dramatically.
o SETTLEMENT DELAYS. "Settlement" is the process of completing a securities
transaction. In many countries, this process takes longer than it does in
the U.S.
o HIGHER CUSTODIAL CHARGES. Fees charged by the Fund's custodian for holding
shares are higher for foreign securities than that of domestic securities.
o HIGHER TRANSACTION COSTS. Fees charged by securities brokers are often
higher for transactions involving foreign securities than domestic
securities. Higher expenses, such as brokerage fees, may reduce the return
a portfolio might otherwise achieve.
o VULNERABILITY TO SEIZURE AND TAXES. Some governments can seize assets. They
may also limit movement of assets from the country. A portfolio's
Prospectus 37
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS (CONTINUED)
- - --------------------------------------------------------------------------------
interest, dividends and capital gains may be subject to foreign
withholding taxes.
o POLITICAL INSTABILITY AND SMALL EMERGING MARKETS. Developing countries can
be politically unstable. Economies can be dominated by a few industries,
and markets may trade a small number of securities. Regulations of banks
and capital markets can be weak.
o DIFFERENT MARKET TRADING DAYS. Foreign markets may not be open for trading
when U.S. markets are and asset values can change before your transaction
occurs.
o HEDGING. A portfolio may, but will not necessarily, enter into forward
currency contracts to hedge against declines in the value of securities
denominated in, or whose value is tied to, a currency other than the U.S.
dollar or to reduce the impact of currency fluctuation on purchases, and
sales of such securities.
/WARNING SIGH/
INVESTING IN FUTURES, OPTIONS AND DERIVATIVES. Besides conventional securities,
your portfolio may seek to increase returns by investing in financial contracts
related to its primary investments. Such contracts involve additional risks and
costs. Risks include:
o INACCURATE MARKET PREDICTIONS. If the sub-adviser is wrong in its
expectation, for example, with respect to interest rates, securities prices
or currency markets, the contracts could produce losses instead of gains.
o PRICES MAY NOT MATCH. Movements in the price of the financial contracts may
be used to offset movements in the price of other securities you own. If
those prices don't correlate or match closely, the benefits of the
transaction might be diminished.
o ILLIQUID MARKETS. If there's no market for the contracts, the portfolio may
not be able to control losses.
o TAX CONSEQUENCES. Sometimes the possibility of incurring high taxes on a
transaction may delay closing out a position and limit the gains it would
have produced.
/WARNING SIGN/
INVESTING IN SPECIAL SITUATIONS. Each portfolio may invest in "special
situations" from time to time. Special situations arise when, in the opinion of
a portfolio manager, a company's securities may be undervalued, then increase
considerably in price, due to:
o A NEW PRODUCT OR PROCESS
o A MANAGEMENT CHANGE
o A TECHNOLOGICAL BREAKTHROUGH
o AN EXTRAORDINARY CORPORATE EVENT
o A TEMPORARY IMBALANCE IN THE SUPPLY OF, AND DEMAND FOR, THE SECURITIES OF
AN ISSUER
Investing in a special situation carries an additional risk of loss if the
expected development does not happen or does not attract the expected
attention. The impact of special situation investing to a portfolio will depend
on the size of a portfolio's investment in a situation.
/ROOK/
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 short-term debt securities that
are considered cash equivalents. This may be done as a temporary 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 decrease.
/QUESTION MARK/
PORTFOLIO TURNOVER
A portfolio turnover rate is, in general, the percentage calculated by taking
the lesser of purchases or sales of portfolio securities (excluding short-term
securities) for a year and dividing it by the monthly average of the market
value of such securities during the year.
Prospectus 38
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EXPLANATION OF STRATEGIES AND RISKS (CONTINUED)
- - --------------------------------------------------------------------------------
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 unforeseen developments.
The rate of portfolio turnover will not be a limiting factor when short-term
investing is considered appropriate. Increased turnover rates result in higher
brokerage costs and other transaction based expenses for a portfolio. These
charges are ultimately borne by the policyholders.
/ROOK/
SHORT SALES
A 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 convertible into, or exchangeable without
further consideration for, securities of the same issue as the securities sold
short.
/QUESTION MARK/ INVESTMENT STRATEGIES
A portfolio is permitted to use other securities and investment strategies in
pursuit of its investment objective, subject to limits established by the
Fund's Board of Directors. No portfolio is under any obligation to use any of
the techniques or strategies at any given time or under any particular economic
condition. Certain instruments and investment strategies may expose the
portfolios to other risks and considerations, which are discussed in the Fund's
SAI.
Prospectus 39
<PAGE>
- - --------------------------------------------------------------------------------
HOW THE FUND IS MANAGED AND ORGANIZED
- - --------------------------------------------------------------------------------
/QUESTION MARK/
HOW THE FUND IS MANAGED
AND ORGANIZED
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.
WRL Investment Management, Inc. (WRL Management) located at 570 Carillon
Parkway, St. Petersburg, Florida 33716, has served as the Fund's investment
adviser since 1997. (Prior to this date, Western Reserve served as investment
adviser to the Fund). The investment adviser is a direct, wholly-owned
subsidiary of Western Reserve Life Assurance Co. of Ohio (Western Reserve),
which is wholly-owned by First AUSA Life Insurance Company, a stock life
insurance company, which is wholly-owned by AEGON USA, Inc. AEGON USA, Inc. is
a financial services holding company whose primary emphasis is on life and
health insurance and annuity and investment products. AEGON USA, Inc. is a
wholly-owned indirect subsidiary of AEGON N.V., a Netherlands corporation which
is a publicly traded international insurance group. The investment adviser had
no prior experience as an adviser.
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.
The Fund has received an order from the Securities and Exchange Commission that
will permit the Fund and the investment adviser, subject to certain conditions,
and without the approval of shareholders to: (1) employ a new unaffiliated
sub-adviser for a portfolio pursuant to the terms of a new investment
sub-advisory agreement, either as a replacement for an existing sub-adviser or
as an additional sub-adviser; (2) materially change the terms of any
sub-advisory agreement; and (3) continue the employment of an existing
sub-adviser on the same sub-advisory contract terms where a contract has been
assigned because of a change in control of the sub-adviser. In such
circumstances, shareholders would receive notice and information about the new
sub-adviser within ninety (90) days after the hiring of any new sub-adviser.
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 advisory fees for each portfolio are:
ADVISORY
PORTFOLIO FEE
WRL Janus Growth* 0.80%
WRL AEGON Bond 0.45%
WRL Janus Global** 0.80%
WRL J.P. Morgan Money Market 0.40%
WRL AEGON Balanced 0.80%
WRL GE International Equity 1.00%
WRL Third Avenue Value 0.80%
WRL VKAM Emerging Growth 0.80%
WRL LKCM Strategic
Total Return 0.80%
WRL Alger Aggressive Growth 0.80%
WRL Federated Growth
& Income 0.75%
WRL Dean Asset Allocation 0.80%
WRL C.A.S.E. Growth 0.80%
WRL NWQ Value Equity 0.80%
WRL GE U.S. Equity 0.80%
* WRL Management currently waives 0.025% of its advisory fee for the first $3
billion of the portfolio's average daily net assets (net fee -- 0.775%); and
0.05% of assets above $3 billion (net fee -- 0.75%). This waiver will terminate
on June 25, 2000.
** WRL Management currently waives 0.025% of its advisory fee for the
portfolio's average daily net assets above $2 billion (net fee -- 0.775%.) This
waiver will terminate on June 25, 2000.
Prospectus 40
<PAGE>
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HOW THE FUND IS MANAGED AND ORGANIZED (CONTINUED)
- - --------------------------------------------------------------------------------
EXPENSE REIMBURSEMENT
WRL Management has entered into an expense limitation agreement with the Fund
on behalf of each applicable portfolio, pursuant to which WRL Management has
agreed to reimburse a portfolio for certain operating expenses so that the
total annual portfolio operating expenses of each applicable portfolio do not
exceed the total operating expenses specified for that portfolio (expense cap)
in the portfolio's then-current SAI. The Fund, on behalf of an applicable
portfolio, will at a later date reimburse WRL Management for operating expenses
previously paid on behalf of such portfolios during the previous 36 months, but
only if, after such reimbursement, the portfolio's expense ratio does not
exceed the expense cap. The agreement has an initial term through April 30,
2001, and will automatically renew for one-year terms unless WRL Management
provides written notice to the Fund at least 30 days prior to the end of the
then-current term. In addition, the agreement will terminate upon termination
of the Investment Advisory Agreement, or may be terminated by the Fund, without
payment of any penalty, upon ninety (90) days' prior written notice to WRL
Management. The voluntary fee waiver on behalf of certain of the Janus
portfolios is not included in this agreement.
SUB-ADVISERS
Here is a listing of the sub-advisers and the portfolios they manage:
SUB-ADVISER PORTFOLIO
Alger WRL Alger Aggressive Growth
GEAM WRL GE International Equity
WRL GE U.S. Equity
Janus WRL Janus Global
WRL Janus Growth
C.A.S.E. WRL C.A.S.E. Growth
NWQ WRL NWQ Value Equity
Dean WRL Dean Asset Allocation
AIMI WRL AEGON Bond
WRL AEGON Balanced
VKAM WRL VKAM Emerging
Growth
EQSF WRL Third Avenue Value
LKCM WRL LKCM Strategic
Total Return
J.P. Morgan WRL J.P. Morgan
Money Market
Federated WRL Federated Growth
& Income
DAY-TO-DAY MANAGEMENT OF THE INVESTMENTS IN EACH PORTFOLIO IS THE
RESPONSIBILITY OF THE PORTFOLIO MANAGER. THE PORTFOLIO MANAGERS OF THE FUND
ARE:
WRL VKAM EMERGING GROWTH
GARY M. LEWIS leads an investment team and is primarily responsible for the day
to day management of this portfolio. Mr. Lewis has been senior vice president
of VKAM since October, 1995. Previously, he has served as vice
president/portfolio manager of VKAM from 1989 to October 1995.
WRL ALGER AGGRESSIVE GROWTH
DAVID D. ALGER has been employed by Alger since 1971 and has served as
president since 1995. He has managed this portfolio since inception.
DAVID HYUN has served as co-manager of this portfolio since February 1998. He
has been employed by Alger as a senior research analyst since 1991, as a
portfolio manager since 1997 and as a senior vice president since 1998.
WRL THIRD AVENUE VALUE
MARTIN J. WHITMAN has served as portfolio manager of this portfolio since its
inception. He is Chairman, President and Chief Executive Officer of the sub-
WRL GE INTERNATIONAL EQUITY
RALPH R. LAYMAN has served as the head of a team of portfolio managers that has
managed a portion of the portfolio's assets since its inception. Prior to May
1, 2000, GEAM was sub-adviser for one half of the portfolio's assets. Mr.
Layman joined GEAM in 1991 as an executive vice president for international
investments.
WRL JANUS GLOBAL
HELEN YOUNG HAYES, CFA and LAURENCE CHANG, CFA have served as co-portfolio
managers of this portfolio since January 2000. Ms. Hayes previously served as
manager of this portfolio since its inception. She has been employed by Janus
since 1987.
Prospectus 41
<PAGE>
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HOW THE FUND IS MANAGED AND ORGANIZED (CONTINUED)
- - --------------------------------------------------------------------------------
Mr. Chang has been employed by Janus since 1993. Before joining Janus, Mr.
Chang was a project director at the National Security Archive.
WRL JANUS GROWTH
EDWARD KEELY has served as manager of this portfolio since January 2000. He
previously served as co-portfolio manager of this portfolio since January 1999.
Prior to joining Janus in 1998, Mr. Keely was a senior vice president of
investments at Founders.
WRL C.A.S.E GROWTH
This portfolio is managed by a team of professionals, called the Portfolio
Management Committee. WILLIAM E. LANGE is the head manager of this Committee.
He has been president of C.A.S.E. since 1984.
WRL GE U.S. EQUITY
EUGENE K. BOLTON leads a team of portfolio managers for this portfolio. He has
served in that capacity since the portfolio's inception. Mr. Bolton joined GEAM
in 1984 as Chief Financial Officer and has been a portfolio manager since 1986.
WRL NWQ VALUE EQUITY
EDWARD C. FRIEDEL has been the senior manager of this portfolio since
inception. He has been a managing director and investment strategist with NWQ
since 1983.
WRL DEAN ASSET ALLOCATION
JOHN C. RIAZZI, CFA serves as portfolio manager of this portfolio.
Previously, Mr. Riazzi served as co-portfolio manager of the portfolio. He
joined Dean in 1989 and has served as a manager of the portfolio since its
inception.
WRL LKCM STRATEGIC
TOTAL RETURN
LUTHER KING, JR., CFA and SCOT C. HOLLMANN, CFA have co-managed this portfolio
since inception.
Mr. King has been the president of Luther King since 1979.
Mr. Hollmann has been a vice president of Luther King since 1983.
WRL FEDERATED GROWTH & INCOME
STEVEN J. LEHMAN, CFA and LINDA A. DUESSEL, CFA serve as co-portfolio managers
of this portfolio.
Mr. Lehman has served as co-portfolio manager since 1997. He joined Federated
in 1997. From 1985 to 1997, he served as portfolio manager, vice president and
senior portfolio manager at First Chicago NBD.
Ms. Duessel, senior vice president, has been employed by Federated since 1991
and has been a portfolio manager of this portfolio since 1996.
WRL AEGON BALANCED
MICHAEL VAN METER has served as the senior portfolio manager of this portfolio
since inception. Mr. Van Meter has been employed by VMF Capital, LLC (VMF)
since July, 1998. Prior to joining VMF, Mr. Van Meter was employed by AIMI.
WRL AEGON BOND
CLIFFORD A. SHEETS, CFA and DAVID R. HALFPAP, CFA have served as co-portfolio
managers of this portfolio since January 2000. Mr. Sheets previously served as
a co-portfolio manager of this portfolio since 1998, and, prior to that date,
as manager since the portfolio's inception. Mr. Sheets joined AIMI in 1990.
Mr. Halfpap has been employed by AIMI since 1975 and is currently a senior vice
president.
WRL J.P. MORGAN MONEY MARKET
JOHN T. DONOHUE and MARK SETTLES have served as co-portfolio managers of this
portfolio since January 2000. Mr. Donohue has been employed by J.P. Morgan
since 1997 and is a portfolio manager in the Fixed Income Group. He previously
served as senior money market trader. Mr. Donohue was a portfolio manager at
Goldman Sachs for 10 years prior to his employment at J.P. Morgan.
MR. SETTLES is a product portfolio manager in the Short Term Fixed Income Group
at J.P. Morgan. Previously, he spent five years trading dollar and euro-
denominated fixed income products on J.P. Morgan's New York and London trading
desks.
Prospectus 42
<PAGE>
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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 information for the separate
accounts, policies or annuity contracts.
YIELD
Yield quotations for the WRL AEGON 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.
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.
SIMILAR 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. Each portfolio's future performance may be
greater or less than the historical performance of the corresponding Similar
Sub-Adviser Fund. There can be no assurance, and no representation is made,
that the investment results of any portfolio will be comparable to the results
of any of the Similar Sub-Adviser Funds or any other fund managed by WRL
Management or any sub-adviser.
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, 1999. 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.
Prospectus 43
<PAGE>
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PERFORMANCE INFORMATION (CONTINUED)
- - --------------------------------------------------------------------------------
SIMILAR SUB-ADVISER FUND PERFORMANCE
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(WITH SALES LOADS)
-----------------------------
SIMILAR 10 YEARS
SUB-ADVISER INCEPTION TOTAL OR SINCE
WRL PORTFOLIO FUND DATE ASSETS 1 YEAR 5 YEARS INCEPTION
- - ----------------------------- -------------------------------- ----------- -------------------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
WRL Janus Global Janus Worldwide(1) 5/15/91 $ 33,802.9M 64.37% 30.88% 25.10%
WRL Alger Aggressive Growth The Alger Fund Class A $ 226.6M 65.74% N/A 40.59%
Capital Appreciation Portfolio 12/31/96 (Net)
Class A Shares(2)
WRL VKAM Emerging Growth Van Kampen Class A $113,175,800,000 92.01% 39.86% 27.16%
Emerging Growth(3) 10/2/70
WRL Third Avenue Value Third Avenue 11/1/90 $ 1,372,960,198 12.82% 18.45% 19.26%
Value Fund(1)
</TABLE>
(1) The Janus Worldwide Fund and Third Avenue Value Fund, do not have a sales
load.
(2) Total returns are for Class A shares of The Alger Fund Capital Appreciation
Portfolio and reflect a deduction of a 4.75% front-end sales load. The
Portfolio also offers Class B and Class C shares with different sales
loads. Calculating total return with those sales loads may have resulted
in lower total returns. The inception dates for Class A, B and C shares
are 12/31/96, 10/29/93 and 8/1/97, respectively.
(3) Total returns are for Class A shares of the Van Kampen Emerging Growth Fund
and reflect a deduction of a 5.75% front end sales load and an annual
12b-1 fee of up to 0.25%. The fund also has Class B and Class C shares
with different sales loads and annual 12b-1 fees. Calculating total return
with those sales loads may have resulted in lower total returns. The
Fund's performance during the one-year period ended December 31, 1999 is
largely attributable to investments in the technology sector, which
performed favorably for the period. This performance was achieved during a
rising market, and there is no guarantee that this performance record or
the circumstances leading to it can be replicated in the future. As the
Fund expects to have a substantial portion of its assets invested in
equity securities of emerging growth companies, the Fund will be subject
to more volatility and erratic movements than the market in general.
SIMILAR SUB-ADVISER FUND PERFORMANCE
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(WITHOUT SALES LOADS)
--------------------------------
SIMILAR 10 YEARS
SUB-ADVISER INCEPTION TOTAL OR SINCE
WRL PORTFOLIO FUND DATE ASSETS 1 YEAR 5 YEARS INCEPTION
- - ----------------------------- ----------------------- ----------- -------------------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
WRL Janus Global Janus Worldwide(3) 5/15/91 $ 33,802.9M 64.37% 30.88% 25.10%
WRL Alger Aggressive Growth The Alger Fund(1) Class A $ 266.6M 74.01% N/A 42.89%
Capital Appreciation 12/31/96 (Net)
WRL VKAM Emerging Growth Van Kampen Class A $113,175,800,000 103.72% 41.53% 27.92%
Emerging Growth(1)(2) 10/2/70
WRL Third Avenue Value Third Avenue 11/1/90 $ 1,372,960,198 12.82% 18.45% 19.26%
Value Fund(3)
</TABLE>
(1) The fund offers Class B and Class C shares as well. Returns for those
classes may differ from those of Class A shares due to differing fee
structures.
(2) The Fund's performance during the one-year period ended December 31, 1999
is largely attributable to investments in the technology sector, which
performed favorably for the period. This performance was achieved during a
rising market, and there is no guarantee that this performance record or
the circumstances leading to it can be replicated in the future. As the
Fund expects to have a substantial portion of its assets invested in
equity securities of emerging growth companies, the Fund will be subject
to more volatility and erratic movements than the market in general.
(3) The Janus Worldwide Fund and Third Avenue Value Fund do not have a sales
load.
THE PERFORMANCE OF SIMILAR SUB-ADVISER FUNDS DOES NOT REFLECT ANY OF THE
CHARGES, FEES, AND EXPENSES IMPOSED UNDER THE POLICIES OR 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-ADVISERS FUNDS AS "SIMILAR SUB-ADVISED FUNDS.")
(See the SAI for more information about the portfolios' performance.)
Prospectus 44
<PAGE>
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OTHER INFORMATION
- - --------------------------------------------------------------------------------
/QUESTION MARK/ PURCHASE AND REDEMPTION
OF SHARES
As described earlier in the prospectus, shares of the portfolios are sold
exclusively to certain separate accounts of Western Reserve Life Assurance Co.
of Ohio, PFL Life Insurance Company, AUSA Life Insurance Company, Inc., Peoples
Benefit Life Insurance Company and Transamerica Occidental Life Insurance
Company and are not offered to the public. Shares are sold and redeemed at
their net asset value without the imposition of any sales commission or
redemption charge. (However, certain sales or other charges may apply to the
policies or annuity contracts, as described in the product prospectus.)
/QUESTION MARK/ 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 (NYSE) (usually 4:00 p.m., Eastern Time), on each day the exchange is
open.
Net asset value (NAV) 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. Share prices for any transaction are those next calculated after
receipt of an order.
- - --------------------------------------------------------------------------------
WHAT IS NET ASSET VALUE?
The 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 WRL J.P. Morgan Money Market) are valued at
market value. If market values are not readily available, securities are valued
at fair value as determined by the Fund's Valuation Committee under the
supervision of the Fund's Board.
Money market instruments maturing in 60 days or less, and all securities held
in the WRL J.P. Morgan Money Market, are valued on the amortized cost basis.
Under this method, the NAV of the money market 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 NAV. (See the SAI for details.)
/QUESTION MARK/ 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.
/QUESTION MARK/ TAXES
Each portfolio has either qualified and expects to continue to qualify or will
qualify in its initial year as a regulated investment company under Subchapter
M of the Internal Revenue Code of 1986, as amended ("Code"). As qualified, a
portfolio is not subject to federal income tax on that part of its taxable
income that it distributes to you. Taxable income consists generally of net
investment income, and any capital gains. It is each portfolio's intention to
distribute all such income and gains.
Shares of each portfolio are offered only to the separate accounts of Western
Reserve and its affiliates. Separate accounts 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 Income Tax Considerations" included in the respective prospectuses for
the policies and the annuity contracts.
Section 817(h) of the Code and the regulations thereunder impose
"diversification" requirements on each portfolio. Each portfolio intends to
comply with the diversification requirements. These requirements are in
addition to the diversification requirements
Prospectus 45
<PAGE>
- - --------------------------------------------------------------------------------
OTHER INFORMATION
- - --------------------------------------------------------------------------------
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. Specifically, the
regulations provide that, except as permitted by "safe harbor," rules described
below, as of the end of each calendar quarter or within 30 days thereafter, no
more than 55% of the portfolio's total assets may be represented by any one
investment, no more than 70% by any two investments, no more than 80% by any
three investments, and no more than 90% by any four investments.
Section 817(h) also 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, 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. If a portfolio does
not satisfy the section 817(h) requirements, the separate accounts, the
insurance companies, the policies and the annuity contracts may be taxable. See
the prospectuses for the policies and annuity contracts.
The foregoing is only a summary of some of the important federal income tax
considerations generally affecting a portfolio and you; see the SAI for a more
detailed discussion. You are urged to consult your tax advisors.
/QUESTION MARK/ REPORT TO POLICYHOLDERS
The fiscal year of each portfolio ends on December 31 of each year. The Fund
will send to you, at least semi-annually, reports which show the portfolios'
composition and other information. An annual report, with audited financial
information, will be sent to you each year.
/QUESTION MARK/ DISTRIBUTION AND
SERVICE PLANS
The Fund has adopted a plan pursuant to Rule 12b-1 under the 1940 Act (the
"Plan") and pursuant to the Plan, entered into a Distribution Agreement with
AFSG Securities Corporation (AFSG) located at 4333 Edgewood Road NE, Cedar
Rapids, Iowa 52499. AFSG is an affiliate of the investment adviser, and serves
as principal underwriter for the Fund. The Plan permits the use of Fund assets
to help finance the distribution of the shares of the portfolios. Under the
Plan, the Fund, on behalf of the portfolios, is permitted to pay to various
service providers up to 0.15% of the average daily net assets of each portfolio
as payment for actual expenses incurred in connection with the distribution of
the shares of the portfolios. Because these fees are paid out of Fund assets on
an on-going basis, over time these costs will increase the cost of your
investment and may cost you more than other types of sales charges.
As of the date of this prospectus, the Fund has not paid any distribution fees
under the Plan and does not intend to do so before April 30, 2001. You will
receive written notice prior to the payment of any fees under the Plan.
Prospectus 46
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
THE FINANCIAL HIGHLIGHTS TABLE IS INTENDED TO HELP YOU UNDERSTAND A PORTFOLIO'S
FINANCIAL PERFORMANCE FOR THE PAST 5 YEARS (OR, IF SHORTER, THE PERIOD OF THE
PORTFOLIO'S OPERATIONS). CERTAIN INFORMATION REFLECTS FINANCIAL RESULTS FOR A
SINGLE PORTFOLIO SHARE. THE TOTAL RETURNS IN THE TABLE REPRESENT THE RATE AN
INVESTOR WOULD HAVE EARNED (OR LOST) ON AN INVESTMENT IN EACH PORTFOLIO
(ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS). THIS INFORMATION HAS BEEN DERIVED
FROM FINANCIAL STATEMENTS AUDITED BY PRICEWATERHOUSECOOPERS LLP, INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS, WHOSE REPORT, ALONG WITH THE FUND'S FINANCIAL
STATEMENTS, IS INCLUDED IN THE FUND'S ANNUAL REPORT, WHICH IS AVAILABLE UPON
REQUEST BY CALLING THE FUND AT 1-800-851-9777.
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL J.P. MORGAN MONEY MARKET
=============================
DECEMBER 31,
-----------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Net asset value, beginning of year ................................... $ 1.00 $ 1.00
Income from operations:
Net investment income (loss) ....................................... 0.05 0.05
Net realized and unrealized gain (loss) on investments ............. 0.00 0.00
-------- --------
Net income (loss) from operations ................................. 0.05 0.05
-------- --------
Distributions:
Dividends from net investment income ............................... (0.05) (0.05)
Dividends in excess of net investment income ....................... 0.00 0.00
Distributions from net realized gains on investments ............... 0.00 0.00
Distributions in excess of net realized gains on investments ....... 0.00 0.00
-------- --------
Total distributions ............................................... (0.05) (0.05)
-------- --------
Net asset value, end of year ......................................... $ 1.00 $ 1.00
======== ========
Total return ......................................................... 4.63 % 5.26 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................... $ 429,811 $ 169,731
Ratio of expenses to average net assets ............................ 0.44 % 0.46 %
Ratio of net investment income (loss) to average net assets ........ 4.81 % 5.24 %
Portfolio turnover rate ............................................ n/a n/a
<CAPTION>
WRL J.P. MORGAN MONEY MARKET
===========================================
DECEMBER 31,
-------------------------------------------
1997 1996 1995
-------------- -------------- -------------
<S> <C> <C> <C>
Net asset value, beginning of year ................................... $ 1.00 $ 1.00 $ 1.00
Income from operations:
Net investment income (loss) ....................................... 0.05 0.05 0.05
Net realized and unrealized gain (loss) on investments ............. 0.00 0.00 0.00
-------- -------- -------
Net income (loss) from operations ................................. 0.05 0.05 0.05
-------- -------- -------
Distributions:
Dividends from net investment income ............................... (0.05) (0.05) (0.05)
Dividends in excess of net investment income ....................... 0.00 0.00 0.00
Distributions from net realized gains on investments ............... 0.00 0.00 0.00
Distributions in excess of net realized gains on investments ....... 0.00 0.00 0.00
-------- -------- -------
Total distributions ............................................... (0.05) (0.05) (0.05)
-------- -------- -------
Net asset value, end of year ......................................... $ 1.00 $ 1.00 $ 1.00
======== ======== =======
Total return ......................................................... 5.24 % 5.03 % 5.40 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................... $ 119,708 $ 122,114 $ 80,544
Ratio of expenses to average net assets ............................ 0.48 % 0.52 % 0.56 %
Ratio of net investment income (loss) to average net assets ........ 5.32 % 5.03 % 5.30 %
Portfolio turnover rate ............................................ n/a n/a n/a
</TABLE>
<TABLE>
<CAPTION>
WRL AEGON BOND
=============================
DECEMBER 31,
-----------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Net asset value, beginning of year .................................. $ 11.59 $ 11.14
Income from operations:
Net investment income (loss) ...................................... 0.64 0.64
Net realized and unrealized gain (loss) on investments ............ (0.97) 0.40
-------- --------
Net income (loss) from operations ................................ (0.33) 1.04
-------- --------
Distributions:
Dividends from net investment income .............................. (0.65) (0.59)
Dividends in excess of net investment income ...................... 0.00 0.00
Distributions from net realized gains on investments .............. 0.00 0.00
Distributions in excess of net realized gains on investments ...... 0.00 0.00
-------- --------
Total distributions .............................................. (0.65) (0.59)
-------- --------
Net asset value, end of year ........................................ $ 10.61 $ 11.59
======== ========
Total return ........................................................ (2.94)% 9.32 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 153,885 $ 170,744
Ratio of expenses to average net assets ........................... 0.53 % 0.54 %
Ratio of net investment income (loss) to average net assets ....... 5.67 % 5.54 %
Portfolio turnover rate ........................................... 26.40 % 51.60 %
<CAPTION>
WRL AEGON BOND
==========================================
DECEMBER 31,
------------------------------------------
1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Net asset value, beginning of year .................................. $ 10.71 $ 11.35 $ 9.80
Income from operations:
Net investment income (loss) ...................................... 0.65 0.64 0.69
Net realized and unrealized gain (loss) on investments ............ 0.32 (0.64) 1.55
-------- -------- --------
Net income (loss) from operations ................................ 0.97 0.00 2.24
-------- -------- --------
Distributions:
Dividends from net investment income .............................. (0.54) (0.64) (0.69)
Dividends in excess of net investment income ...................... 0.00 0.00 0.00
Distributions from net realized gains on investments .............. 0.00 0.00 0.00
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00
-------- -------- --------
Total distributions .............................................. (0.54) (0.64) (0.69)
-------- -------- --------
Net asset value, end of year ........................................ $ 11.14 $ 10.71 $ 11.35
======== ======== ========
Total return ........................................................ 9.16 % 0.14 % 22.99 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 129,654 $ 95,759 $ 96,972
Ratio of expenses to average net assets ........................... 0.64 % 0.64 % 0.61 %
Ratio of net investment income (loss) to average net assets ....... 5.90 % 5.96 % 6.45 %
Portfolio turnover rate ........................................... 213.03 % 187.72 % 120.54 %
</TABLE>
Prospectus 47
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL JANUS GROWTH
=================================
DECEMBER 31,
---------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Net asset value, beginning of year .................................. $ 59.94 $ 36.84
Income from operations:
Net investment income (loss) ...................................... (0.04) 0.12
Net realized and unrealized gain (loss) on investments ............ 34.02 23.49
---------- ----------
Net income (loss) from operations ................................ 33.98 23.61
---------- ----------
Distributions:
Dividends from net investment income .............................. 0.00 (0.09)
Dividends in excess of net investment income ...................... (1.17) 0.00
Distributions from net realized gains on investments .............. (14.75) (0.42)
Distributions in excess of net realized gains on investments ...... 0.00 0.00
---------- ----------
Total distributions .............................................. (15.92) (0.51)
---------- ----------
Net asset value, end of year ........................................ $ 78.00 $ 59.94
========== ==========
Total return ........................................................ 59.67 % 64.47 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 4,141,240 $ 3,086,057
Ratio of expenses to average net assets ........................... 0.82 % 0.83 %
Ratio of net investment income (loss) to average net assets ....... (0.05)% 0.25 %
Portfolio turnover rate ........................................... 70.95 % 35.29 %
<CAPTION>
WRL JANUS GROWTH
==================================================
DECEMBER 31,
--------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net asset value, beginning of year .................................. $ 35.00 $ 31.66 $ 23.81
Income from operations:
Net investment income (loss) ...................................... 0.31 0.34 0.26
Net realized and unrealized gain (loss) on investments ............ 5.88 5.35 10.97
---------- ---------- ----------
Net income (loss) from operations ................................ 6.19 5.69 11.23
---------- ---------- ----------
Distributions:
Dividends from net investment income .............................. (0.26) (0.35) (0.24)
Dividends in excess of net investment income ...................... 0.00 (0.01) 0.00
Distributions from net realized gains on investments .............. (4.09) (1.99) (3.14)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00
---------- ---------- ----------
Total distributions .............................................. (4.35) (2.35) (3.38)
---------- ---------- ----------
Net asset value, end of year ........................................ $ 36.84 $ 35.00 $ 31.66
========== ========== ==========
Total return ........................................................ 17.54 % 17.96 % 47.12 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 1,839,453 $ 1,527,409 $ 1,195,174
Ratio of expenses to average net assets ........................... 0.87 % 0.88 % 0.86 %
Ratio of net investment income (loss) to average net assets ....... 0.80 % 0.98 % 0.90 %
Portfolio turnover rate ........................................... 85.88 % 45.21 % 130.48 %
</TABLE>
<TABLE>
<CAPTION>
WRL JANUS GLOBAL
=================================
DECEMBER 31,
---------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Net asset value, beginning of year .................................. $ 23.71 $ 19.04
Income from operations:
Net investment income (loss) ...................................... (0.04) 0.05
Net realized and unrealized gain (loss) on investments ............ 16.42 5.61
---------- ----------
Net income (loss) from operations ................................ 16.38 5.66
---------- ----------
Distributions:
Dividends from net investment income .............................. 0.00 (0.13)
Dividends in excess of net investment income ...................... 0.00 0.00
Distributions from net realized gains on investments .............. (2.63) (0.80)
Distributions in excess of net realized gains on investments ...... 0.00 (0.06)
---------- ----------
Total distributions .............................................. (2.63) (0.99)
---------- ----------
Net asset value, end of year ........................................ $ 37.46 $ 23.71
========== ==========
Total return ........................................................ 71.10 % 30.01 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 1,926,210 $ 1,069,765
Ratio of expenses to average net assets ........................... 0.92 % 0.95 %
Ratio of net investment income (loss) to average net assets ....... (0.14)% 0.23 %
Portfolio turnover rate ........................................... 68.10 % 87.36 %
<CAPTION>
WRL JANUS GLOBAL
============================================
DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net asset value, beginning of year .................................. $ 18.12 $ 15.52 $ 13.12
Income from operations:
Net investment income (loss) ...................................... 0.08 0.08 0.10
Net realized and unrealized gain (loss) on investments ............ 3.32 4.20 2.91
-------- -------- --------
Net income (loss) from operations ................................ 3.40 4.28 3.01
-------- -------- --------
Distributions:
Dividends from net investment income .............................. (0.13) (0.04) 0.00
Dividends in excess of net investment income ...................... (1.01) (0.17) 0.00
Distributions from net realized gains on investments .............. (1.34) (1.47) (0.61)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00
-------- -------- --------
Total distributions .............................................. (2.48) (1.68) (0.61)
-------- -------- --------
Net asset value, end of year ........................................ $ 19.04 $ 18.12 $ 15.52
======== ======== ========
Total return ........................................................ 18.75 % 27.74 % 23.06 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 785,966 $ 534,820 $ 289,506
Ratio of expenses to average net assets ........................... 1.00 % 0.99 % 0.99 %
Ratio of net investment income (loss) to average net assets ....... 0.41 % 0.46 % 0.75 %
Portfolio turnover rate ........................................... 97.54 % 88.31 % 130.60 %
</TABLE>
Prospectus 48
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL LKCM STRATEGIC TOTAL
RETURN
=============================
DECEMBER 31,
-----------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Net asset value, beginning of year .................................. $ 16.40 $ 15.62
Income from operations:
Net investment income (loss) ...................................... 0.34 0.39
Net realized and unrealized gain (loss) on investments ............ 1.59 1.09
-------- --------
Net income (loss) from operations ................................ 1.93 1.48
-------- --------
Distributions:
Dividends from net investment income .............................. (0.35) (0.38)
Dividends in excess of net investment income ...................... 0.00 0.00
Distributions from net realized gains on investments .............. (1.13) (0.32)
Distributions in excess of net realized gains on investments ...... 0.00 0.00
-------- --------
Total distributions .............................................. (1.48) (0.70)
-------- --------
Net asset value, end of year ........................................ $ 16.85 $ 16.40
======== ========
Total return ........................................................ 12.07 % 9.64 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 624,416 $ 592,312
Ratio of expenses to average net assets ........................... 0.86 % 0.86 %
Ratio of net investment income (loss) to average net assets ....... 2.02 % 2.43 %
Portfolio turnover rate ........................................... 45.42 % 49.20 %
<CAPTION>
WRL LKCM STRATEGIC TOTAL RETURN
============================================
DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net asset value, beginning of year .................................. $ 13.97 $ 12.86 $ 10.90
Income from operations:
Net investment income (loss) ...................................... 0.37 0.37 0.37
Net realized and unrealized gain (loss) on investments ............ 2.68 1.56 2.33
-------- -------- --------
Net income (loss) from operations ................................ 3.05 1.93 2.70
-------- -------- --------
Distributions:
Dividends from net investment income .............................. (0.35) (0.32) (0.37)
Dividends in excess of net investment income ...................... (0.03) 0.00 0.00
Distributions from net realized gains on investments .............. (1.02) (0.50) (0.37)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00
-------- -------- --------
Total distributions .............................................. (1.40) (0.82) (0.74)
-------- -------- --------
Net asset value, end of year ........................................ $ 15.62 $ 13.97 $ 12.86
======== ======== ========
Total return ........................................................ 21.85 % 15.00 % 24.66 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 526,577 $ 390,141 $ 256,806
Ratio of expenses to average net assets ........................... 0.88 % 0.91 % 0.87 %
Ratio of net investment income (loss) to average net assets ....... 2.43 % 2.72 % 3.07 %
Portfolio turnover rate ........................................... 48.20 % 49.32 % 52.59 %
</TABLE>
<TABLE>
<CAPTION>
WRL VKAM EMERGING GROWTH
===============================
DECEMBER 31,
-------------------------------
1999 1998
---------------- --------------
<S> <C> <C>
Net asset value, beginning of year .................................. $ 26.92 $ 20.37
Income from operations:
Net investment income (loss) ...................................... (0.15) (0.08)
Net realized and unrealized gain (loss) on investments ............ 26.83 7.56
---------- --------
Net income (loss) from operations ................................ 26.68 7.48
---------- --------
Distributions:
Dividends from net investment income .............................. 0.00 0.00
Dividends in excess of net investment income ...................... (0.21) 0.00
Distributions from net realized gains on investments .............. (7.38) (0.93)
Distributions in excess of net realized gains on investments ...... 0.00 0.00
---------- --------
Total distributions .............................................. (7.59) (0.93)
---------- --------
Net asset value, end of year ........................................ $ 46.01 $ 26.92
========== ========
Total return ........................................................ 105.16 % 37.33 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 1,916,025 $ 853,440
Ratio of expenses to average net assets ........................... 0.87 % 0.89 %
Ratio of net investment income (loss) to average net assets ....... (0.44)% (0.36)%
Portfolio turnover rate ........................................... 117.72 % 99.50 %
<CAPTION>
WRL VKAM EMERGING GROWTH
============================================
DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net asset value, beginning of year .................................. $ 18.46 $ 16.25 $ 11.55
Income from operations:
Net investment income (loss) ...................................... (0.05) (0.04) 0.01
Net realized and unrealized gain (loss) on investments ............ 4.03 3.10 5.42
-------- -------- --------
Net income (loss) from operations ................................ 3.98 3.06 5.43
-------- -------- --------
Distributions:
Dividends from net investment income .............................. 0.00 0.00 0.00
Dividends in excess of net investment income ...................... 0.00 0.00 0.00
Distributions from net realized gains on investments .............. (2.07) (0.85) (0.73)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00
-------- -------- --------
Total distributions .............................................. (2.07) (0.85) (0.73)
-------- -------- --------
Net asset value, end of year ........................................ $ 20.37 $ 18.46 $ 16.25
======== ======== ========
Total return ........................................................ 21.45 % 18.88 % 46.79 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 592,003 $ 431,454 $ 288,519
Ratio of expenses to average net assets ........................... 0.93 % 0.94 % 0.91 %
Ratio of net investment income (loss) to average net assets ....... (0.27)% (0.24)% 0.03 %
Portfolio turnover rate ........................................... 99.78 % 80.02 % 124.13 %
</TABLE>
Prospectus 49
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL ALGER AGGRESSIVE GROWTH
===============================
DECEMBER 31,
-------------------------------
1999 1998
---------------- --------------
<S> <C> <C>
Net asset value, beginning of year .................................. $ 22.44 $ 16.04
Income from operations:
Net investment income (loss) ...................................... (0.15) (0.04)
Net realized and unrealized gain (loss) on investments ............ 14.95 7.68
---------- --------
Net income (loss) from operations ................................ 14.80 7.64
---------- --------
Distributions:
Dividends from net investment income .............................. (0.16) 0.00
Dividends in excess of net investment income ...................... (1.38) (0.05)
Distributions from net realized gains on investments .............. (2.42) (1.19)
Distributions in excess of net realized gains on investments ...... 0.00 0.00
---------- --------
Total distributions .............................................. (3.96) (1.24)
---------- --------
Net asset value, end of year ........................................ $ 33.28 $ 22.44
========== ========
Total return ........................................................ 69.02 % 48.69 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 1,117,511 $ 574,164
Ratio of expenses to average net assets ........................... 0.89 % 0.91 %
Ratio of net investment income (loss) to average net assets ....... (0.56)% (0.21)%
Portfolio turnover rate ........................................... 101.71 % 117.44 %
<CAPTION>
WRL ALGER AGGRESSIVE GROWTH
============================================
DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net asset value, beginning of year .................................. $ 14.18 $ 13.25 $ 9.86
Income from operations:
Net investment income (loss) ...................................... (0.01) (0.01) (0.06)
Net realized and unrealized gain (loss) on investments ............ 3.44 1.38 3.96
-------- -------- --------
Net income (loss) from operations ................................ 3.43 1.37 3.90
-------- -------- --------
Distributions:
Dividends from net investment income .............................. 0.00 0.00 0.00
Dividends in excess of net investment income ...................... (0.42) (0.19) 0.00
Distributions from net realized gains on investments .............. (1.15) (0.25) (0.51)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00
-------- -------- --------
Total distributions .............................................. (1.57) (0.44) (0.51)
-------- -------- --------
Net asset value, end of year ........................................ $ 16.04 $ 14.18 $ 13.25
======== ======== ========
Total return ........................................................ 24.25 % 10.45 % 38.02 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 336,166 $ 220,552 $ 158,534
Ratio of expenses to average net assets ........................... 0.96 % 0.98 % 1.07 %
Ratio of net investment income (loss) to average net assets ....... (0.06)% (0.10)% (0.48)%
Portfolio turnover rate ........................................... 136.18 % 101.28 % 108.04 %
</TABLE>
<TABLE>
<CAPTION>
WRL AEGON BALANCED
============================
DECEMBER 31,
----------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Net asset value, beginning of year ................................... $ 12.54 $ 12.01
Income from operations:
Net investment income (loss) ....................................... 0.26 0.35
Net realized and unrealized gain (loss) on investments ............. 0.12 0.47
-------- -------
Net income (loss) from operations ................................. 0.38 0.82
-------- -------
Distributions:
Dividends from net investment income ............................... (0.26) (0.28)
Dividends in excess of net investment income ....................... 0.00 0.00
Distributions from net realized gains on investments ............... 0.00 0.00
Distributions in excess of net realized gains on investments ....... 0.00 (0.01)
-------- -------
Total distributions ............................................... (0.26) (0.29)
-------- -------
Net asset value, end of year ......................................... $ 12.66 $ 12.54
======== =======
Total return ......................................................... 3.03 % 6.93 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................... $ 108,473 $ 95,000
Ratio of expenses to average net assets ............................ 0.89 % 0.91 %
Ratio of net investment income (loss) to average net assets ........ 2.06 % 2.89 %
Portfolio turnover rate ............................................ 74.88 % 83.94 %
<CAPTION>
WRL AEGON BALANCED
=========================================
DECEMBER 31,
-----------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net asset value, beginning of year ................................... $ 11.39 $ 10.63 $ 9.24
Income from operations:
Net investment income (loss) ....................................... 0.38 0.34 0.44
Net realized and unrealized gain (loss) on investments ............. 1.56 0.80 1.38
------- ------- -------
Net income (loss) from operations ................................. 1.94 1.14 1.82
------- ------- -------
Distributions:
Dividends from net investment income ............................... (0.36) (0.28) (0.43)
Dividends in excess of net investment income ....................... (0.30) 0.00 0.00
Distributions from net realized gains on investments ............... (0.66) (0.10) 0.00
Distributions in excess of net realized gains on investments ....... 0.00 0.00 0.00
------- ------- -------
Total distributions ............................................... (1.32) (0.38) (0.43)
------- ------- -------
Net asset value, end of year ......................................... $ 12.01 $ 11.39 $ 10.63
======= ======= =======
Total return ......................................................... 17.10 % 10.72 % 19.80 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................... $ 73,451 $ 49,331 $ 31,114
Ratio of expenses to average net assets ............................ 0.94 % 0.97 % 0.97 %
Ratio of net investment income (loss) to average net assets ........ 3.13 % 3.14 % 4.38 %
Portfolio turnover rate ............................................ 77.06 % 76.90 % 98.55 %
</TABLE>
Prospectus 50
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL FEDERATED GROWTH &
INCOME
===========================
DECEMBER 31,
---------------------------
1999 1998
------------- -------------
<S> <C> <C>
Net asset value, beginning of year .................................. $ 12.28 $ 12.56
Income from operations:
Net investment income (loss) ...................................... 0.48 0.53
Net realized and unrealized gain (loss) on investments ............ (1.00) (0.16)
-------- -------
Net income (loss) from operations ................................ (0.52) 0.37
-------- -------
Distributions:
Dividends from net investment income .............................. (0.73) (0.55)
Dividends in excess of net investment income ...................... (0.02) 0.00
Distributions from net realized gains on investments .............. (0.10) (0.10)
Distributions in excess of net realized gains on investments ...... 0.00 0.00
-------- -------
Total distributions .............................................. (0.85) (0.65)
-------- -------
Net asset value, end of year ........................................ $ 10.91 $ 12.28
======== =======
Total return ........................................................ (4.45)% 3.05 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 76,280 $ 87,616
Ratio of expenses to average net assets ........................... 0.89 % 0.90 %
Ratio of net investment income (loss) to average net assets ....... 4.01 % 4.35 %
Portfolio turnover rate ........................................... 117.14 % 97.17 %
<CAPTION>
WRL FEDERATED GROWTH & INCOME
=========================================
DECEMBER 31,
-----------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net asset value, beginning of year .................................. $ 11.76 $ 11.12 $ 9.30
Income from operations:
Net investment income (loss) ...................................... 0.49 0.42 0.46
Net realized and unrealized gain (loss) on investments ............ 2.35 0.87 1.93
-------- ------- -------
Net income (loss) from operations ................................ 2.84 1.29 2.39
-------- ------- -------
Distributions:
Dividends from net investment income .............................. (0.43) (0.33) (0.46)
Dividends in excess of net investment income ...................... (0.59) 0.00 0.00
Distributions from net realized gains on investments .............. (1.02) (0.32) (0.11)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00
-------- ------- -------
Total distributions .............................................. (2.04) (0.65) (0.57)
-------- ------- -------
Net asset value, end of year ........................................ $ 12.56 $ 11.76 $ 11.12
======== ======= =======
Total return ........................................................ 24.65 % 11.64 % 25.25 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 60,492 $ 38,115 $ 24,607
Ratio of expenses to average net assets ........................... 0.96 % 1.00 % 1.00 %
Ratio of net investment income (loss) to average net assets ....... 3.84 % 3.73 % 4.56 %
Portfolio turnover rate ........................................... 155.77 % 68.53 % 78.34 %
</TABLE>
<TABLE>
<CAPTION>
WRL DEAN ASSET ALLOCATION
=============================
DECEMBER 31,
-----------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Net asset value, beginning of year .................................. $ 13.35 $ 13.61
Income from operations:
Net investment income (loss) ...................................... 0.39 0.41
Net realized and unrealized gain (loss) on investments ............ (1.14) 0.71
-------- --------
Net income (loss) from operations ................................ (0.75) 1.12
-------- --------
Distributions:
Dividends from net investment income .............................. (0.41) (0.39)
Dividends in excess of net investment income ...................... 0.00 0.00
Distributions from net realized gains on investments .............. (0.04) (0.99)
Distributions in excess of net realized gains on investments ...... (0.02) 0.00
-------- --------
Total distributions .............................................. (0.47) (1.38)
-------- --------
Net asset value, end of year ........................................ $ 12.13 $ 13.35
======== ========
Total return ........................................................ (5.64)% 8.33 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 261,707 $ 365,738
Ratio of expenses to average net assets ........................... 0.87 % 0.86 %
Ratio of net investment income (loss) to average net assets ....... 2.99 % 2.93 %
Portfolio turnover rate ........................................... 88.78 % 76.62 %
<CAPTION>
WRL DEAN ASSET ALLOCATION
============================================
DECEMBER 31,
--------------------------------------------
1997 1996 1995(A)
-------------- -------------- --------------
<S> <C> <C> <C>
Net asset value, beginning of year .................................. $ 12.61 $ 11.49 $ 10.00
Income from operations:
Net investment income (loss) ...................................... 0.36 0.33 0.41
Net realized and unrealized gain (loss) on investments ............ 1.72 1.33 1.93
-------- -------- --------
Net income (loss) from operations ................................ 2.08 1.66 2.34
-------- -------- --------
Distributions:
Dividends from net investment income .............................. (0.33) (0.30) (0.41)
Dividends in excess of net investment income ...................... (0.19) 0.00 0.00
Distributions from net realized gains on investments .............. (0.56) (0.24) (0.44)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00
-------- -------- --------
Total distributions .............................................. (1.08) (0.54) (0.85)
-------- -------- --------
Net asset value, end of year ........................................ $ 13.61 $ 12.61 $ 11.49
======== ======== ========
Total return ........................................................ 16.59 % 14.42 % 20.09 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 302,745 $ 206,172 $ 120,531
Ratio of expenses to average net assets ........................... 0.87 % 0.90 % 0.93 %
Ratio of net investment income (loss) to average net assets ....... 2.65 % 2.78 % 3.76 %
Portfolio turnover rate ........................................... 63.76 % 98.97 % 38.68 %
</TABLE>
Prospectus 51
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL C.A.S.E. GROWTH
===========================
DECEMBER 31,
---------------------------
1999 1998
------------- -------------
<S> <C> <C>
Net asset value, beginning of year .................................. $ 12.99 $ 14.01
Income from operations:
Net investment income (loss) ...................................... (0.05) 0.02
Net realized and unrealized gain (loss) on investments ............ 4.38 0.31
-------- --------
Net income (loss) from operations ................................ 4.33 0.33
-------- --------
Distributions:
Dividends from net investment income .............................. (0.66) (0.36)
Dividends in excess of net investment income ...................... (0.96) (0.90)
Distributions from net realized gains on investments .............. 0.00 (0.09)
Distributions in excess of net realized gains on investments ...... 0.00 0.00
-------- --------
Total distributions .............................................. (1.62) (1.35)
-------- --------
Net asset value, end of year ........................................ $ 15.70 $ 12.99
======== ========
Total return ........................................................ 33.84 % 2.47 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 93,608 $ 69,401
Ratio of expenses to average net assets ........................... 1.00 % 1.00 %
Ratio of net investment income (loss) to average net assets ....... (0.36)% 0.14 %
Portfolio turnover rate ........................................... 143.52 % 205.28 %
<CAPTION>
WRL C.A.S.E. GROWTH
========================================
DECEMBER 31,
----------------------------------------
1997 1996 1995(B)
------------- ------------- ------------
<S> <C> <C> <C>
Net asset value, beginning of year .................................. $ 13.42 $ 11.66 $ 10.00
Income from operations:
Net investment income (loss) ...................................... 0.04 0.12 0.12
Net realized and unrealized gain (loss) on investments ............ 1.95 1.92 2.49
-------- -------- ---------
Net income (loss) from operations ................................ 1.99 2.04 2.61
-------- -------- ---------
Distributions:
Dividends from net investment income .............................. (0.03) (0.05) (0.12)
Dividends in excess of net investment income ...................... (1.23) 0.00 0.00
Distributions from net realized gains on investments .............. (0.14) (0.23) (0.83)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00
-------- -------- ---------
Total distributions .............................................. (1.40) (0.28) (0.95)
-------- -------- ---------
Net asset value, end of year ........................................ $ 14.01 $ 13.42 $ 11.66
======== ======== =========
Total return ........................................................ 15.03 % 17.50 % 20.65 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 60,596 $ 26,559 $ 2,578
Ratio of expenses to average net assets ........................... 1.00 % 1.00 % 1.00 %
Ratio of net investment income (loss) to average net assets ....... 0.25 % 0.94 % 1.02 %
Portfolio turnover rate ........................................... 196.50 % 160.27 % 121.62 %
</TABLE>
<TABLE>
<CAPTION>
WRL NWQ VALUE EQUITY
=========================================================
DECEMBER 31,
---------------------------------------------------------
1999 1998 1997 1996(C)
-------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ................................... $ 12.12 $ 13.90 $ 11.27 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 0.10 0.12 0.12 0.10
Net realized and unrealized gain (loss) on investments ............. 0.85 (0.78) 2.69 1.23
-------- -------- -------- -------
Net income (loss) from operations ................................. 0.95 (0.66) 2.81 1.33
-------- -------- -------- -------
Distributions:
Dividends from net investment income ............................... (0.10) (0.13) (0.09) (0.04)
Dividends in excess of net investment income ....................... 0.00 (0.12) (0.07) 0.00
Distributions from net realized gains on investments ............... 0.00 (0.62) (0.02) (0.02)
Distributions in excess of net realized gains on investments ....... (0.20) (0.25) 0.00 0.00
-------- -------- -------- -------
Total distributions ............................................... (0.30) (1.12) (0.18) (0.06)
-------- -------- -------- -------
Net asset value, end of year ......................................... $ 12.77 $ 12.12 $ 13.90 $ 11.27
======== ======== ======== =======
Total return ......................................................... 7.95 % (4.78)% 25.04 % 13.19 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................... $ 137,158 $ 157,157 $ 173,435 $ 49,394
Ratio of expenses to average net assets ............................ 0.90 % 0.89 % 0.89 % 1.00 %
Ratio of net investment income (loss) to average net assets ........ 0.77 % 0.89 % 0.90 % 0.89 %
Portfolio turnover rate ............................................ 34.19 % 43.60 % 17.28 % 7.93 %
</TABLE>
Prospectus 52
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL GE/SCOTTISH
EQUITABLE INTERNATIONAL EQUITY
============================================
DECEMBER 31,
--------------------------------------------
1999 1998 1997(D)
------------- ------------- ------------
<S> <C> <C> <C>
Net asset value, beginning of year ................................... $ 12.07 $ 10.70 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 0.04 0.03 0.02
Net realized and unrealized gain (loss) on investments ............. 2.90 1.35 0.73
------- ------- -------
Net income (loss) from operations ................................. 2.94 1.38 0.75
------- ------- -------
Distributions:
Dividends from net investment income ............................... (0.05) (0.01) (0.01)
Dividends in excess of net investment income ....................... 0.00 0.00 (0.04)
Distributions from net realized gains on investments ............... (0.68) 0.00 0.00
Distributions in excess of net realized gains on investments ....... 0.00 0.00 0.00
------- ------- -------
Total distributions ............................................... (0.73) (0.01) (0.05)
------- ------- -------
Net asset value, end of year ......................................... $ 14.28 $ 12.07 $ 10.70
======= ======= =======
Total return ......................................................... 24.95 % 12.85 % 7.50 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................... $ 33,579 $ 32,149 $ 19,795
Ratio of expenses to average net assets ............................ 1.50 % 1.50 % 1.50 %
Ratio of net investment income (loss) to average net assets ........ 0.31 % 0.30 % 0.18 %
Portfolio turnover rate ............................................ 99.77 % 71.74 % 54.33 %
</TABLE>
<TABLE>
<CAPTION>
WRL GE U.S. EQUITY
==============================================
DECEMBER 31,
----------------------------------------------
1999 1998 1997(D)
-------------- -------------- ------------
<S> <C> <C> <C>
Net asset value, beginning of year ................................... $ 14.42 $ 12.23 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 0.07 0.09 0.09
Net realized and unrealized gain (loss) on investments ............. 2.55 2.69 2.60
-------- -------- -------
Net income (loss) from operations ................................. 2.62 2.78 2.69
-------- -------- -------
Distributions:
Dividends from net investment income ............................... (0.18) (0.15) (0.04)
Dividends in excess of net investment income ....................... (0.33) (0.33) (0.38)
Distributions from net realized gains on investments ............... (0.74) (0.11) (0.04)
Distributions in excess of net realized gains on investments ....... 0.00 0.00 0.00
-------- -------- -------
Total distributions ............................................... (1.25) (0.59) (0.46)
-------- -------- -------
Net asset value, end of year ......................................... $ 15.79 $ 14.42 $ 12.23
======== ======== =======
Total return ......................................................... 18.41 % 22.87 % 27.01 %
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................... $ 179,267 $ 110,803 $ 42,951
Ratio of expenses to average net assets ............................ 0.93 % 1.05 % 1.30 %
Ratio of net investment income (loss) to average net assets ........ 0.46 % 0.67 % 0.75 %
Portfolio turnover rate ............................................ 44.01 % 63.08 % 92.35 %
</TABLE>
Prospectus 53
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL THIRD AVENUE
VALUE
============================
DECEMBER 31,
----------------------------
1999 1998(E)
------------- ------------
<S> <C> <C>
Net asset value, beginning of year ..................................... $ 9.29 $ 10.00
Income from operations:
Net investment income (loss) ......................................... 0.16 0.06
Net realized and unrealized gain (loss) on investments ............... 1.28 (0.74)
------- -------
Net income (loss) from operations ................................... 1.44 (0.68)
------- -------
Distributions:
Dividends from net investment income ................................. (0.28) (0.03)
Dividends in excess of net investment income ......................... 0.00 0.00
Distributions from net realized gains on investments ................. 0.00 0.00
Distributions in excess of net realized gains on investments ......... 0.00 0.00
------- -------
Total distributions ................................................. (0.28) (0.03)
------- -------
Net asset value, end of year ........................................... $ 10.45 $ 9.29
======= =======
Total return ........................................................... 15.72 % (6.84)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................. $ 19,217 $ 18,206
Ratio of expenses to average net assets .............................. 1.00 % 1.00 %
Ratio of net investment income (loss) to average net assets .......... 1.76 % 0.63 %
Portfolio turnover rate .............................................. 9.56 % 4.35 %
</TABLE>
Prospectus 54
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS
Per share information has been computed using average shares outstanding
throughout each period. Total return reflects all Portfolio expenses and
includes reinvestment of dividends and capital gains; it does not reflect the
charges and deductions under the policies or annuity contracts. Total return
and portfolio turnover rate are not annualized for periods of less than one
year. Ratio of expenses and ratio of net investment income (loss) to average
net assets are annualized for periods of less than one year. For the year ended
December 31, 1999, ratio of expenses to average net assets is net of the
advisory fee waiver. For the years prior to 1999, ratio of expenses to average
net assets is net of the advisory fee waiver and fees paid indirectly. Without
the advisory fee waived by WRL Management and the fees paid indirectly, ratio
of expenses to average net assets for each period presented would be as follows
(ratios are annualized for periods of less than one year):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
PORTFOLIO 1999 1998 1997 1996 1995
- - -------------------------------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
WRL J.P. Morgan Money Market ........................... * * * * *
WRL AEGON Bond ......................................... * * * * *
WRL Janus Growth ....................................... 0.82 % * * * *
WRL Janus Global ....................................... * * * * *
WRL LKCM Strategic Total Return ........................ * * * * *
WRL VKAM Emerging Growth ............................... * * * * *
WRL Alger Aggressive Growth ............................ * * * * *
WRL AEGON Balanced ..................................... * * * * *
WRL Federated Growth & Income .......................... * * * * 1.08 %
WRL Dean Asset Allocation .............................. * * * * *
WRL C.A.S.E. Growth .................................... * * 1.14 % 1.70 % 4.17 %
WRL NWQ Value Equity ................................... * * * 1.10 % **
WRL GE/Scottish Equitable International Equity ......... 1.84 % 1.96 % 3.14 % ** **
WRL GE U.S. Equity ..................................... * * 1.54 % ** **
WRL Third Avenue Value ................................. 1.06 % 1.13 % ** ** **
</TABLE>
* Ratio difference less than 0.01%.
** Portfolio was not in existence during this period.
(a) The inception date of this portfolio was January 3, 1995.
(b) The inception date of this portfolio was May 1, 1995.
(c) The inception date of this portfolio was May 1, 1996.
(d) The inception date of this portfolio was January 2, 1997.
(e) The inception date of this portfolio was January 2, 1998.
Prospectus 55
<PAGE>
ADDITIONAL INFORMATION ABOUT THESE PORTFOLIOS IS CONTAINED IN THE
FUND'S ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, DATED MAY 1, 2000, WHICH IS
INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. IN THE FUND'S
ANNUAL REPORT, YOU WILL FIND A DISCUSSION OF THE MARKET CONDITIONS
AND INVESTMENT STRATEGIES THAT SIGNIFICANTLY AFFECTED THE FUND'S
PERFORMANCE DURING THE LAST FISCAL YEAR.
YOU MAY ALSO CALL 1-800-851-9777 TO REQUEST THIS ADDITIONAL
INFORMATION ABOUT THE FUND WITHOUT CHARGE OR TO MAKE SHAREHOLDER
INQUIRIES.
OTHER INFORMATION ABOUT THESE PORTFOLIOS HAS BEEN FILED WITH AND
IS AVAILABLE FROM THE U.S. SECURITIES AND EXCHANGE COMMISSION.
INFORMATION ABOUT THE FUND (INCLUDING THE SAI) CAN BE REVIEWED AND
COPIED AT THE SECURITIES AND EXCHANGE COMMISSION'S PUBLIC
REFERENCE ROOM IN WASHINGTON, D.C. INFORMATION ON THE OPERATION OF
THE PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE
COMMISSION AT 202-942-8090. INFORMATION MAY BE OBTAINED, UPON
PAYMENT OF A DUPLICATING FEE BY WRITING THE PUBLIC REFERENCE
SECTION OF THE COMMISSION, WASHINGTON, D.C. 20549-6009.
REPORTS AND OTHER INFORMATION ABOUT THE FUND ARE ALSO AVAILABLE ON
THE COMMISSION'S INTERNET SITE AT HTTP://WWW.SEC.GOV.
(WRL SERIES FUND FILE NO. 811-4419.)
FOR MORE INFORMATION ABOUT THESE PORTFOLIOS, YOU MAY OBTAIN A COPY
OF THE SAI OR THE ANNUAL OR SEMI-ANNUAL REPORTS WITHOUT CHARGE, OR
TO MAKE OTHER INQUIRIES ABOUT THIS FUND, CALL THE NUMBER LISTED
ABOVE.
(WRL SERIES FUND FILE NO. 811-4419.)
<PAGE>
WRL SERIES FUND, INC.
AGGRESSIVE EQUITY PORTFOLIOS
o WRL T. ROWE PRICE SMALL CAP
o WRL PILGRIM BAXTER MID CAP GROWTH
o WRL ALGER AGGRESSIVE GROWTH
FOREIGN EQUITY PORTFOLIOS
o WRL JANUS GLOBAL
GROWTH EQUITY PORTFOLIOS
o WRL GOLDMAN SACHS GROWTH
o WRL SALOMON ALL CAP
o WRL NWQ VALUE EQUITY
BALANCED PORTFOLIOS
o WRL T. ROWE PRICE DIVIDEND GROWTH
Prospectus
The Securities and Exchange Commission
has not approved or disapproved these
securities or passed upon
the adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
May 1, 2000
<PAGE>
- - --------------------------------------------------------------------------------
TABLE OF CONTENTS
- - --------------------------------------------------------------------------------
INVESTOR INFORMATION .......................... 1
ALL ABOUT THE FUND
AGGRESSIVE EQUITY PORTFOLIOS
WRL T. Rowe Price Small Cap ................ 2
WRL Pilgrim Baxter Mid Cap Growth .......... 3
WRL Alger Aggressive Growth ................ 3
FOREIGN EQUITY PORTFOLIOS
WRL Janus Global ........................... 8
GROWTH EQUITY PORTFOLIOS
WRL Goldman Sachs Growth ................... 11
WRL Salomon All Cap ........................ 12
WRL NWQ Value Equity ....................... 12
BALANCED PORTFOLIOS
WRL T. Rowe Price Dividend Growth .......... 16
RISK/REWARD INFORMATION ....................... 19
EXPLANATION OF STRATEGIES AND RISKS ........... 20
HOW THE FUND IS MANAGED AND ORGANIZED ......... 25
PERFORMANCE INFORMATION ....................... 28
OTHER INFORMATION ............................. 30
FINANCIAL HIGHLIGHTS .......................... 32
- - --------------------------------------------------------------------------------
WRL Series Fund, Inc. (Fund) currently offers twenty-six separate series
or investment portfolios. This prospectus includes eight of those
portfolios. The Fund is an open-end management investment company, more
commonly known as a mutual fund.
Shares of these portfolios are currently only sold to separate accounts of
Western Reserve Life Assurance Co. of Ohio, PFL Life Insurance Company,
AUSA Life Insurance Company, Peoples Benefit Life Insurance Company and
Transamerica Occidental Life Insurance Company to fund the benefits under
certain individual flexible premium variable life insurance policies and
individual and group variable annuity contracts.
A particular portfolio of the Fund may not be available under the policy
or annuity contract you have chosen. The prospectus or disclosure document
for your policy or annuity contract shows the portfolios available to you.
Please read this prospectus carefully before selecting a portfolio. It
provides information to assist you in your decision. If you would like
additional information about a portfolio, please request a copy of the
Statement of Additional Information (SAI) (see back cover). The SAI is
incorporated by reference into this prospectus.
- - --------------------------------------------------------------------------------
Prospectus
<PAGE>
- - --------------------------------------------------------------------------------
INVESTOR INFORMATION
- - --------------------------------------------------------------------------------
TO HELP YOU UNDERSTAND . . .
In this prospectus, you will see the symbols below.
These are "icons" which serve as tools to direct you to the type of information
that is included in the accompanying paragraphs.
The icons are for your convenience and to assist you as you read this
prospectus.
/target/ The target directs you to a portfolio's goal or
objective.
/chess piece/ The chess piece indicates discussion about a
portfolio's strategies.
/warning sign/ The warning sign indicates the risks of investing
in a portfolio.
/graph/ The graph indicates investment performance.
/question mark/ The question mark provides additional
information about the Fund or may direct you on how to obtain
further information.
SHARES OF A PORTFOLIO ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY
BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT.
Prospectus 1
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS
- - --------------------------------------------------------------------------------
WRL T. ROWE PRICE SMALL CAP
WRL PILGRIM BAXTER MID CAP GROWTH
WRL ALGER AGGRESSIVE GROWTH
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES EACH AGGRESSIVE EQUITY PORTFOLIO OF
THE FUND AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIOS. FOR FURTHER
INFORMATION ON THESE PORTFOLIOS, PLEASE READ THE SECTION ENTITLED "EXPLANATION
OF STRATEGIES AND RISKS," BEGINNING ON PAGE 20, AND THE FUND'S SAI.
/target/ OBJECTIVES
WRL T. ROWE PRICE SMALL CAP
This portfolio seeks long-term growth of capital by investing primarily in
common stocks of small growth companies.
WRL PILGRIM BAXTER MID CAP GROWTH
This portfolio seeks capital appreciation.
WRL ALGER AGGRESSIVE GROWTH
This portfolio seeks long-term capital appreciation.
- - --------------------------------------------------------------------------------
WHAT IS AN AGGRESSIVE EQUITY PORTFOLIO?
Aggressive Equity Portfolios are those that seek maximum capital
appreciation (a rise in the share price/value). Current income is not a
significant factor. Some portfolios that are included in this category may
invest in out-of-the main-stream stocks, such as those of fledging or
struggling companies, or those in new or currently out-of-favor industries.
Some portfolios in this category may also use specialized investment
techniques such as options or short-term investing. For these reasons,
these portfolios usually entail greater risk than the overall equity
portfolio category.
- - --------------------------------------------------------------------------------
/chess piece/ POLICIES AND STRATEGIES
- - --------------------------------------------------------------------------------
WHAT IS A TOP-DOWN APPROACH?
When using a "top-down" approach, the portfolio manager looks first at
broad market factors, and on the basis of those market factors, chooses
certain sectors, or industries within the overall market. The manager then
looks at individual companies within those sectors or industries.
- - --------------------------------------------------------------------------------
WRL T. ROWE PRICE SMALL CAP
The portfolio's sub-adviser, T. Rowe Price Associates, Inc. (T. Rowe Price),
seeks to achieve the portfolio's objective by investing principally in:
o Common stocks of small-cap growth companies
This portfolio will invest at least 65% of the fund's total assets in small-cap
growth companies. These companies are defined as companies whose market
capitalization falls within the range of or smaller than the bottom 100
companies in the Standard & Poor's 500 Stock Index (S&P 500), which was
approximately $3.3 billion and below as of December 31, 1999, but the upper
size limit will vary with market fluctuations. The S&P 500 measures
Prospectus 2
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
the performance of the common stocks of 500 large U.S. companies in the
manufacturing, utilities, transportation, and financial industries. It also
tracks the performance of common stocks issued by foreign and smaller U.S.
companies in similar industries. (A company's market "cap" is found by
multiplying its shares outstanding by its stock price.) Companies whose
capitalization increases above this range after the portfolio's initial
purchase continue to be considered small companies for purposes of this policy.
To help manage cash flows efficiently, T. Rowe Price may also buy and sell
stock index futures. The portfolio intends to be invested in a large number of
holdings. T. Rowe Price believes this diversificaiton should minimize the
effects of individual security selection on portfolio performance.
Quantitative models are furnished by a sub-adviser to assist the sub-adviser in
evaluating a potential security. Characteristics are included in the model that
the sub-adviser deems advantageous in a security. Based on these models, stocks
are selected in a "top-down" manner so that the portfolio's portfolio as a
whole reflects characteristics T. Rowe Price considers important, such as
valuations (price/earnings or price/
book value ratios, for example) and projected earnings growth.
While the portfolio invests principally in common stocks, and, to a lesser
extent in stock index futures, it may also purchase other securities, in
keeping with its objective.
The portfolio may sell securities for a variety of reasons, such as to secure
gains, limit losses, or redeploy assets into more promising opportunities.
The portfolio may take a temporary defensive position when the securities
trading markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist. This may be
inconsistent with the portfolio's principal investment strategies. Under these
circumstances, the portfolio may be unable to achieve its investment objective.
- - --------------------------------------------------------------------------------
WHAT IS A QUANTITATIVE MODEL?
A quantitative model is fashioned by a portfolio's sub-adviser to assist
the sub-adviser in evaluating a potential security. The sub-adviser creates
a model that is designed using characteristics that the sub-adviser deems
advantageous in a security. The sub-adviser then compares a potential
security's characteristics against those of the model, and makes a
determination of whether or not to purchase the security based on the
results of that comparison.
- - --------------------------------------------------------------------------------
WRL PILGRIM BAXTER MID CAP GROWTH
The portfolio's sub-adviser, Pilgrim Baxter & Associates, Ltd. (Pilgrim
Baxter), seeks to achieve the portfolio's objective by investing principally
in:
o Common stocks
o Convertible securities
In seeking capital appreciation, Pilgrim Baxter normally invests at least 65%
of the portfolio's total assets in growth securities, such as common stocks,
issued by companies with market capitalizations or annual revenues between $500
million and $10 billion. The portfolio invests primarily in companies that
Pilgrim Baxter believes have strong business momentum, earnings growth and
capital-appreciation potential. The portfolio may also invest in foreign
securities, warrants and rights.
Pilgrim Baxter uses its own fundamental research, computer models and
proprietary measures of growth and business momentum in managing this
portfolio.
Pilgrim Baxter's decision to sell a stock depends on many factors. Generally
speaking, Pilgrim Baxter considers selling a security when its antipicated
appreciation is no longer probable, alternate investments offer more superior
appreciation prospects, or the risk of a decline in its market price is too
great.
Prospectus 3
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
Pilgrim Baxter may take a temporary defensive position when the securities
trading markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist. Under these
circumstances, the portfolio may be unable to achieve its investment objective.
While the fund invests principally in common stocks of medium-sized companies,
Pilgrim Baxter may, to a lesser extent, elect to invest in options and futures
contracts for hedging and risk management, or in other securities and
investment strategies in pursuit of its investment objective, which are
explained beginning on page 20 and in the SAI.
WRL ALGER AGGRESSIVE GROWTH
The portfolio's sub-adviser, Fred Alger Management, Inc. (Alger), seeks to
achieve the portfolio's objective by investing principally in:
o Equity securities such as common or preferred stocks
o Convertible securities (convertible securities are securities which can be
exchanged or converted into common stock of such companies)
To a lesser extent, the sub-adviser may invest portfolio assets in:
o U.S. dollar denominated securities of foreign issuers (American Depositary
Receipts (ADRs))
o Money market instruments
o Repurchase agreements
Under normal market conditions, the portfolio invests at least 85% of its
assets in common stocks, which may include stocks of developing companies, of
older companies that are entering a new stage of growth, and of companies whose
products or services have a high unit volume growth rate.
The portfolio may also use leveraging, a technique that involves borrowing
money to invest in an effort to enhance shareholder returns.
The portfolio's manager may take a temporary defensive position when the
securities trading markets or the economy are experiencing excessive volatility
or a prolonged general decline, or other adverse conditions exist. This may be
inconsistent with the portfolio's principal investment strategies. During this
time, the portfolio may invest up to 100% of its assets in money market
instruments and cash equivalents. Under these circumstances, the portfolio will
be unable to pursue its investment objective.
The portfolio may take a temporary defensive position when the securities
trading markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist. This may be
inconsistent with the portfolio's principal investment strategies. Under these
conditions, the portfolio may be unable to achieve its investment objective.
/warning sign/ RISKS OF INVESTING IN AGGRESSIVE EQUITY PORTFOLIOS
The principal risks of investing in Aggressive Equity Portfolios that may
adversely affect your investment are described below. (Not all of these risks
apply to each Aggressive Equity Portfolio. See the chart below for the
principal risks of your portfolio.) Please note that there are many other
circumstances which could adversely affect your investment and prevent a
portfolio from achieving its objective, which are not described here. Please
refer to the section entitled "Explanation of Strategies and Risks" beginning
on page 20 and the Fund's SAI for more information about the risks of investing
in the Aggressive Equity Portfolios.
Prospectus 4
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
PRINCIPAL RISKS
AGGRESSIVE EQUITY PORTFOLIOS
<TABLE>
<CAPTION>
WRL WRL WRL
RISKS T. ROWE PRICE PILGRIM BAXTER ALGER AGGRESSIVE
- - ----- SMALL CAP MID CAP GROWTH GROWTH
<S> <C> <C> <C>
STOCKS X X X
INVESTING AGGRESSIVELY X X X
SMALL-CAP AND GROWTH COMPANIES X
QUANTITATIVE MODELS X
FUTURES & OPTIONS X
DEPOSITARY RECEIPTS X
CONVERTIBLES X X
LEVERAGING X
VALUE INVESTING X
</TABLE>
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the short term. These
price movements may result from factors affecting individual companies, certain
industries or the securities market as a whole.
Because the stocks a portfolio holds fluctuate in price, the value of your
investment in the portfolio will go up and down.
o INVESTING AGGRESSIVELY
o The value of developing-company stocks may be very volatile, and
can drop significantly in a short period of time
o Rights, options and futures contracts may not be exercised and
may expire worthless
o Warrants and rights may be less liquid than stocks
o Use of futures and other derivatives may make the portfolio more
volatile
o SMALL-CAP AND GROWTH COMPANIES
Investing in small companies involves greater risk than is customarily
associated with more established companies. Stocks of small companies may be
subject to more abrupt or erratic price movements than larger company
securities. Small companies often have limited product lines, markets, or
financial resources, and their management may lack depth and experience.
Securities of such issuers may lack sufficient market liquidity to enable a
portfolio to effect sales at an advantageous time or without a substantial drop
in price.
Also, growth stocks can experience steep price declines if the company's
earnings disappoint investors. Since many of the Aggressive Equity Portfolios
will typically be fully invested in this market sector, investors are fully
exposed to its volatility.
o QUANTITATIVE MODELS
Stocks selected using quantitative models may not perform as well as these
models might otherwise suggest effective and may cause overall returns to be
lower than if other methods are used.
o FUTURES AND OPTIONS
Futures and options involve additional investment risks and transactional
costs, and draw upon skills and experience which are different than those
needed to pick other securities. Special risks include:
o Inaccurate market predictions
o Imperfect correlation
o Illiquidity
o Tax considerations
The portfolios are not required to hedge their investments.
o ADRS
Many securities of foreign issuers are represented by American Depositary
Receipts (ADRs). While ADRs principally are traded on domestic securities
exchanges,
Prospectus 5
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
investing in ADRs involves many of the same risks associated with foreign
securities in general. These risks include:
o Changes in currency value
o Currency speculation
o Currency trading costs
o More fluctuations in market prices
o Less information available
o CONVERTIBLES
As with all debt securities, the market value of convertibles tends to decline
as interest rates increase and, conversely, to increase as interest rates
decline.
o VALUE INVESTING RISK
Undervalued stocks may not realize their perceived value for extended periods
of time. Value stocks may respond differently to market and other developments
than other types of stocks. Value oriented funds will typically underperform
when growth investing is in favor.
o LEVERAGING
Leveraging by a portfolio involves special risks:
o Leveraging practices may make a portfolio more volatile
o Leveraging may exaggerate the effect on net asset value of any increase or
decrease in the market value of the portfolio's securities
o Money borrowed for leveraging is subject to interest costs
o Minimum average balances may need to be maintained or a line of credit in
connection with borrowing may be necessary resulting in an increase in the
cost of borrowing over the stated interest rate.
WRL ALGER AGGRESSIVE GROWTH
For the investor who seeks capital growth aggressively, and can tolerate wide
swings in the value of their investment.
WRL PILGRIM BAXTER MID CAP GROWTH
For the investor who wants long-term growth of capital and who can tolerate the
fluctuations inherent in stock investing.
WRL ALGER AGGRESSIVE GROWTH
For the investor who seeks capital growth aggressively, and can tolerate wide
swings in the value of their investment.
Prospectus 6
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
/graph/ PORTFOLIO PERFORMANCE
The bar charts and tables below give an indication of the portfolios' risks and
performance. The charts show changes in a portfolio's performance from year to
year. The performance calculations do not reflect charges or deductions under
the policies or the annuity contracts. These fees and expenses would lower
investment performance. The tables show how a portfolio's average annual
returns for the periods indicated compare to those of a broad measure of market
performance.
Because the WRL T. Rowe Price Small Cap and WRL Pilgrim Baxter Mid Cap Growth
portfolios commenced operations in 1999, their performance history is not
included.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL ALGER AGGRESSIVE GROWTH
- - --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
32.02% 10.45% 24.25% 48.69% 69.02%
1995 1996 1997 1998 1999
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1995-1999)
- - ------------------------------------------
QUARTER ENDED
Highest 44.67 % 12/31/99
Lowest (9.72)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - ---------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (MARCH 1, 1994)
WRL Alger Aggressive
Growth 69.02% 36.62% 30.35%
S&P 500 Index 21.04% 28.56% 24.15%
- - --------------------------------------------------------------------------------
Prospectus 7
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIOS
- - --------------------------------------------------------------------------------
WRL JANUS GLOBAL
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES EACH FOREIGN EQUITY PORTFOLIO OF THE
FUND AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIOS. FOR FURTHER
INFORMATION ON THESE PORTFOLIOS, PLEASE READ THE SECTION ENTITLED "EXPLANATION
OF STRATEGIES AND RISKS," BEGINNING ON PAGE 20, AND THE FUND'S SAI.
/target/ OBJECTIVES
WRL JANUS GLOBAL
This Portfolio seeks long-term growth of capital in a manner consistent with
the preservation of capital.
- - --------------------------------------------------------------------------------
WHAT IS A FOREIGN EQUITY PORTFOLIO?
This type of portfolio principally invests in equity securities of
companies located outside the U.S.
- - --------------------------------------------------------------------------------
/chess piece/ POLICIES AND STRATEGIES
WRL JANUS GLOBAL
The portfolio's sub-adviser, Janus Capital Corporation (Janus) seeks to achieve
the portfolio's investment objective by investing principally in:
o Common stocks of foreign and domestic issuers
o Depositary receipts including ADRs, GDRs and EDRs
The portfolio may also use forward foreign currency contracts for hedging.
Janus' main strategy is to use a "bottom up" approach to build the portfolio's
portfolio. They seek to identify individual companies with earnings growth
potential that may not be recognized by the market at large.
Foreign securities are generally selected on a stock-by-stock basis without
regard to defined allocation among countries or geographic regions.
When evaluating foreign investments, Janus (in addition to looking at
individual companies) considers such factors as:
o Expected levels of inflation in various countries
o Government policies that might affect business conditions
o The outlook for currency relationships
o Prospects for economic growth among countries, regions or
geographic areas
- - --------------------------------------------------------------------------------
WHAT IS A "BOTTOM-UP" APPROACH?
When portfolio managers use a "bottom-up" approach, they look primarily at
individual companies against the context of broader market factors.
- - --------------------------------------------------------------------------------
/warning sign/ RISKS OF INVESTING IN FOREIGN EQUITY PORTFOLIOS
The principal risks of investing in Foreign Equity Portfolios that may
adversely affect your investment are described below. Please note that there
are many other circumstances which could adversely affect your investment and
prevent a portfolio from achieving its objective, which are not described here.
Please refer to the section entitled "Explanation of Strategies and Risks"
beginning on page 20, and the Fund's SAI for more information about the risks
associated with investing in the Foreign Equity Portfolios.
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
certain industries or the securities market as a whole.
Because the stocks the portfolio holds fluctuate in price, the value of your
investment in the portfolio will go up and down.
o FOREIGN SECURITIES
Investments in foreign securities involve risks relating to political, social
and economic developments abroad as well as risks resulting from differences in
regulations to which U.S. and foreign issuers and markets are subject. To the
extent a portfolio invests in emerging markets, these risks would be greater.
These risks include:
o Changes in currency values
o Currency speculation
Prospectus 8
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
o Currency trading costs
o Different accounting and reporting practices
o Less information available to the public
o Less (or different) regulation of securities markets
o Greater complex business negotiations
o Less liquidity
o More fluctuations in prices
o Delays in settling foreign securities transactions
o Higher costs for holding shares (custodial fees)
o Higher transaction costs
o Vulnerability to seizure and taxes
o Political instability and small markets
o Different market trading days
o Forward foreign currency contracts for hedging
o EMERGING MARKETS RISK
Investing in the securities of issuers located in or principally doing business
in emerging markets bear foreign risks as discussed above. In addition, the
risks associated with investing in emerging markets are often greater than
investing in developed foreign markets. Specifically, the economic structures
in emerging markets countries are less diverse and mature than those in
developed countries, and their political systems are less stable. Investments
in emerging markets countries may be affected by national policies that
restrict foreign investments. Emerging market countries may have less developed
legal structures, and the small size of their securities markets and low
trading volumes can make investments illiquid and more volatile than
investments in developed countries. As a result, a portfolio investing in
emerging market countries may be required to establish special custody or other
arrangements before investing.
o FORWARD FOREIGN CURRENCY CONTRACTS
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of portfolio securities decline.
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 the portfolio's
limitation on investing in illiquid securities.
If the portfolio manager's judgment of markets proves incorrect or the strategy
does not correlate well with a portfolio's investment, the use of such hedging
transactions could result in a loss regardless of whether the intent was to
reduce risk or increase return and may increase a portfolio's volatility. In
addition, in the event that non-exchange traded forward currency contracts are
used, such transactions could result in a loss if the counterparty to the
transaction does not perform as promised.
o CONVERTIBLES
As with all debt securities, the market value of convertibles tends to decline
as interest rates increase and, conversely, to increase as the interest rates
decline.
o WARRANTS AND RIGHTS
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.
o DEPOSITARY RECEIPTS
Depositary receipts represent interests in an account at a bank or trust
company which holds equity securities. They are subject to some of the same
risks as direct investments in foreign securities, including currency risk. The
regulatory requirements with respect to depositary receipts that are issued in
sponsored and unsponsored programs are generally similar, but the issuers of
unsponsored depositary receipts 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 depositary receipts.
/chess piece/ INVESTOR PROFILES
WRL JANUS GLOBAL
For the investor who seeks capital growth without being limited to investments
in U.S. securities, and who can tolerate the significant risks associated with
foreign investing.
Prospectus 9
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
/graph/ PORTFOLIO PERFORMANCE
The bar chart and table below gives an indication of the portfolio's risks and
performance. The chart shows changes in the portfolio's performance from year
to year. The performance calculations do not reflect charges or deductions
under the policies or the annuity contracts. These fees and expenses would
lower investment performance. The table shows how the portfolio's average
annual returns for the periods indicated compare to those of a broad measure of
market performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL JANUS GLOBAL
- - --------------------------------------------------------------------------------
TOTAL RETURN
(PER CALENDAR YEAR)
- - --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
35.05% 0.25% 23.06% 27.74% 18.75% 30.01% 71.10%
1993 1994 1995 1996 1997 1998 1999
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1993-1999)
- - --------------------------------------------
QUARTER ENDED
Highest 46.11 % 12/31/99
Lowest (16.52)% 9/30/98
- - ---------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - ---------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (DECEMBER 3, 1992)
WRL Janus Global 71.10% 32.94% 27.91%
Morgan Stanley
Capital
International
World Index 24.93% 20.08% 18.23%
- - ---------------------------------------------------------------
Prospectus 10
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS
- - --------------------------------------------------------------------------------
WRL GOLDMAN SACHS GROWTH
WRL SALOMON ALL CAP
WRL NWQ VALUE EQUITY
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES EACH GROWTH EQUITY PORTFOLIO OF THE
FUND AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIOS. FOR FURTHER
INFORMATION ON THESE PORTFOLIOS, PLEASE READ THE SECTION ENTITLED "EXPLANATION
OF STRATEGIES AND RISKS," BEGINNING ON PAGE 20, AND THE FUND'S SAI.
/target/ OBJECTIVES
WRL GOLDMAN SACHS GROWTH
This portfolio seeks long-term growth of capital.
WRL SALOMON ALL CAP
This portfolio seeks capital appreciation.
WRL NWQ VALUE EQUITY
This portfolio seeks to achieve maximum, consistent total return with minimum
risk to principal.
- - --------------------------------------------------------------------------------
WHAT IS A GROWTH EQUITY PORTFOLIO?
Each growth equity portfolio invests in the common stock of companies that
offer potentially rising share prices. These portfolios primarily aim to
provide capital appreciation (a rise in share price) rather than steady
income.
- - --------------------------------------------------------------------------------
/chess piece/ POLICIES AND STRATEGIES
WRL GOLDMAN SACHS GROWTH
The portfolio's sub-adviser, Goldman Sachs Asset Management (GSAM), seeks to
achieve the portfolio's objective by investing principally in:
o Equity securities
The portfolio will invest at least 90% of total assets in a diversified
portfolio of equity securities that are considered by GSAM to have long-term
capital appreciation potential. Although the portfolio will invest primarily in
publicly traded U.S. securities, it may invest up to 10% of its total assets in
foreign securities, including securities of issuers in emerging (developing)
countries and securities quoted in foreign currencies.
Equity securities for this portfolio are selected based on their prospects for
above-average growth. GSAM will select securities of growth companies trading,
in GSAM's opinion, at a reasonable price relative to other industries,
competitors and historical price/earnings multiples.
In order to determine whether a security has favorable growth prospects, GSAM
ordinarily looks for one or more of the following characteristics in relation
to the security's prevailing price:
o prospects for above average sales and earnings growth per share
o high return on invested capital
o free cash flow generation
o sound balance sheet, financial and accounting policies, and
overall financial strength
o strong competitive advantages
o effective research, product development, and marketing
o pricing flexibility
o strength of management
o general operating characteristics that will enable the company to
compete successfully in its marketplace
The portfolio generally will invest in companies whose earnings are believed to
be in a relatively strong growth trend, or, to a lesser extent, in companies in
which significant further growth is not anticipated, but whose market value per
share is thought to be undervalued.
GSAM may take a temporary defensive position when the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist. This may be inconsistent
with the portfolio's principal investment strategies. Under these
circumstances, the portfolio may be unable to achieve its investment objective.
Prospectus 11
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
WRL SALOMON ALL CAP
The portfolio's sub-adviser, Salomon Brothers Asset Management Inc (SBAM),
seeks to achieve the portfolio's investment objective by investing principally
in:
o Common stocks
o Convertible securities
To a lesser extent, the portfolio may invest in:
o Cash and cash equivalents
This portfolio is non-diversified. The portfolio will primarily invest in
common stocks, or securities convertible into or exchangeable for common
stocks, such as convertible preferred stocks or convertible debentures.
The portfolio's classification as "non-diversified" under the 1940 Act means
that the portfolio has the ability to take larger positions in a smaller number
of issuers. However, to meet federal tax requirements, at the close of each
quarter the portfolio may not have more than 25% of its total assets invested
in any one issuer and, with respect to 50% of its total assets, not more than
5% of its total assets invested in any one issuer.
In seeking capital appreciation, the portfolio may purchase securities of:
seasoned issuers; small companies; newer companies; and new issues. The
portfolio may be subject to wide fluctuations in market value. Portfolio
securities may have limited marketability or may be widely and publicly traded.
SBAM anticipates that the portfolio's investments generally will be in
securities of companies which it considers to reflect some or all the following
characteristics:
o Undervalued share prices
o Special situations such as existing or possible changes in
management or management policies, corporate structure or control,
capitalization, regulatory environment, or other circumstances which
could be expected to favor earnings or market price of such company's
shares
o Growth potential due to technological advances, new methods in
marketing or production, new or unique products or services, changes in
demands for products or services or other significant new developments
SBAM uses a "bottom-up," fundamental research process to select the portfolio's
securities. They seek to identify individual companies with earnings growth
potential that may not be recognized by the market.
SBAM may take a temporary defensive position when the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist. This may be inconsistent
with the portfolio's principal investment strategies. Under these
circumstances, the portfolio may be unable to pursue its investment objective.
WRL NWQ VALUE EQUITY
The portfolio's sub-adviser, NWQ Investment Management Company, Inc. (NWQ),
seeks to achieve its objective by investing principally in:
o Common stocks
To a lesser extent, NWQ may invest portfolio assets in:
o Money market and short-term instruments (Treasury Bills)
o ADRs and exchange listed foreign stocks
NWQ employs a value-oriented approach to investing, combining top-down and
bottom-up disciplines.
NWQ will use statistical measures to look for above-average stock valuations,
screening for below-average price-to-earnings and price-to-book ratios,
above-average dividend yields and strong financial stability.
NWQ also identifies those market sectors believed to benefit from long-term
positive fundamentals, and focuses on the companies within these sectors which
represent above-average statistical value and are undervalued when purchased.
The portfolio consists primarily of mid-capitalization to large capitalization
companies. NWQ considers the following when making a security selection:
o below-average price-to-earnings ratios
o below-average price-to-book
o strong financial stability
o industries/sectors with strong long-term fundamentals
Prospectus 12
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
o leading/strong market positions
o uses earnings averaged over both strong and weak periods in evaluating
cyclical companies
/warning sign/ RISKS
The principal risks of investing in Growth Equity Portfolios that may adversely
affect your investment are described below. (Not all of these risks apply to
each Growth Equity Portfolio. See the chart below for the principal risks of
your portfolio.) Please note that there are many other circumstances which
could adversely affect your investment and prevent a portfolio from achieving
its objective, which are not described here. Please refer to the section
entitled "Explanation of Strategies and Risks," beginning on page 20, and the
Fund's SAI for more information about the risks associated with investing in
the Growth Equity Portfolios.
PRINCIPAL RISKS
GROWTH EQUITY PORTFOLIOS
WRL WRL
GOLDMAN WRL NWQ
RISKS SACHS SALOMON VALUE
- - ------------------------ GROWTH ALL CAP EQUITY
NON-DIVERSIFICATION X
STOCKS X X X
MEDIUM SIZED COMPANIES
FOREIGN SECURITIES X
EMERGING MARKETS RISK
CONVERTIBLES X X
STYLE RISK X X X
DEPOSITARY RECEIPTS X
o NON-DIVERSIFICATION
To the extent a portfolio invests a greater proportion of its assets in the
securities of a smaller number of issuers, it may be more susceptible to any
single economic, political or regulatory occurrence than a more widely
diversified portfolio and may be subject to greater risk of loss with respect
to its portfolio securities.
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
industries, or the securities market as a whole.
Because the stocks the portfolio holds fluctuate in price, the value of your
investment in the portfolio go up and down.
o MEDIUM-SIZED COMPANIES
These companies present additional risks because their earnings may be less
predictable, their share price more volatile, and their securities less liquid
than larger more established companies.
o FOREIGN SECURITIES
Investments in foreign securities involve risks relating to political, social
and economic developments abroad as well as risks resulting from differences in
regulations to which U.S. and foreign issuers and markets are subject. These
risks include:
o Changes in currency values
o Currency speculation
o Currency trading costs
o Different accounting and reporting practices
o Less information available to the public
o Less (or different) regulation of securities markets
Prospectus 13
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
o More complex business negotiations
o Less liquidity
o More fluctuations in market prices
o Delays in settling foreign securities transactions
o Higher costs for holding foreign securities (custodial fees)
o Higher transaction costs
o Vulnerability to seizure and taxes
o Political instability and small markets
o Different market trading days
o CONVERTIBLES
As with all debt securities, the market value of convertibles tends to decline
as interest rates increase and, conversely, increase as interest rates decline.
o STYLE RISK
Securities with different characteristics tend to shift in and out of favor
depending upon market and economic conditions as well as investor sentiment. A
portfolio may underperform other portfolios that employ a different style. A
portfolio also may employ a combination of styles that impact its risk
characteristics. Examples of different styles include growth and value
investing, as well as those focusing on large, medium, or small company
securities.
o GROWTH INVESTING RISK
Growth stocks may be more volatile than other stocks because they are
more sensitive to investor perceptions of the issuing company's growth
potential. Growth oriented funds will typically underperform when value
investing is in favor.
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.
o DEPOSITARY RECEIPTS
Depositary receipts represent interests in an account at a bank or trust
company which holds equity securities. They are subject to some of the same
risks as direct investments in foreign securities, including currency risk. The
regulatory requirements with respect to depositary receipts that are issued in
sponsored and unsponsored programs are generally similar, but the issuers of
unsponsored depositary receipts 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 depositary receipts.
YOU MAY LOSE MONEY IF YOU INVEST IN ANY OF THE GROWTH EQUITY PORTFOLIOS.
/chess piece/ INVESTOR PROFILES
WRL GOLDMAN SACHS GROWTH
For the investor who seeks long-term growth of capital and who can tolerate
fluctuations inherent in stock investing.
WRL SALOMON ALL CAP
For the investor who wants long-term growth of capital and who can tolerate the
risks of a non-diversified portfolio and fluctuations in their investment.
WRL NWQ VALUE EQUITY
For the investor who seeks both capital preservation and long-term capital
appreciation and who can tolerate fluctuations inherent in stock investing.
Prospectus 14
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
/graph/ PORTFOLIO PERFORMANCE
The bar chart and table below gives an indication of the portfolios' risks and
performance. The chart shows changes in the portfolio's performance from year
to year. The performance calculations do not reflect charges or deductions
under the policies or the annuity contracts. These fees and expenses would
lower investment performance. The table shows how the portfolio's average
annual returns for the periods indicated compare to those of a broad measure of
market performance.
Because the WRL Salomon All Cap, and WRL Goldman Sachs Growth portfolios
commenced operations in 1999, their performance history is not included.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL NWQ VALUE EQUITY
- - --------------------------------------------------------------------------------
TOTAL RETURN
(PER CALENDAR YEAR)
- - ---------------------------
[GRAPHIC OMITTED]
25.04% (4.78%) 7.95%
1993 1994 1995
- - ---------------------------
- - ---------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1997-1999)
- - -----------------------------------------
QUARTER ENDED
Highest 16.23% 6/30/99
Lowest (17.95)% 9/30/98
- - ----------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - ---------------------------------------------
SINCE
INCEPTION
1 YEAR (MAY 1, 1996)
WRL NWQ Value
Equity 7.95% 10.76%
S&P 500 Index 21.04% 26.74%
- - ---------------------------------------------
Prospectus 15
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS
- - --------------------------------------------------------------------------------
WRL T. ROWE PRICE DIVIDEND GROWTH
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES EACH BALANCED PORTFOLIO OF THE FUND
AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIOS. FOR FURTHER INFORMATION
ON THESE PORTFOLIOS, PLEASE READ THE SECTION ENTITLED "EXPLANATION OF
STRATEGIES AND RISKS," BEGINNING ON PAGE 20, AND THE FUND'S SAI.
/target/ OBJECTIVES
WRL T. ROWE PRICE DIVIDEND
GROWTH
This portfolio seeks to provide an increasing level of dividend income,
long-term capital appreciation, and reasonable current income through
investments primarily in dividend paying stocks.
- - --------------------------------------------------------------------------------
WHAT IS A BALANCED PORTFOLIO?
A balanced portfolio generally tries to balance three different objectives:
moderate long-term growth of capital, moderate income, and moderate
stability in an investor's principal. To reach these goals, balanced
portfolios invest in a mixture of stocks, bonds and money market
instrument.
- - --------------------------------------------------------------------------------
/chess piece/ POLICIES AND STRATEGIES
WRL T. ROWE PRICE
DIVIDEND GROWTH
The portfolio's sub-adviser, T. Rowe Price Associates, Inc. (T. Rowe Price),
seeks to achieve the portfolio's objective by investing principally in:
o Dividend-paying common stocks with favorable prospects for increasing
dividends and long-term appreciation
To a lesser extent, T. Rowe Price may invest in:
o Foreign securities
o Futures
T. Rowe Price typically invests at least 65% of total assets in common stocks
of dividend-paying companies that it expects to increase their dividends over
time and also provide long-term appreciation.
T. Rowe Price believes that a track record of dividend increases is an
excellent indicator of financial health and growth prospects, and over the
long-term, income can contribute significantly to total return. Dividends can
also help reduce the portfolio's volatility during periods of market turbulence
and help offset losses when stock prices are falling.
T. Rowe Price looks for stocks with sustainable, above-average growth in
earnings and dividends, and attempts to buy them when they are temporarily out
of favor or undervalued by the market. Holdings tend to be in large to
medium-sized companies. In selecting investments, T. Rowe Price favors
companies with one or more of the following:
o Either a track record of, or the potential for, above-average
earnings and dividend growth
o A competitive current dividend yield
o A sound balance sheet and solid cash flow to support future
dividend increases
o A sustainable competitive advantage and leading market position
o Attractive valuations such as a relatively high dividend yield
While the portfolio invests primarily in common stocks, T. Rowe Price may also
purchase other securities including foreign securities, convertible securities,
warrants, preferred stocks, and corporate and government debt when considered
consistent with the portfolio's objective. Futures and options may be used for
any number of reasons, including: managing the portfolio's exposure to
securities prices and foreign currencies; to enhance income; to manage cash
flows efficiently; or to protect the value of portfolio securities. If the
portfolio uses futures and options it is exposed to additional volatility and
potential losses.
The portfolio may sell securities for a variety of reasons such as to secure
gains, limit losses, or redeploy assets into more promising opportunities.
Prospectus 16
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
The portfolio may take a temporary defensive position when the securities
trading markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist (which is
inconsistent with the portfolio's principal investment strategies). Under these
circumstances, the portfolio may be unable to achieve its investment objective.
/warnign sign/ RISKS
The principal risks of investing in Balanced Portfolios that may adversely
affect your investment are described below. Please note that there are many
other circumstances that could adversely affect your investment and prevent a
portfolio from achieving its objective, which are not described here. Please
refer to the section entitled "Explanation of Strategies and Risks," beginning
on page 20 and the Fund's SAI for more information about the risks associated
with investing in Balanced Portfolios.
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the short term. These
price movements may result from factors affecting individual companies,
industries or the securities market as a whole.
Because the stocks a portfolio holds fluctuate in price, the value of your
investment in a portfolio will go up and down.
o FOREIGN SECURITIES
Investments in foreign securities involve risks relating to political, social
and economic developments abroad as well as risks resulting from differences in
regulations to which U.S. and foreign issuers and markets are subject. These
risks include:
o Changes in currency values
o Currency speculation
o Currency trading costs
o Different accounting and reporting practices
o Less information available to the public
o Less (or different) regulation of securities markets
o More complex business negotiations
o Less liquidity
o More fluctuations in market prices
o Delays in settling foreign securities transactions
o Higher costs for holding foreign securities (custodial fees)
o Higher transaction costs
o Vulnerability to seizure and taxes
o Political instability and small markets
o Different market trading days
o HIGH-YIELD/HIGH-RISK FIXED-INCOME SECURITIES
o Credit risk
o Greater sensitivity to interest rate movements
o More speculative than higher rated securities
o Greater vulnerability to economic changes
o Decline in market value in event of default
o Less liquidity
Prospectus 17
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
o CONVERTIBLES
As with all debt securities, the market value of convertibles tends to decline
as interest rates increase and, conversely, to increase as interest rates
decline.
o FUTURES AND OPTIONS
Futures and options involve additional investment risks and transactional
costs, and draw upon skills and experience which are different than those
needed to pick other securities. Special risks include:
o Inaccurate market predictions
o Imperfect correlation
o Illiquidity
o Tax considerations
The portfolios are not required to hedge their investments.
o STYLE RISK-DIVIDEND-PAYING COMPANIES (WRL T. ROWE PRICE DIVIDEND GROWTH)
Securities with different characteristics tend to shift in and out of favor
depending upon market and economic conditions as well as investor sentiment. A
portfolio may underperform other portfolios that employ a different style. A
portfolio also may employ a combination of styles that impact its risk
characteristics. Examples of different styles include growth and value
investing, as well as those focusing on large, medium, or small company
securities.
/graph/ PORTFOLIO PERFORMANCE
Because the WRL T. Rowe Price Dividend Growth portfolio commenced operations in
1999, its performance history is not included.
T. Rowe Price's emphasis on dividend-paying companies could result in
significant investments in large-capitalization stocks. At times, stocks such
as these may lag shares of smaller, faster-growing companies. Also, a company
may reduce or eliminate its dividend. The portfolio's efforts to buy stocks
that appear temporarily out of favor also carries the risk that a stock or
group of stocks may remain out of favor for a long time and may continue to
decline.
YOU MAY LOSE MONEY IF YOU INVEST IN ANY OF THE BALANCED PORTFOLIOS.
/chess piece/ INVESTOR PROFILES
WRL T. ROWE PRICE DIVIDEND GROWTH
For the investor who wants a reasonable level of current income from equity
investments that has the potential to rise faster than inflation, along with
capital appreciation and who can tolerate significant fluctuations in the value
of their investment.
Prospectus 18
<PAGE>
- - --------------------------------------------------------------------------------
RISK/REWARD INFORMATION
- - --------------------------------------------------------------------------------
BEFORE YOU CHOOSE AN INVESTMENT PORTFOLIO,
PLEASE CONSIDER . . .
All of the investment portfolios involve risk, but there is also the potential
for reward. You can lose money -- and you can make money. The Fund portfolios
are structured so that each offers a slightly different degree of risk and
reward than others.
In this prospectus, we've arranged the portfolios in order of risk/
reward from highest to lowest. Notice the scale at the right. It covers the
full spectrum of risk/reward of the portfolios described in this prospectus.
WHAT RISK/REWARD LEVEL IS FOR YOU? ASK YOURSELF THE FOLLOWING:
(1) HOW WELL DO I HANDLE FLUCTUATIONS IN MY ACCOUNT VALUE?
The higher a portfolio is on the risk/reward spectrum, the more its
price is likely to move up and down on a day to day basis. If this makes
you uncomfortable, you may prefer an investment at the lower end of the
scale that may not fluctuate in price as much.
(2) AM I LOOKING FOR A HIGHER RATE OF RETURN?
Generally, the higher the potential return, the higher the risk. If you
find the potential to make money is worth the possibility of losing
more, then a portfolio at the higher end of the spectrum may be right
for you.
A final note: These portfolios are designed for long-term investment.
Each portfolio has an investment objective that it tries to achieve by
following certain investment strategies and techniques. The objective can be
changed without shareholder vote.
---------------------
Aggressive Equity
--------------------
WRL T. ROWE PRICE SMALL CAP
WRL PILGRIM BAXTER MID CAP GROWTH HIGHER
WRL ALGER AGGRESSIVE GROWTH
---------------------
Foreign Equity
---------------------
WRL JANUS GLOBAL
---------------------
Growth Equity
---------------------
WRL SALOMON ALL CAP
WRL NWQ VALUE EQUITY RISK REWARD
---------------------
Balanced
---------------------
WRL T. ROWE PRICE DIVIDEND GROWTH
---------------------
Fixed-Income
---------------------
---------------------
Capital Preservation
---------------------
LOWER
Prospectus 19
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS
- - --------------------------------------------------------------------------------
HOW TO USE THIS SECTION
In the discussions of the individual portfolios on pages 2 through 18, you
found descriptions of the strategies and risks associated with each. In those
pages, you were referred to this section for a more complete description of the
risks. For best understanding, first read the description of the portfolio
you're interested in. Then refer to this section and read about the risks
particular to that portfolio. For even more discussions of strategies and
risks, see the SAI, which is available upon request. See the back cover of this
prospectus for information on how to order the SAI.
/chess piece/
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 WRL Salomon All Cap), 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):
o 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.
o 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
would cause the portfolio's holdings of that issuer to amount to more than 5%
of the portfolio's total assets.
o 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.
WRL Salomon All Cap, reserves the right to become a diversified investment
company (as defined by the 1940 Act).
/warning sign/
INVESTING IN COMMON STOCKS. Many factors cause common stocks to go up and down
in price. A major one is the financial performance of the company that issues
the stock. Other factors include the overall economy, conditions in a
particular industry, and monetary factors like interest rates. When your
portfolio holds stocks, there's a risk that some or all of them may be down in
price when you choose to sell, causing you to lose money. This is called MARKET
RISK.
/warning sign/
INVESTING IN PREFERRED STOCKS. Because these stocks come with a promise to pay
a stated dividend, their price depends more on the size of the dividend than on
the company's performance. But if a company fails to pay the dividend, its
preferred stock is likely to drop in price. Changes in interest rates can also
affect their price. (See "Investing in Bonds," below.)
/warning sign/
INVESTING IN CONVERTIBLE SECURITIES, PREFERRED STOCKS, AND BONDS. Since
preferred stocks and corporate bonds pay a stated return, their prices usually
don't depend on the price of the company's common stock. But some companies
issue preferred stocks and bonds that are CONVERTIBLE into their common stocks.
Linked to the common stock in this way, convertible securities go up and down
in price as the common stock does, adding to their market risk.
Prospectus 20
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS (CONTINUED)
- - --------------------------------------------------------------------------------
/warning sign/
T. ROWE PRICE RESERVE INVESTMENT FUND. The WRL T. Rowe Price Small Cap and WRL
T. Rowe Price Dividend Growth portfolios may invest in money market instruments
directly or indirectly through investment in the Reserve Investment Fund
(Reserve Fund). The Reserve Fund is advised by T. Rowe Price and charges no
advisory fees to the investment manager, but other fees may be incurred which
may result in a duplication of fees. Further information is included in the
SAI.
/warning sign/
VOLATILITY. The more an investment goes up and down in price, the more VOLATILE
it is. Volatility increases the market risk because even though your portfolio
may go UP more than the market in good times, it may also go DOWN more than the
market in bad times. If you decide to sell when a volatile portfolio is down,
you could lose more.
/warning sign/
INVESTING IN BONDS. Like common stocks, bonds fluctuate in value, though the
factors causing this fluctuation are different, including:
o CHANGES IN INTEREST RATES. Bond prices tend to move the opposite of interest
rates. Why? Because when interest rates on new bond issues go up, rates on
existing bonds stay the same and they become less desirable. When rates go
down, the reverse happens. This is also true for most preferred stocks and
some convertible securities.
o LENGTH OF TIME TO MATURITY. When a bond matures, the issuer must pay the owner
its face value. If the maturity date is a long way off, many things can affect
its value, so a bond is more volatile the farther it is from maturity. As that
date approaches, fluctuations usually become smaller and the price gets closer
to face value.
o DEFAULTS. All bond issuers make at least two promises: (1) to pay interest
during the bond's term and (2) to return principal when it matures. If an
issuer fails to keep one or both of these promises, the bond will probably
drop in price dramatically, and may even become worthless. Changes in
financial condition and general economic conditions can affect the ability to
honor financial obligations and therefore credit quality. A security's price
may be adversely affected by the market's opinion of the security's credit
quality level even if the issuer or counterparty has suffered no degradation
in ability to honor the obligation.
o DECLINES IN RATINGS. At the time of issue, most bonds are rated by
professional rating services, such as Moody's Investors Service, Inc.
(Moody's) and Standard & Poor's Corporation (S&P). The stronger the financial
backing behind the bond, the higher the rating. If this backing is weakened or
lost, the rating service may downgrade the bond's rating. This is virtually
certain to cause the bond to drop in price. Bonds that are rated below BBB by
S&P, and below Ba by Moody's, are considered to be below investment grade.
Moody's rates bonds in nine categories, from Aaa to C, with Aaa being the
highest with least risk. S&P rates bonds in six categories, from AAA to D,
with AAA being the highest.
o LOW RATING. High-yield/high-risk fixed-income securities (commonly known as
"junk bonds") have greater credit risk, are more sensitive to interest rate
movements, are considered more speculative than higher rated bonds, have a
greater vulnerability to economic changes and are less liquid. The market for
such securities may be less active than for higher rated securities, which can
adversely affect the price at which these securities may be sold and may
diminish a portfolio's ability to obtain accurate market quotations when
valuing the portfolio securities and calculating the portfolio's net asset
value.
o LACK OF RATING. Some bonds are considered speculative, or for other reasons
are not rated. Such bonds must pay a higher interest rate in order to attract
investors. They're considered riskier because of the higher possibility of
default or loss of liquidity.
o LOSS OF LIQUIDITY. If a bond is downgraded, or for other reasons drops in
price, the market demand for it may "dry up". In that case, the bond may be
hard to sell or "liquidate" (convert to cash).
/warning sign/
INVESTING IN FOREIGN SECURITIES. These are investments offered by foreign
companies, governments and government agencies. They involve risks not usually
associated with U.S. securities, including:
Prospectus 21
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS (CONTINUED)
- - --------------------------------------------------------------------------------
o CHANGES IN CURRENCY VALUES. Foreign securities are sold in currencies other
than U.S. dollars. If a currency's value drops, the value of the securities
held by a portfolio could drop too, even if the securities are strong. In
turn, the value of the shares of the portfolio could also drop. Dividend and
interest payments may be lower. Factors affecting exchange rates are:
differing interest rates among countries; balances of trade; amount of a
country's overseas investments; and any currency manipulation by banks.
o CURRENCY SPECULATION. The foreign currency market is largely unregulated and
subject to speculation.
o ADRS/ADSS. Some portfolios also invest in American Depositary Receipts (ADRs)
and American Depositary Shares (ADSs). They represent securities of foreign
companies traded on U.S. exchanges, and their values are expressed in U.S.
dollars. Changes in the value of the underlying foreign currency will change
the value of the ADR or ADS. A portfolio incurs costs when it converts other
currencies into dollars, and vice-versa.
o EURO CONVERSION. On January 1, 1999, certain participating countries in the
European Economic Monetary Union adopted the "Euro" as their official
currency. Other EU member countries may convert to the Euro at a later date.
As of January 1, 1999, governments in participating countries issued new debt
and redenominated existing debt in Euros; corporations chose to issue stocks
or bonds in Euros or national currency. The new European Central Bank (the
"ECB") will assume responsibility for a uniform monetary policy in
participating countries. Euro conversion risks that could affect a portfolio's
foreign investments include: (1) the readiness of Euro payment, clearing, and
other operational systems; (2) the legal treatment of debt instruments and
financial contracts in existing national currencies rather than the Euro; (3)
exchange-rate fluctuations between the Euro and non-Euro currencies during the
transition period of January 1, 1999 through December 31, 2002 and beyond; (4)
potential U.S. tax issues with respect to portfolio securities; and (5) the
ECB's abilities to manage monetary policies among the participating countries;
and (6) the ability of financial institution systems to process Euro
transactions.
o DIFFERENT ACCOUNTING AND REPORTING PRACTICES. Foreign tax laws are different,
as are laws, practices and standards for accounting, auditing and reporting
data to investors.
o LESS INFORMATION AVAILABLE TO THE PUBLIC. Foreign companies usually make less
information available to the public.
o LESS REGULATION. Securities regulations in many foreign countries are more lax
than in the U.S.
o MORE COMPLEX NEGOTIATIONS. Because of differing business and legal procedures,
a portfolio may find it hard to enforce obligations or negotiate favorable
brokerage commission rates.
o LESS LIQUIDITY/MORE VOLATILITY. Some foreign securities are harder to convert
to cash than U.S. securities, and their prices may fluctuate more
dramatically.
o SETTLEMENT DELAYS. "Settlement" is the process of completing a securities
transaction. In many countries, this process takes longer than it does in the
U.S.
o HIGHER CUSTODIAL CHARGES. Fees charged by the Fund's custodian for holding
shares are higher for foreign securities than that of domestic securities.
o HIGHER TRANSACTION COSTS. Fees charged by securities brokers are often higher
for transactions involving foreign securities than domestic securities. Higher
expenses, such as brokerage fees, may reduce the return a portfolio might
otherwise achieve.
o VULNERABILITY TO SEIZURE AND TAXES. Some governments can seize assets. They
may also limit movement of assets from the country. A portfolio's interest,
dividends and capital gains may be subject to foreign withholding taxes.
o POLITICAL INSTABILITY AND SMALL EMERGING MARKETS. Developing countries can be
politically unstable. Economies can be dominated by a few industries, and
markets may trade a small number of securities. Regulations of banks and
capital markets can be weak.
o DIFFERENT MARKET TRADING DAYS. Foreign markets may not be open for trading
when U.S. markets are and asset values can change before your transaction
occurs.
o HEDGING. A portfolio may, but will not necessarily, enter into forward
currency contracts to hedge against declines in the value of securities
Prospectus 22
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS (CONTINUED)
- - --------------------------------------------------------------------------------
denominated in, or whose value is tied to, a currency other than the U.S.
dollar or to reduce the impact of currency fluctuation on purchases, and
sales of such securities.
/warning sign/
INVESTING IN FUTURES, OPTIONS AND DERIVATIVES. Besides conventional securities,
your portfolio may seek to increase returns by investing in financial contracts
related to its primary investments. Such contracts involve additional risks and
costs. Risks include:
o INACCURATE MARKET PREDICTIONS. If the sub-adviser is wrong in its expectation,
for example, with respect to interest rates, securities prices or currency
markets, the contracts could produce losses instead of gains.
o PRICES MAY NOT MATCH. Movements in the price of the financial contracts may be
used to offset movements in the price of other securities you own. If those
prices don't correlate or match closely, the benefits of the transaction might
be diminished.
o ILLIQUID MARKETS. If there's no market for the contracts, the portfolio may
not be able to control losses.
o TAX CONSEQUENCES. Sometimes the possibility of incurring high taxes on a
transaction may delay closing out a position and limit the gains it would have
produced.
/warning sign/
INVESTING IN SPECIAL SITUATIONS. Each portfolio may invest in "special
situations" from time to time. Special situations arise when, in the opinion of
a portfolio manager, a company's securities may be undervalued, then increase
considerably in price, due to:
o A NEW PRODUCT OR PROCESS
o A MANAGEMENT CHANGE
o A TECHNOLOGICAL BREAKTHROUGH
o AN EXTRAORDINARY CORPORATE EVENT
o A TEMPORARY IMBALANCE IN THE SUPPLY OF, AND DEMAND FOR, THE SECURITIES OF AN
ISSUER
Investing in a special situation carries an additional risk of loss if the
expected development does not happen or does not attract the expected
attention. The impact of special situation investing to a portfolio will depend
on the size of a portfolio's investment in a situation.
/chess piece/
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 short-term debt securities that
are considered cash equivalents. This may be done as a temporary 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 decrease.
/question mark/
PORTFOLIO TURNOVER
A portfolio turnover rate is, in general, the percentage calculated by taking
the lesser of purchases or sales of portfolio securities (excluding short-term
securities) for a year and dividing it by the monthly average of the market
value of such securities during the year.
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 unforeseen developments.
The rate of portfolio turnover will not be a limiting factor when short-term
investing is considered appropriate. Increased turnover rates result in higher
brokerage costs and other transaction based expenses for a portfolio. These
charges are ultimately borne by the policyholders.
/chess piece/
SHORT SALES
A 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
Prospectus 23
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS (CONTINUED)
- - --------------------------------------------------------------------------------
times when the short position is open, the portfolio owns an equal amount of
the securities convertible into, or exchangeable without further consideration
for, securities of the same issue as the securities sold short.
/question mark/ INVESTMENT STRATEGIES
A portfolio is permitted to use other securities and investment strategies in
pursuit of its investment objective, subject to limits established by the
Fund's Board of Directors. No portfolio is under any obligation to use any of
the techniques or strategies at any given time or under any particular economic
condition. Certain instruments and investment strategies may expose the
portfolios to other risks and considerations, which are discussed in the Fund's
SAI.
Prospectus 24
<PAGE>
- - --------------------------------------------------------------------------------
HOW THE FUND IS MANAGED AND ORGANIZED
- - --------------------------------------------------------------------------------
/question mark/
HOW THE FUND IS MANAGED AND ORGANIZED
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.
WRL Investment Management, Inc. (WRL Management) located at 570 Carillon
Parkway, St. Petersburg, Florida 33716, has served as the Fund's investment
adviser since 1997. (Prior to this date, Western Reserve served as investment
adviser to the Fund). The investment adviser is a direct, wholly-owned
subsidiary of Western Reserve Life Assurance Co. of Ohio (Western Reserve),
which is wholly-owned by First AUSA Life Insurance Company, a stock life
insurance company, which is wholly-owned by AEGON USA, Inc. AEGON USA, Inc. is
a financial services holding company whose primary emphasis is on life and
health insurance and annuity and investment products. AEGON USA, Inc. is a
wholly-owned indirect subsidiary of AEGON N.V., a Netherlands corporation which
is a publicly traded international insurance group. The investment adviser had
no prior experience as an adviser.
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.
The Fund has received an order from the Securities and Exchange Commission that
will permit the Fund and the investment adviser, subject to certain conditions,
and without the approval of shareholders to: (1) employ a new unaffiliated
sub-adviser for a portfolio pursuant to the terms of a new investment
sub-advisory agreement, either as a replacement for an existing sub-adviser or
as an additional sub-adviser; (2) materially change the terms of any
sub-advisory agreement; and (3) continue the employment of an existing
sub-adviser on the same sub-advisory contract terms where a contract has been
assigned because of a change in control of the sub-adviser. In such
circumstances, shareholders would receive notice and information about the new
sub-adviser within ninety (90) days after the hiring of any new sub-adviser.
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 advisory fees for each portfolio are:
ADVISORY
PORTFOLIO FEE
WRL Janus Global* 0.80%
WRL Alger Aggressive Growth 0.80%
WRL NWQ Value Equity 0.80%
WRL Salomon All Cap 0.90% up to $100 million
0.80% over $100 million
WRL T. Rowe Price 0.90% up to $100 million
Dividend Growth 0.80% over $100 million
WRL T. Rowe Price 0.75%
Small Cap
WRL Pilgrim Baxter 0.90% up to $100 million
Mid Cap Growth 0.80% over $100 million
WRL Goldman Sachs Growth 0.90% up to $100 million
0.80% over $100 million
* WRL Management currently waives 0.025% of its advisory fee for the
portfolio's average daily net assets above $2 billion (net fee -- 0.775%.) This
waiver will terminate on June 25, 2000.
EXPENSE REIMBURSEMENT
WRL Management has entered into an expense limitation agreement with the Fund
on behalf of, each applicable portfolio, reimburse a portfolio for certain
operating expenses pursuant to which WRL Management has agreed to so that the
total annual operating expenses of each applicable portfolio do not exceed the
total operating expenses specified for that portfolio (expense cap) in the
portfolio's then-current SAI. The Fund, on behalf of an applicable portfolio,
will at a later date reimburse WRL Management for operating expenses previously
paid on behalf of such
Prospectus 25
<PAGE>
- - --------------------------------------------------------------------------------
HOW THE FUND IS MANAGED AND ORGANIZED (CONTINUED)
- - --------------------------------------------------------------------------------
portfolio during the previous 36 months, but only if, after such reimbursement,
the portfolio's expense ratio does not exceed the expense cap. The agreement
has an initial term through April 30, 2001, and will automatically renew for
one-year terms unless WRL Management provides written notice to the Fund at
least 30 days prior to the end of the then-current term. In addition, the
agreement will terminate upon termination of the Investment Advisory Agreement,
or may be terminated by the Fund, without payment of any penalty, upon ninety
(90) days' prior written notice to WRL Management. The voluntary fee waiver on
behalf of certain of the Janus portfolios is not included in this agreement.
SUB-ADVISERS
Here is a listing of the sub-advisers and the portfolios they manage:
SUB-ADVISER PORTFOLIO
Alger WRL Alger Aggressive Growth
Janus WRL Janus Global
NWQ WRL NWQ Value Equity
T. Rowe Price WRL T. Rowe Price
Dividend Growth
WRL T. Rowe Price Small Cap
SBAM WRL Salomon All Cap
GSAM WRL Goldman Sachs Growth
Pilgrim Baxter WRL Pilgrim Baxter
Mid Cap Growth
DAY-TO-DAY MANAGEMENT OF THE INVESTMENTS IN EACH PORTFOLIO IS THE
RESPONSIBILITY OF THE PORTFOLIO MANAGER. THE PORTFOLIO MANAGERS OF THE FUND
ARE:
WRL T. ROWE PRICE SMALL CAP
RICHARD T. WHITNEY, CFA has managed this portfolio since inception and heads
the Investment Team for this portfolio. He joined T. Rowe Price in 1985.
WRL PILGRIM BAXTER MID CAP GROWTH
JEFFREY A. WRONA, CFA has managed this portfolio since inception. Prior to
joining Pilgrim Baxter, he was a senior portfolio manager at Munder Capital
Management.
WRL ALGER AGGRESSIVE GROWTH
DAVID D. ALGER has been employed by Alger since 1971 and has served as
president since 1995. He has managed this portfolio since inception.
DAVID HYUN has served as co-manager of this portfolio since February 1998. He
has been employed by Alger as a senior research analyst since 1991, as a
portfolio manager since 1997 and as a senior vice president since 1998.
WRL JANUS GLOBAL
HELEN YOUNG HAYES, CFA and LAURENCE CHANG, CFA have served as co-portfolio
managers of this portfolio since January 2000. Ms. Hayes previously served as
manager of this portfolio since its inception. She has been employed by Janus
since 1987.
Mr. Chang has been employed by Janus since 1993. Before joining Janus, Mr.
Chang was a project director at the National Security Archive.
WRL SALOMON ALL CAP
ROSS S. MARGOLIES has managed this portfolio since inception. Mr. Margolies
joined Salomon in 1992.
ROBERT M. DONAHUE, JR. assists in the day-to-day management of the portfolio.
Prior to joining SBAM in 1997, Mr. Donahue worked as an equity analyst at
Gabelli & Company.
WRL GOLDMAN SACHS GROWTH
HERBERT E. EHLERS has served as head of a six person investment team that has
managed the portfolio since inception. Prior to joining GSAM in 1997, he was
chief investment officer at Liberty Investment Management, Inc. from 1994-1997.
WRL NWQ VALUE EQUITY
EDWARD C. FRIEDEL has been the senior manager of this portfolio since
inception. He has been a managing director and investment strategist with NWQ
since 1983.
WRL T. ROWE PRICE DIVIDEND GROWTH
THOMAS HUBER, CFA, has served as manager of this portfolio since March 2000.
Mr. Huber is a Vice President of T. Rowe Price Associates. Within the Equity
Division, he covers consumer products, leisure and gaming, apparel, drugstores
and supermarkets. Before joining the firm in 1994, he worked for NationsBank as
a Corporate Banking Officer.
Prospectus 26
<PAGE>
- - --------------------------------------------------------------------------------
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 information for the separate
accounts, policies or annuity contracts.
TOTAL RETURN
Total return refers to the average annual percentage change in value of an
investment in a portfolio held for a stated period of time as of a stated
ending date. When a portfolio has been in operation for the stated period, the
total return for such period will be provided if performance information is
quoted. Total return quotations are expressed as average annual compound rates
of return for each of the periods quoted. They also reflect the deduction of a
proportionate share of a portfolio's investment advisory fees and direct
portfolio expenses, and assume that all dividends and capital gains
distributions during the period are reinvested in the portfolio when made.
SIMILAR 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. Each portfolio's future performance may be
greater or less than the historical performance of the corresponding Similar
Sub-Adviser Fund. There can be no assurance, and no representation is made,
that the investment results of any portfolio will be comparable to the results
of any of the Similar Sub-Adviser Funds or any other fund managed by WRL
Management or any sub-adviser.
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, 1999. 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.
Prospectus 27
<PAGE>
- - --------------------------------------------------------------------------------
PERFORMANCE INFORMATION (CONTINUED)
- - --------------------------------------------------------------------------------
SIMILAR SUB-ADVISER FUND PERFORMANCE
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(WITH SALES LOADS)
------------------------------
SIMILAR 10 YEARS
SUB-ADVISER INCEPTION TOTAL OR SINCE
WRL PORTFOLIO FUND DATE ASSETS 1 YEAR 5 YEARS INCEPTION
- - ----------------------------- -------------------------------- ----------- ------------------ --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
WRL Janus Global Janus Worldwide(1) 5/15/91 $ 33,802.9M 64.37% 30.88% 25.10%
WRL Alger Aggressive Growth The Alger Fund Class A $ 226.6M 65.74% N/A 40.59%
Capital Appreciation Portfolio 12/31/96 (Net)
Class A Shares(2)
WRL Goldman Sachs Growth Goldman Sachs Capital Class A $3,285,584,250 20.24% 27.15% 19.81%
Growth Fund(3) 4/20/90
WRL T. Rowe Price T. Rowe Price Dividend 12/30/92 $1,027,968,177 (2.09)% 20.32% 17.75%
Dividend Growth Growth Fund(1)
WRL T. Rowe Price Small Cap T. Rowe Price Diversified 6/30/97 $ 74,803,935 29.27% N/A 16.36%
Small-Cap Growth Fund(1)(5)
WRL Pilgrim Baxter PBHG Growth II Portfolio(1) 4/30/97 $ 178.6M 98.19% N/A 36.70%
Mid Cap Growth
WRL Salomon All Cap Salomon Brothers Class O $ 215,308,000 23.44% 28.36% 16.11%
Capital Fund(4) 8/23/76
</TABLE>
(1) The Janus Worldwide Fund, T. Rowe Price Dividend Growth, PBHG Growth II and
T. Rowe Price Diversified Small Cap Growth Funds do not have sales loads.
(2) Total returns are for Class A shares of The Alger Fund Capital Appreciation
Portfolio and reflect a deduction of a 4.75% front-end sales load. The
Portfolio also offers Class B and Class C shares with different sales
loads. Calculating total return with those sales loads may have resulted
in lower total returns. The inception dates for Class A, B and C shares
are 12/31/96, 10/29/93 and 8/1/97, respectively.
(3) Total returns are for Class A shares of the Goldman Sachs Capital Growth
Fund and reflects a deduction of a 5.5% front-end sales load. The Fund
also offers 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) Total returns are for Class O shares of the Salomon Brothers Capital Fund.
Class O shares are sold without any sales charge to the fund. The fund
also offers Class A, Class B and Class 2 shares. Since May 1, 1990, the
Fund has been managed by Salomon Brothers Asset Management Inc. Prior
hereto, it was managed by Lehman Management Co.
(5) Total returns for the T. Rowe Price Diversified Small-Cap Growth Fund
reflect past and present expense limitations, which increased the fund's
total return.
Prospectus 28
<PAGE>
- - --------------------------------------------------------------------------------
PERFORMANCE INFORMATION (CONTINUED)
- - --------------------------------------------------------------------------------
SIMILAR SUB-ADVISER FUND PERFORMANCE
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(WITHOUT SALES LOADS)
------------------------------
SIMILAR 10 YEARS
SUB-ADVISER INCEPTION TOTAL OR SINCE
WRL PORTFOLIO FUND DATE ASSETS 1 YEAR 5 YEARS INCEPTION
- - ----------------------------- --------------------------- ----------- ------------------ --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
WRL Janus Global Janus Worldwide(2) 5/15/91 $ 33,802.9M 64.37% 30.88% 25.10%
WRL Alger Aggressive Growth The Alger Fund(1) Class A $ 266.6M 74.01% N/A 42.89%
Capital Appreciation 12/31/96 (Net)
Portfolio
WRL Goldman Sachs Growth Goldman Sachs Capital Class A $3,285,584,250 27.23% 28.58% 20.51%
Growth Fund(1) 4/20/90
WRL T. Rowe Price Dividend T. Rowe Price Dividend 12/30/92 $ 1,027,968M (2.09)% 20.32% 17.75%
Growth Growth Fund(2)
WRL T. Rowe Price Small Cap T. Rowe Price Diversified 6/30/97 $ 74,803,935 29.27% N/A 16.36%
Small-Cap Growth Fund(2)
WRL Pilgrim Baxter Mid Cap PBHG Growth II Portfolio 5/1/97 $ 178.6M 98.19% N/A 36.70%
Growth
WRL Salomon All Cap Salomon Brothers Class O $ 763,203,000 30.99% 30.57% 19.55%
Capital Fund(3) 8/23/76
</TABLE>
(1) Total returns are for Class A shares of The Alger Fund Capital Appreciation
Portfolio and reflect a deduction of a 4.75% front-end sales load. The
Portfolio also offers Class B and Class C shares with different sales
loads. Calculating total return with those sales loads may have resulted
in lower total returns. The inception dates for Class A, B and C shares
are 12/31/96, 10/29/93 and 8/1/97, respectively.
(2) The T. Rowe Price Dividend Growth, Janus Worldwide, PBHG Growth II and T.
Rowe Price Diversified Small-Cap Growth Funds do not have a sales loads.
(3) The Salomon Brothers Capital Fund Class O shares does not have a sales
load. Since May 1, 1990, the Fund has been managed by Salomon Brothers
Asset Management Inc. Prior hereto, it was managed by Lehman Management
Co.
THE PERFORMANCE OF SIMILAR SUB-ADVISER FUNDS DOES NOT REFLECT ANY OF THE
CHARGES, FEES, AND EXPENSES IMPOSED UNDER THE POLICIES OR 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-ADVISERS FUNDS AS "SIMILAR SUB-ADVISED FUNDS.")
(See the SAI for more information about the portfolios' performance.)
Prospectus 29
<PAGE>
- - --------------------------------------------------------------------------------
OTHER INFORMATION
- - --------------------------------------------------------------------------------
/question mark/ PURCHASE AND REDEMPTION OF SHARES
As described earlier in the prospectus, shares of the portfolios are sold
exclusively to certain separate accounts of Western Reserve Life Assurance Co.
of Ohio, PFL Life Insurance Company, AUSA Life Insurance Company, Inc. and
Peoples Benefit Life Insurance Company and are not offered to the public.
Shares are sold and redeemed at their net asset value without the imposition of
any sales commission or redemption charge. (However, certain sales or other
charges may apply to the policies or annuity contracts, as described in the
product prospectus.)
/question mark/ 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 (NYSE) (usually 4:00 p.m., Eastern Time), on each day the exchange is
open.
Net asset value (NAV) 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. Share prices for any transaction are those next calculated after
receipt of an order.
- - --------------------------------------------------------------------------------
WHAT IS NET ASSET VALUE?
The 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 WRL J.P. Morgan Money Market) are valued at
market value. If market values are not readily available, securities are valued
at fair value as determined by the Fund's Valuation Committee under the
supervision of the Fund's Board.
Money market instruments maturing in 60 days or less, and all securities held
in the WRL J.P. Morgan Money Market, are valued on the amortized cost basis.
Under this method, the NAV of the money market 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 NAV. (See the SAI for details.)
/question mark/ 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.
/question mark/ TAXES
Each portfolio has either qualified and expects to continue to qualify or will
qualify in its initial year as a regulated investment company under Subchapter
M of the Internal Revenue Code of 1986, as amended ("Code"). As qualified, a
portfolio is not subject to federal income tax on that part of its taxable
income that it distributes to you. Taxable income consists generally of net
investment income, and any capital gains. It is each portfolio's intention to
distribute all such income and gains.
Shares of each portfolio are offered only to the separate accounts of Western
Reserve and its affiliates. Separate accounts 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 Income Tax Considerations" included in the respective prospectuses for
the policies and the annuity contracts.
Section 817(h) of the Code and the regulations thereunder impose
"diversification" requirements on each portfolio. Each portfolio intends to
comply with the diversification requirements. These requirements are in
addition to the diversification requirements
Prospectus 30
<PAGE>
- - --------------------------------------------------------------------------------
OTHER INFORMATION (CONTINUED)
- - --------------------------------------------------------------------------------
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. Specifically, the
regulations provide that, except as permitted by "safe harbor," rules described
below, as of the end of each calendar quarter or within 30 days thereafter, no
more than 55% of the portfolio's total assets may be represented by any one
investment, no more than 70% by any two investments, no more than 80% by any
three investments, and no more than 90% by any four investments.
Section 817(h) also 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, 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. If a portfolio does
not satisfy the section 817(h) requirements, the separate accounts, the
insurance companies, the policies and the annuity contracts may be taxable. See
the prospectuses for the policies and annuity contracts.
The foregoing is only a summary of some of the important federal income tax
considerations generally affecting a portfolio and you; see the SAI for a more
detailed discussion. You are urged to consult your tax advisors.
/question mark/ REPORT TO POLICYHOLDERS
The fiscal year of each portfolio ends on December 31 of each year. The Fund
will send to you, at least semi-annually, reports which show the portfolios'
composition and other information. An annual report, with audited financial
information, will be sent to you each year.
/question mark/ DISTRIBUTION AND SERVICE PLANS
The Fund has adopted a plan pursuant to Rule 12b-1 under the 1940 Act (the
"Plan") and pursuant to the Plan, entered into a Distribution Agreement with
AFSG Securities Corporation (AFSG) located at 4333 Edgewood Road NE, Cedar
Rapids, Iowa 52499. AFSG is an affiliate of the investment adviser, and serves
as principal underwriter for the Fund. The Plan permits the use of Fund assets
to help finance the distribution of the shares of the portfolios. Under the
Plan, the Fund, on behalf of the portfolios, is permitted to pay to various
service providers up to 0.15% of the average daily net assets of each portfolio
as payment for actual expenses incurred in connection with the distribution of
the shares of the portfolios. Because these fees are paid out of Fund assets on
an on-going basis, over time these costs will increase the cost of your
investment and may cost you more than other types of sales charges.
As of the date of this prospectus, the Fund has not paid any distribution fees
under the Plan and does not intend to do so before April 30, 2001. You will
receive written notice prior to the payment of any fees under the Plan.
Prospectus 31
<PAGE>
FINANCIAL HIGHLIGHTS*
THE FINANCIAL HIGHLIGHTS TABLE IS INTENDED TO HELP YOU UNDERSTAND A PORTFOLIO'S
FINANCIAL PERFORMANCE FOR THE PAST 5 YEARS (OR, IF SHORTER, THE PERIOD OF THE
PORTFOLIO'S OPERATIONS). CERTAIN INFORMATION REFLECTS FINANCIAL RESULTS FOR A
SINGLE PORTFOLIO SHARE. THE TOTAL RETURNS IN THE TABLE REPRESENT THE RATE AN
INVESTOR WOULD HAVE EARNED (OR LOST) ON AN INVESTMENT IN EACH PORTFOLIO
(ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS). THIS INFORMATION HAS BEEN DERIVED
FROM FINANCIAL STATEMENTS AUDITED BY PRICEWATERHOUSECOOPERS LLP, INDEPENDENT
ACCOUNTANTS, WHOSE REPORT, ALONG WITH THE FUND'S FINANCIAL STATEMENTS, IS
INCLUDED IN THE FUND'S ANNUAL REPORT, WHICH IS AVAILABLE UPON REQUEST BY
CALLING THE FUND AT 1-800-851-9777.
<TABLE>
<CAPTION>
WRL JANUS GLOBAL
---------------------------------
DECEMBER 31,
---------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Net asset value, beginning of year .................................. $ 23.71 $ 19.04
Income from operations:
Net investment income (loss) ...................................... (0.04) 0.05
Net realized and unrealized gain (loss) on investments ............ 16.42 5.61
---------- ----------
Net income (loss) from operations ................................ 16.38 5.66
---------- ----------
Distributions:
Dividends from net investment income .............................. 0.00 (0.13)
Dividends in excess of net investment income ...................... 0.00 0.00
Distributions from net realized gains on investments .............. (2.63) (0.80)
Distributions in excess of net realized gains on investments ...... 0.00 (0.06)
---------- ----------
Total distributions .............................................. (2.63) (0.99)
---------- ----------
Net asset value, end of year ........................................ $ 37.46 $ 23.71
========== ==========
Total return ........................................................ 71.10% 30.01 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 1,926,210 $ 1,069,765
Ratio of expenses to average net assets ........................... 0.92% 0.95%
Ratio of net investment income (loss) to average net assets ....... (0.14)% 0.23%
Portfolio turnover rate ........................................... 68.10% 87.36%
<CAPTION>
WRL JANUS GLOBAL
--------------------------------------------
DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net asset value, beginning of year .................................. $ 18.12 $ 15.52 $ 13.12
Income from operations:
Net investment income (loss) ...................................... 0.08 0.08 0.10
Net realized and unrealized gain (loss) on investments ............ 3.32 4.20 2.91
-------- -------- --------
Net income (loss) from operations ................................ 3.40 4.28 3.01
-------- -------- --------
Distributions:
Dividends from net investment income .............................. (0.13) (0.04) 0.00
Dividends in excess of net investment income ...................... (1.01) (0.17) 0.00
Distributions from net realized gains on investments .............. (1.34) (1.47) (0.61)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00
-------- -------- --------
Total distributions .............................................. (2.48) (1.68) (0.61)
-------- -------- --------
Net asset value, end of year ........................................ $ 19.04 $ 18.12 $ 15.52
======== ======== ========
Total return ........................................................ 18.75% 27.74% 23.06%
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $785,966 $ 534,820 $ 289,506
Ratio of expenses to average net assets ........................... 1.00% 0.99% 0.99%
Ratio of net investment income (loss) to average net assets ....... 0.41% 0.46% 0.75%
Portfolio turnover rate ........................................... 97.54% 88.31% 130.60%
</TABLE>
<TABLE>
<CAPTION>
WRL ALGER AGGRESSIVE GROWTH
------------------------------
DECEMBER 31,
-------------------------------
1999 1998
---------------- --------------
<S> <C> <C>
Net asset value, beginning of year .................................. $ 22.44 $ 16.04
Income from operations:
Net investment income (loss) ...................................... (0.15) (0.04)
Net realized and unrealized gain (loss) on investments ............ 14.95 7.68
---------- --------
Net income (loss) from operations ................................ 14.80 7.64
---------- --------
Distributions:
Dividends from net investment income .............................. (0.16) 0.00
Dividends in excess of net investment income ...................... (1.38) (0.05)
Distributions from net realized gains on investments .............. (2.42) (1.19)
Distributions in excess of net realized gains on investments ...... 0.00 0.00
---------- --------
Total distributions .............................................. (3.96) (1.24)
---------- --------
Net asset value, end of year ........................................ $ 33.28 $ 22.44
========== ========
Total return ........................................................ 69.02% 48.69%
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $1,117,511 $ 574,164
Ratio of expenses to average net assets ........................... 0.89% 0.91%
Ratio of net investment income (loss) to average net assets ....... (0.56)% (0.21)%
Portfolio turnover rate ........................................... 101.71% 117.44%
<CAPTION>
WRL ALGER AGGRESSIVE GROWTH
--------------------------------------------
DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net asset value, beginning of year .................................. $ 14.18 $ 13.25 $ 9.86
Income from operations:
Net investment income (loss) ...................................... (0.01) (0.01) (0.06)
Net realized and unrealized gain (loss) on investments ............ 3.44 1.38 3.96
-------- -------- --------
Net income (loss) from operations ................................ 3.43 1.37 3.90
-------- -------- --------
Distributions:
Dividends from net investment income .............................. 0.00 0.00 0.00
Dividends in excess of net investment income ...................... (0.42) (0.19) 0.00
Distributions from net realized gains on investments .............. (1.15) (0.25) (0.51)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00
-------- -------- --------
Total distributions .............................................. (1.57) (0.44) (0.51)
-------- -------- --------
Net asset value, end of year ........................................ $ 16.04 $ 14.18 $ 13.25
======== ======== ========
Total return ........................................................ 24.25% 10.45% 38.02%
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $336,166 $220,552 $158,534
Ratio of expenses to average net assets ........................... 0.96% 0.98% 1.07%
Ratio of net investment income (loss) to average net assets ....... (0.06)% (0.10)% (0.48)%
Portfolio turnover rate ........................................... 136.18% 101.28% 108.04%
</TABLE>
Prospectus 32
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL NWQ VALUE EQUITY
---------------------------------------------------------
DECEMBER 31,
---------------------------------------------------------
1999 1998 1997 1996(a)
-------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ................................... $ 12.12 $ 13.90 $ 11.27 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 0.10 0.12 0.12 0.10
Net realized and unrealized gain (loss) on investments ............. 0.85 (0.78) 2.69 1.23
-------- -------- -------- -------
Net income (loss) from operations ................................. 0.95 (0.66) 2.81 1.33
-------- -------- -------- -------
Distributions:
Dividends from net investment income ............................... (0.10) (0.13) (0.09) (0.04)
Dividends in excess of net investment income ....................... 0.00 (0.12) (0.07) 0.00
Distributions from net realized gains on investments ............... 0.00 (0.62) (0.02) (0.02)
Distributions in excess of net realized gains on investments ....... (0.20) (0.25) 0.00 0.00
-------- -------- -------- -------
Total distributions ............................................... (0.30) (1.12) (0.18) (0.06)
-------- -------- -------- -------
Net asset value, end of year ......................................... $ 12.77 $ 12.12 $ 13.90 $ 11.27
======== ======== ======== =======
Total return ......................................................... 7.95% (4.78)% 25.04% 13.19%
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................... 137,158 $157,157 $173,435 $49,394
Ratio of expenses to average net assets ............................ 0.90% 0.89% 0.89% 1.00%
Ratio of net investment income (loss) to average net assets ........ 0.77% 0.89% 0.90% 0.89%
Portfolio turnover rate ............................................ 34.19% 43.60% 17.28% 7.93%
</TABLE>
<TABLE>
<CAPTION>
WRL WRL WRL
GOLDMAN SACHS T. ROWE PRICE T. ROWE PRICE
GROWTH DIVIDEND GROWTH SMALL CAP
--------------- ----------------- --------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
--------------- ----------------- --------------
1999(B) 1999(B) 1999(B)
--------------- ----------------- --------------
<S> <C> <C> <C>
Net asset value, beginning of year ................................. $ 10.00 $ 10.00 $ 10.00
Income from operations:
Net investment income (loss) ..................................... 0.01 0.11 (0.03)
Net realized and unrealized gain (loss) on investments ........... 1.74 (0.85) 3.87
-------- ------- --------
Net income (loss) from operations ............................... 1.75 (0.74) 3.84
-------- ------- --------
Distributions:
Dividends from net investment income ............................. 0.00 0.00 0.00
Dividends in excess of net investment income ..................... 0.00 0.00 (0.43)
Distributions from net realized gains on investments ............. 0.00 0.00 0.00
Distributions in excess of net realized gains on investments ..... 0.00 0.00 0.00
-------- ------- --------
Total distributions ............................................. 0.00 0.00 (0.43)
-------- ------- --------
Net asset value, end of year ....................................... $ 11.75 $ 9.26 $ 13.41
======== ======= ========
Total return ....................................................... 17.50% (7.40)% 38.49%
Ratios and supplemental data:
Net assets at end of year (in thousands) ......................... $ 8,204 $ 8,730 $ 9,824
Ratio of expenses to average net assets .......................... 1.00% 1.00% 1.00%
Ratio of net investment income (loss) to average net assets ...... 0.12% 1.75% (0.44)%
Portfolio turnover rate .......................................... 40.46% 43.76% 159.02%
</TABLE>
Prospectus 33
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL WRL
SALOMON PILGRIM BAXTER
ALL CAP MID CAP GROWTH
-------------- ---------------
DECEMBER 31, DECEMBER 31,
-------------- ---------------
1999(B) 1999(B)
-------------- ---------------
<S> <C> <C>
Net asset value, beginning of year ................................. $ 10.00 $ 10.00
Income from operations:
Net investment income (loss) ..................................... 0.08 (0.03)
Net realized and unrealized gain (loss) on investments ........... 1.48 7.83
-------- --------
Net income (loss) from operations ............................... 1.56 7.80
-------- --------
Distributions:
Dividends from net investment income ............................. (0.06) 0.00
Dividends in excess of net investment income ..................... (0.32) (0.05)
Distributions from net realized gains on investments ............. 0.00 0.00
Distributions in excess of net realized gains on investments ..... 0.00 0.00
-------- --------
Total distributions ............................................. (0.38) (0.05)
-------- --------
Net asset value, end of year ....................................... $ 11.18 $ 17.75
======== ========
Total return ....................................................... 15.57% 78.00%
Ratios and supplemental data:
Net assets at end of year (in thousands) ......................... $ 6,686 $ 37,201
Ratio of expenses to average net assets .......................... 1.00% 1.00%
Ratio of net investment income (loss) to average net assets ...... 1.09% (0.30)%
Portfolio turnover rate .......................................... 216.29% 155.71%
</TABLE>
Prospectus 34
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS
Per share information has been computed using average shares outstanding
throughout each period. Total return reflects all Portfolio expenses and
includes reinvestment of dividends and capital gains; it does not reflect the
charges and deductions under the policies or annuity contracts. Total return
and portfolio turnover rate are not annualized for periods of less than one
year. Ratio of expenses and ratio of net investment income (loss) to average
net assets are annualized for periods of less than one year. For the year ended
December 31, 1999, ratio of expenses to average net assets is net of the
advisory fee waiver. For the years prior to 1999, ratio of expenses to average
net assets is net of the advisory fee waiver and fees paid indirectly. Without
the advisory fee waived by WRL Management and the fees paid indirectly, ratio
of expenses to average net assets for each period presented would be as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
PORTFOLIO 1999 1998 1997 1996 1995
- - ------------------------------------------- ------------ ------ ------ ------------ -----
<S> <C> <C> <C> <C> <C>
WRL Janus Global .......................... * * * * *
WRL Alger Aggressive Growth ............... * * * * *
WRL NWQ Value Equity ...................... * * * 1.10% **
WRL Goldman Sachs Growth .................. 2.68% ** ** ** **
WRL T. Rowe Price Dividend Growth ......... 2.35% ** ** ** **
WRL T. Rowe Price Small Cap ............... 2.46% ** ** ** **
WRL Salomon All Cap ....................... 2.87% ** ** ** **
WRL Pilgrim Baxter Mid Cap Growth ......... 1.40% ** ** ** **
</TABLE>
* Ratio difference less than 0.01%.
** Portfolio was not in existence during this period.
(a) The inception date of this portfolio was May 1, 1996.
(b) The inception date of this portfolio was May 1, 1999.
Prospectus 35
<PAGE>
- - --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT THESE PORTFOLIOS IS CONTAINED IN THE
FUND'S ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION, DATED MAY 1, 2000, WHICH IS
INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. IN THE FUND'S
ANNUAL REPORT, YOU WILL FIND A DISCUSSION OF THE MARKET CONDITIONS
AND INVESTMENT STRATEGIES THAT SIGNIFICANTLY AFFECTED THE FUND'S
PERFORMANCE DURING THE LAST FISCAL YEAR.
YOU MAY ALSO CALL 1-800-851-9777 TO REQUEST THIS ADDITIONAL
INFORMATION ABOUT THE FUND WITHOUT CHARGE OR TO MAKE SHAREHOLDER
INQUIRIES.
OTHER INFORMATION ABOUT THESE PORTFOLIOS HAS BEEN FILED WITH AND
IS AVAILABLE FROM THE U.S. SECURITIES AND EXCHANGE COMMISSION.
INFORMATION ABOUT THE FUND (INCLUDING THE SAI) CAN BE REVIEWED AND
COPIED AT THE SECURITIES AND EXCHANGE COMMISSION'S PUBLIC
REFERENCE ROOM IN WASHINGTON, D.C. INFORMATION ON THE OPERATION OF
THE PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE
COMMISSION AT 202-942-8090. INFORMATION MAY BE OBTAINED, UPON
PAYMENT OF A DUPLICATING FEE BY WRITING THE PUBLIC REFERENCE
SECTION OF THE COMMISSION, WASHINGTON, D.C. 20549-6009.
REPORTS AND OTHER INFORMATION ABOUT THE FUND ARE ALSO AVAILABLE ON
THE COMMISSION'S INTERNET SITE AT HTTP://WWW.SEC.GOV.
(WRL SERIES FUND FILE NO. 811-4419.)
FOR MORE INFORMATION ABOUT THESE PORTFOLIOS, YOU MAY OBTAIN A COPY
OF THE SAI OR THE ANNUAL OR SEMI-ANNUAL REPORTS WITHOUT CHARGE, OR
TO MAKE OTHER INQUIRIES ABOUT THIS FUND, CALL THE NUMBER LISTED
ABOVE.
(WRL SERIES FUND FILE NO. 811-4419.)
- - --------------------------------------------------------------------------------
<PAGE>
WRL SERIES FUND, INC.
AGGRESSIVE EQUITY PORTFOLIO
o WRL ALGER AGGRESSIVE GROWTH
FOREIGN EQUITY PORTFOLIO
o WRL JANUS GLOBAL
GROWTH EQUITY PORTFOLIO
o WRL JANUS GROWTH
BALANCED PORTFOLIOS
o WRL LKCM STRATEGIC TOTAL RETURN
o WRL J.P. MORGAN REAL ESTATE SECURITIES
Prospectus
The Securities and Exchange Commission
has not approved or disapproved these
securities or passed upon the adequacy
of this prospectus.
Any representation to the contrary is a criminal offense.
May 1, 2000
<PAGE>
- - --------------------------------------------------------------------------------
TABLE OF CONTENTS
- - --------------------------------------------------------------------------------
INVESTOR INFORMATION .............................. 1
ALL ABOUT THE FUND
AGGRESSIVE EQUITY PORTFOLIO
WRL ALGER AGGRESSIVE GROWTH .................... 2
FOREIGN EQUITY PORTFOLIO
WRL JANUS GLOBAL ............................... 5
GROWTH EQUITY PORTFOLIO
WRL JANUS GROWTH ............................... 8
BALANCED PORTFOLIOS
WRL LKCM STRATEGIC TOTAL RETURN ................ 11
WRL J.P. MORGAN REAL ESTATE SECURITIES ......... 12
RISK/REWARD INFORMATION ........................... 15
EXPLANATION OF STRATEGIES AND RISKS ............... 16
HOW THE FUND IS MANAGED AND ORGANIZED ............. 20
PERFORMANCE INFORMATION ........................... 22
OTHER INFORMATION ................................. 24
FINANCIAL HIGHLIGHTS .............................. 26
- - --------------------------------------------------------------------------------
WRL Series Fund, Inc. (Fund) currently offers twenty-six separate series
or investment portfolios. This prospectus includes five of those
portfolios. The Fund is an open-end management investment company, more
commonly known as a mutual fund.
Shares of these portfolios are currently only sold to separate accounts of
Western Reserve Life Assurance Co. of Ohio, PFL Life Insurance Company,
AUSA Life Insurance Company, Peoples Benefit Life Insurance Company and
Transamerica Occidental Life Insurance Company to fund the benefits under
certain individual flexible premium variable life insurance policies and
individual and group variable annuity contracts.
A particular portfolio of the Fund may not be available under the policy
or annuity contract you have chosen. The prospectus or disclosure document
for your policy or annuity contract shows the portfolios available to you.
Please read this prospectus carefully before selecting a portfolio. It
provides information to assist you in your decision. If you would like
additional information about a portfolio, please request a copy of the
Statement of Additional Information (SAI) (see back cover). The SAI is
incorporated by reference into this prospectus.
- - --------------------------------------------------------------------------------
Prospectus
<PAGE>
- - --------------------------------------------------------------------------------
INVESTOR INFORMATION
- - --------------------------------------------------------------------------------
TO HELP YOU UNDERSTAND . . .
In this prospectus, you will see the symbols below.
These are "icons" which serve as tools to direct you to the type of information
that is included in the accompanying paragraphs.
The icons are for your convenience and to assist you as you read this
prospectus.
/target/ The target directs you to a portfolio's goals or objective.
/chess piece/ The chess piece indicates discussion about a portfolio's
strategies.
/warning sign/ The warning sign indicates the risks of investing in a portfolio.
/graph/ The graph indicates investment performance.
/question mark/ The question mark provides additional information about the Fund
or may direct you on how to obtain further information.
SHARES OF A PORTFOLIO ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY
BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT.
Prospectus 1
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
WRL ALGER AGGRESSIVE GROWTH
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES YOUR AGGRESSIVE EQUITY PORTFOLIO OF
THE FUND AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIO. FOR FURTHER
INFORMATION ON THIS PORTFOLIO, PLEASE READ THE SECTION ENTITLED "EXPLANATION OF
STRATEGIES AND RISKS," BEGINNING ON PAGE 16 AND THE FUND'S SAI.
/target/ OBJECTIVES
WRL ALGER AGGRESSIVE GROWTH
This portfolio seeks long-term capital appreciation.
- - --------------------------------------------------------------------------------
WHAT IS AN AGGRESSIVE EQUITY PORTFOLIO?
Aggressive Equity Portfolio seeks maximum capital appreciation (a rise in
the share price/value). Current income is not a significant factor. Some
portfolios that are included in this category may invest in out-of-the
main-stream stocks, such as those of fledging or struggling companies, or
those in new or currently out-of-favor industries. Some portfolios in this
category may also use specialized investment techniques such as options or
short-term investing. For these reasons, these portfolios usually entail
greater risk than the overall equity portfolio category.
- - --------------------------------------------------------------------------------
/chess piece/ POLICIES AND STRATEGIES
WRL ALGER AGGRESSIVE GROWTH
The portfolio's sub-adviser, Fred Alger Management, Inc. (Alger), seeks to
achieve the portfolio's objective by investing principally in:
o Equity securities such as common or preferred stocks
o Convertible securities (convertible securities are securities which can be
exchanged or converted into common stock of such companies)
To a lesser extent, the sub-adviser may invest portfolio assets in:
o U.S. dollar denominated securities of foreign issuers (American Depositary
Receipts (ADRs))
o Money market instruments
o Repurchase agreements
Under normal market conditions, the portfolio invests at least 85% of its
assets in common stocks, which may include stocks of developing companies, of
older companies that are entering a new stage of growth, and of companies whose
products or services have a high unit volume growth rate.
The portfolio may also use leveraging, a technique that involves borrowing
money to invest in an effort to enhance shareholder returns.
The portfolio's manager may take a temporary defensive position when the
securities trading markets or the economy are experiencing excessive volatility
or a prolonged general decline, or other adverse conditions exist. This may be
inconsistent with the portfolio's principal investment strategies. During this
time, the portfolio may invest up to 100% of its assets in money market
instruments and cash equivalents. Under these circumstances, the portfolio will
be unable to pursue its investment objective.
/waring sign/ RISKS OF INVESTING IN AN AGGRESSIVE EQUITY PORTFOLIO
The principal risks of investing in an Aggressive Equity Portfolio are
described below. Please note that there are many other circumstances which
could adversely affect your investment and prevent your portfolio from
achieving its objective, which are not described here. Please refer to the
section entitled "Explanation of Strategies and Risks" beginning on page 16 and
the Fund's SAI for more information about the risks of investing in an
Aggressive Equity Portfolio.
Prospectus 2
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO (CONTINUED)
- - --------------------------------------------------------------------------------
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the short term. These
price movements may result from factors affecting individual companies, certain
industries or the securities market as a whole.
Because the stocks a portfolio holds fluctuate in price, the value of your
investment in the portfolio will go up and down.
o INVESTING AGGRESSIVELY
o The value of developing-company stocks may be very volatile, and can drop
significantly in a short period of time
o Rights, options and futures contracts may not be exercised and may expire
worthless
o Warrants and rights may be less liquid than stocks
o Use of futures and other derivatives may make the portfolio more volatile
o ADRS
Many securities of foreign issuers are represented by American Depositary
Receipts (ADRs). While ADRs principally are traded on domestic securities
exchanges, investing in ADRs involves many of the same risks associated with
foreign securities in general. These risks include:
o Changes in currency value
o Currency speculation
o Currency trading costs
o More fluctuations in market prices
o Less information available
o LEVERAGING
Leveraging by a portfolio involves special risks:
o Leveraging practices may make a portfolio more volatile
o Leveraging may exaggerate the effect on net asset value of any increase or
decrease in the market value of the portfolio's securities
o Money borrowed for leveraging is subject to interest costs
o Minimum average balances may need to be maintained or a line of credit in
connection with borrowing may be necessary resulting in an increase in the
cost of borrowing over the stated interest rate
o VALUE INVESTING RISK
Undervalued stocks may not realize their perceived value for extended periods
of time. Value stocks may respond differently to market and other developments
than other types of stocks. Value oriented portfolios will typically
underperform when growth investing is in favor.
o CONVERTIBLES
As with all debt securities, the market value of convertibles tends to decline
as interest rates increase and, conversely, to increase as interest rates
decline.
YOU MAY LOSE MONEY IF YOU INVEST IN AN AGGRESSIVE EQUITY PORTFOLIO.
/chess piece/ INVESTOR PROFILE
WRL ALGER AGGRESSIVE GROWTH
For the investor who seeks capital growth aggressively, and can tolerate wide
swings in the value of their investment.
Prospectus 3
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO (CONTINUED)
- - --------------------------------------------------------------------------------
/graph/ PORTFOLIO PERFORMANCE
The bar chart and table below give an indication of the portfolio's risks and
performance. The chart shows changes in the portfolio's performance from year
to year. The performance calculations do not reflect charges or deductions
under the policies or the annuity contracts. These fees would lower investment
performance. The table shows how the portfolio's average annual returns for the
periods indicated compare to those of a broad measure of market performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL ALGER AGGRESSIVE GROWTH
- - --------------------------------------------------------------------------------
TOTAL RETURN
(PER CALENDAR YEAR)
- - ----------------------------------------------
[GRAPHIC OMITTED]
38.02% 10.45% 24.25% 48.69% 69.02%
1995 1996 1997 1998 1999
- - ----------------------------------------------
- - -------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1995-1999)
- - -------------------------------------------
QUARTER ENDED
Highest 44.67 % 12/31/99
Lowest (9.72)% 9/30/98
- - --------------------------------------------
- - ----------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - ----------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (MARCH 1, 1994)
WRL Alger
Aggressive Growth 69.02% 36.62% 30.35%
S&P 500 Index 21.04% 28.56% 24.15%
- - --------------------------------------------------------------------------------
Prospectus 4
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
WRL JANUS GLOBAL
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES YOUR FOREIGN EQUITY PORTFOLIO AND
THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIO. FOR FURTHER INFORMATION ON
THIS PORTFOLIO, PLEASE READ THE SECTION ENTITLED "EXPLANATION OF STRATEGIES AND
RISKS," BEGINNING ON PAGE 16 AND THE FUND'S SAI.
/target/ OBJECTIVES
WRL JANUS GLOBAL
This Portfolio seeks long-term growth of capital in a manner consistent with
the preservation of capital.
- - --------------------------------------------------------------------------------
WHAT IS A FOREIGN EQUITY PORTFOLIO?
This type of portfolio principally invests in equity securities of
companies located outside the U.S.
- - --------------------------------------------------------------------------------
/chess piece/ POLICIES AND STRATEGIES
WRL JANUS GLOBAL
The portfolio's sub-adviser, Janus Capital Corporation (Janus), seeks to
achieve the portfolio's investment objective by investing principally in:
o Common stocks of foreign and domestic issuers
o Depositary receipts including ADRs, Global Depositary Receipts (GDRs) and
European Depositary Receipts (EDRs)
The portfolio may also use forward foreign currency contracts for hedging.
Janus' main strategy is to use a "bottom up" approach to build the portfolio's
portfolio. They seek to identify individual companies with earnings growth
potential that may not be recognized by the market at large.
Foreign securities are generally selected on a stock-by-stock basis without
regard to defined allocation among countries or geographic regions.
When evaluating foreign investments, Janus (in addition to looking at
individual companies) considers such factors as:
o Expected levels of inflation in various countries
o Government policies that might affect business conditions
o The outlook for currency relationships
o Prospects for economic growth among countries, regions or geographic areas
- - --------------------------------------------------------------------------------
WHAT IS A "BOTTOM-UP" APPROACH?
When portfolio managers use a "bottom-up" approach, they look primarily at
individual companies against the context of broader market factors.
- - --------------------------------------------------------------------------------
/warning sign/ RISKS OF INVESTING IN A FOREIGN EQUITY PORTFOLIO
The principal risks of investing in a Foreign Equity Portfolio that may
adversely affect your investment are described below. Please note that there
are many other circumstances which could adversely affect your investment and
prevent your portfolio from achieving its objective, which are not described
here. Please refer to the section entitled "Explanation of Strategies and
Risks" beginning on page 16, and the Fund's SAI for more information about the
risks associated with investing in a Foreign Equity Portfolio.
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
certain industries or the securities market as a whole.
Because the stocks the portfolio holds fluctuate in price, the value of your
investment in the portfolio will go up and down.
o FOREIGN SECURITIES
Investments in foreign securities involve risks relating to political, social
and economic developments abroad as well as risks resulting from differences in
regulations to which U.S. and foreign issuers and markets are subject. To the
extent a portfolio invests in emerging markets, these risks would be greater.
These risks include:
o Changes in currency values
o Currency speculation
o Currency trading costs
Prospectus 5
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIO (CONTINUED)
- - --------------------------------------------------------------------------------
o Different accounting and reporting practices
o Less information available to the public
o Less (or different) regulation of securities markets
o Greater complex business negotiations
o Less liquidity
o More fluctuations in prices
o Delays in settling foreign securities transactions
o Higher costs for holding shares (custodial fees)
o Higher transaction costs
o Vulnerability to seizure and taxes
o Political instability and small markets
o Different market trading days
o Forward foreign currency contracts for hedging
o FORWARD FOREIGN CURRENCY CONTRACTS
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of portfolio securities decline.
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 the portfolio's
limitation on investing in illiquid securities.
If the portfolio manager's judgment of markets proves incorrect or the strategy
does not correlate well with a portfolio's investment, the use of such hedging
transactions could result in a loss regardless of whether the intent was to
reduce risk or increase return and may increase a portfolio's volatility. In
addition, in the event that non-exchange traded forward currency contracts are
used, such transactions could result in a loss if the counterparty to the
transaction does not perform as promised.
o EMERGING MARKETS RISK
Investing in the securities of issuers located in or principally doing business
in emerging markets bear foreign risks as discussed above. In addition, the
risks associated with investing in emerging markets are often greater than
investing in developed foreign markets. Specifically, the economic structures
in emerging markets countries are less diverse and mature than those in
developed countries, and their political systems are less stable. Investments
in emerging markets countries may be affected by national policies that
restrict foreign investments. Emerging market countries may have less developed
legal structures, and the small size of their securities markets and low
trading volumes can make investments illiquid and more volatile than
investments in developed countries. As a result, a portfolio investing in
emerging market countries may be required to establish special custody or other
arrangements before investing.
o WARRANTS AND RIGHTS
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.
o DEPOSITARY RECEIPTS
Depositary receipts represent interests in an account at a bank or trust
company which holds equity securities. They are subject to some of the same
risks as direct investments in foreign securities, including currency risk. The
regulatory requirements with respect to depositary receipts that are issued in
sponsored and unsponsored programs are generally similar, but the issuers of
unsponsored depositary receipts 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 depositary receipts.
YOU MAY LOSE MONEY IF YOU INVEST IN A FOREIGN EQUITY PORTFOLIO.
/chess piece/ INVESTOR PROFILE
WRL JANUS GLOBAL
For the investor who seeks capital growth without being limited to investments
in U.S. securities, and who can tolerate the significant risks associated with
foreign investing.
Prospectus 6
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIO (CONTINUED)
- - --------------------------------------------------------------------------------
/graph/ PORTFOLIO PERFORMANCE
The bar chart and table below give an indication of the portfolio's risks and
performance. The chart shows changes in the portfolio's performance from year
to year. The performance calculations do not reflect charges or deductions
under the policies on the annuity contracts. These fees and expenses would
lower investment performance. The table shows how the portfolio's average
annual returns for the periods indicated compare to those of a broad measure of
market performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
WRL JANUS GLOBAL
TOTAL RETURN
(PER CALENDAR YEAR)
- - ------------------------------------------------------------------
[GRAPHIC OMITTED]
35.05% 0.25% 23.06% 27.74% 18.75% 30.01% 71.10%
1993 1994 1995 1996 1997 1998 1999
- - ------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1993-1999)
- - --------------------------------------------
QUARTER ENDED
Highest 46.11 % 12/31/99
Lowest (16.52)% 9/30/98
- - --------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - ---------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (DECEMBER 3, 1992)
WRL Janus Global 71.10% 32.94% 27.91%
Morgan Stanley
Capital
International
World Index 24.93% 20.08% 18.23%
- - --------------------------------------------------------------------------------
Prospectus 7
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
WRL JANUS GROWTH
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES YOUR GROWTH EQUITY PORTFOLIO AND THE
PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIO. FOR FURTHER INFORMATION ON THIS
PORTFOLIO, PLEASE READ THE SECTION ENTITLED "EXPLANATION OF STRATEGIES AND
RISKS," BEGINNING ON PAGE 16, AND THE FUND'S SAI.
/target/ OBJECTIVES
WRL JANUS GROWTH
This portfolio seeks growth of capital.
- - --------------------------------------------------------------------------------
WHAT IS A GROWTH EQUITY PORTFOLIO?
A growth equity portfolio invests in the common stock of companies that
offer potentially rising share prices. These portfolios primarily aim to
provide capital appreciation (a rise in share price) rather than steady
income.
- - --------------------------------------------------------------------------------
/chess piece/ POLICIES AND STRATEGIES
WRL JANUS GROWTH
The portfolio's sub-adviser, Janus Capital Corporation (Janus), seeks to
achieve the portfolio's objective by investing principally in:
o Common stocks
The portfolio's strategy is to invest almost all of its assets in common stock
at times when Janus believes the market environment favors such investing.
Janus generally takes a "bottom-up" approach to building the stock portfolio.
In other words, Janus seeks to identify individual companies with earnings
growth potential that may not be recognized by the stock market at large.
Although themes may emerge in the portfolio, securities are generally selected
without regard to any defined industry sector or other similarly defined
selection procedure. Realization of income is not a significant investment
consideration for the portfolio and any income realized on the portfolio's
investments is incidental to its objective.
Janus may take a temporary defensive position when the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse market conditions exist. This may be
inconsistent with the portfolio's principal investment strategies. Under these
circumstances, the portfolio may be unable to achieve its investment objective.
/warning sign/ RISKS
The principal risks of investing in a Growth Equity Portfolio that may
adversely affect your investment are described below. Please note that there
are many other circumstances which could adversely affect your investment and
prevent a portfolio from achieving its objective, which are not described here.
Please refer to the section entitled "Explanation of Strategies and Risks,"
beginning on page 16, and the Fund's SAI for more information about the risks
associated with investing in a Growth Equity Portfolio.
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
industries, or the securities market as a whole.
Because the stocks the portfolio holds fluctuate in price, the value of your
investment in the portfolio go up and down.
o STYLE RISK
Securities with different characteristics tend to shift in and out of favor
depending upon market and economic conditions as well as investor sentiment. A
portfolio may underperform other portfolios that employ a different style. A
portfolio also may employ a combination of styles that impact its risk
characteristics. Examples of different styles include growth and value
investing, as well as those focusing on large, medium, or small company
securities.
o FUTURES AND OPTIONS
Futures and options involve additional investment risks and transactional
costs, and draw upon skills and
Prospectus 8
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
experience which are different than those needed to pick other securities.
Special risks include:
o Inaccurate market predictions
o Imperfect correlation
o Illiquidity
o Tax considerations
The portfolios are not required to hedge their investments.
o WARRANTS AND RIGHTS
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.
o DEPOSITARY RECEIPTS
Depositary receipts represent interests in an account at a bank or trust
company which holds equity securities. They are subject to some of the same
risks as direct investments in foreign securities, including currency risk. The
regulatory requirements with respect to depositary receipts that are issued in
sponsored and unsponsored programs are generally similar, but the issuers of
unsponsored depositary receipts 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 depositary receipts.
YOU MAY LOSE MONEY IF YOU INVEST IN A GROWTH EQUITY PORTFOLIO.
/chess piece/ INVESTOR PROFILE
WRL JANUS GROWTH
For the investor who wants capital growth in a broadly diversified stock
portfolio, and who can tolerate significant fluctuations in value.
Prospectus 9
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIO (CONTINUED)
- - --------------------------------------------------------------------------------
/graph/ PORTFOLIO PERFORMANCE
The bar chart and table below gives an indication of the portfolio's risks and
performance. The chart shows changes in the portfolio's performance from year
to year. The performance calculations do not reflect charges or deductions
under the policies on the annuity contracts. These fees and expenses would
lower investment performance. The tables show how the portfolio's average
annual returns for the periods indicated compare to those of a broad measure of
market performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL JANUS GROWTH
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURN
(PER CALENDAR YEAR)
- - -----------------------------------------------------------------------------------------------
[GRAPHIC OMITTED]
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(0.22)% 59.79% 2.35% 3.97% (8.31)% 47.12% 17.96% 17.54% 64.47% 59.67%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- - -----------------------------------------------------------------------------------------------
</TABLE>
HIGHEST AND LOWEST RETURN
(Quarterly 1990-1999)
- - -------------------------------------------
QUARTER ENDED
Highest 33.08 % 12/31/99
Lowest (16.60)% 9/30/90
- - --------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999
- - -----------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
WRL Janus Growth 59.67% 39.89% 23.62%
S&P 500 Index 21.04% 28.56% 18.21%
- - -----------------------------------------------------
Prospectus 10
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS
- - --------------------------------------------------------------------------------
WRL LKCM STRATEGIC TOTAL RETURN
WRL J.P. MORGAN REAL ESTATE SECURITIES
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES EACH BALANCED PORTFOLIO OF THE FUND
AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIOS. FOR FURTHER INFORMATION
ON THESE PORTFOLIOS, PLEASE READ THE SECTION ENTITLED "EXPLANATION OF
STRATEGIES AND RISKS," BEGINNING ON PAGE 16 AND THE FUND'S SAI.
/target/ OBJECTIVES
WRL LKCM STRATEGIC TOTAL RETURN
The objective of this portfolio is to provide current income, long-term growth
of income and capital appreciation.
WRL J.P. MORGAN REAL ESTATE SECURITIES
This portfolio 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.
- - --------------------------------------------------------------------------------
WHAT IS A BALANCED PORTFOLIO?
A balanced portfolio generally tries to balance three different objectives:
moderate long-term growth of capital, moderate income, and moderate
stability in an investor's principal. To reach these goals, balanced
portfolios invest in a mixture of stocks, bonds and money market
instruments.
- - --------------------------------------------------------------------------------
/chess piece/ POLICIES AND STRATEGIES
WRL LKCM STRATEGIC TOTAL RETURN
The portfolio's sub-adviser, Luther King Capital Management Corporation (LKCM),
seeks to achieve the portfolio's investment objective by investing primarily
in:
o Common stocks
o Corporate bonds
o Convertible preferred stocks
o Corporate convertible bonds
o U.S. Treasury Notes
The portfolio seeks to invest in a blend of equity and fixed-income securities
to achieve a balance of capital appreciation and investment income while
limiting volatility. The portfolio will also invest in convertible securities,
which have both equity and fixed-income characteristics. In choosing such
securities, LKCM looks for companies with strong fundamental characteristics.
It considers factors such as:
o balance sheet quality
o cash flow generation
o earnings and dividend growth record and outlook
o profitability levels
In some cases, LKCM bases its selections on other factors. For example, some
securities may be bought at an apparent discount to their appropriate value,
with the anticipation that they'll increase in value over time.
The portfolio seeks to achieve an income yield greater than the average yield
of the stocks in the S&P 500.
The portfolio invests mainly in the stocks and bonds of companies with
established operating histories and strong fundamental characteristics. The
majority of the stocks the portfolio buys will be listed on a national exchange
or traded on NASDAQ or domestic over-the-counter markets.
LKCM closely analyzes a company's financial status and a security's valuation
in an effort to control risk at the individual level. In addition, the growth
elements of the portfolio's equity investments drive capital appreciation.
As part of its income-oriented strategy, LKCM expects to invest about 25% of
the portfolio's assets in fixed-income securities, some of which will be
convertible into common stocks, and no more than 20% of its assets in stocks
that don't pay a dividend.
Prospectus 11
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
WRL J.P. MORGAN REAL ESTATE SECURITIES
This portfolio's sub-adviser, J.P. Morgan Investment Management Inc. (J.P.
Morgan), seeks to achieve the portfolio's objective by investing principally in
equity securities of real estate companies which include:
o Common stocks
o Convertible securities
Under normal conditions, J.P. Morgan invests at least 65% of portfolio assets
in real estate company securities. 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.
Companies chosen are generally 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, J.P. Morgan ranks these companies within four broad sectors of
the real estate industry from undervalued to overvalued. From this target
universe, J.P. Morgan selects stocks for the portfolio based on a variety of
criteria including managerial strength, geographic diversification, prospects
for growth and the company's competitive position.
The portfolio may also invest in debt securities of real estate and non-real
estate companies; mortgage-backed securities such as pass through certificates,
real estate mortgage investment conduit (REMIC) certificates, and
collateralized mortgage obligations (CMOs), or short-term debt obligations.
However, the portfolio does not directly invest in real estate.
The portfolio is non-diversified under federal securities laws.
The portfolio's classification as "non-diversified" under the 1940 Act means
that the portfolio has the ability to take larger positions in a smaller number
of issuers. However, to meet federal tax requirements, at the close of each
quarter the portfolio may not have more than 25% of its total assets invested
in any one issuer and, with respect to 50% of its total assets, not more than
5% of its total assets invested in any one issuer.
/warning sign/ RISKS
The principal risks of investing in Balanced Portfolios that may adversely
affect your investment are described below. (Not all of these risks apply to
each Balanced Portfolio. See the chart below for the principal risks of your
portfolio.) Please note that there many other circumstances that could
adversely affect your investment and prevent a portfolio from achieving its
objective, which are not described here. Please refer to the section entitled
"Explanation of Strategies and Risks," beginning on page 16 and the Fund's SAI
for more information about the risks associated with investing in Balanced
Portfolios.
PRINCIPAL RISKS
BALANCED PORTFOLIOS
PORTFOLIO
WRL WRL
VKCM J.P. MORGAN
STRATEGIC TOTAL REAL ESTATE
RISKS RETURN SECURITIES
Stocks X X
Fixed-Income Securities X
Convertibles X
Real Estate Securities X
Non-Diversified X
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the short term. These
price movements may result from factors affecting individual companies,
industries or the securities market as a whole.
Because the stocks a portfolio holds fluctuate in price, the value of your
investment in a portfolio will go up and down.
o CONVERTIBLES
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.
o REAL ESTATE SECURITIES
Investments in the real estate industry are subject to risks associated with
direct investment in real estate. These risks may include:
o Declining real estate value
Prospectus 12
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
o Risks relating to general and local economic conditions
o FIXED-INCOME SECURITIES
The value of these securities may change daily based on changes in the interest
rate, and other market conditions and factors. The risks include:
o Changes in interest rates
o Length of time to maturity
o Issuers defaulting on their obligations to pay interest or return
principal
o Over-building
o Increased competition for assets in local and regional markets
o Increases in property taxes
o Increases in operating expenses or interest rates
o Change in neighborhood value or the appeal of properties to tenants
o Insufficient levels of occupancy
o Inadequate rents to cover operating expenses
o NON-DIVERSIFIED
To the extent a portfolio invests a greater proportion of its assets in the
securities of a smaller number of issuers, it may be more susceptible to any
single economic, political or regulatory occurrence than a more widely
diversified portfolio and may be subject to greater risks of loss with respect
to its portfolio securities.
YOU MAY LOSE MONEY IF YOU INVEST IN ANY OF THE BALANCED PORTFOLIOS.
/chess piece/ INVESTOR PROFILES
WRL LKCM STRATEGIC TOTAL RETURN
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 portfolio that invests in both equity and fixed
income securities.
WRL J.P. MORGAN REAL ESTATE SECURITIES
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 non-diversified portfolio invested primarily in securities of
real estate companies and their exposure to real estate markets.
Prospectus 13
<PAGE>
- - --------------------------------------------------------------------------------
BALANCED PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
/graph/ PORTFOLIO PERFORMANCE
The bar charts and tables below give an indication of the portfolios' risks and
performance. The charts show changes in a portfolio's performance from year to
year. The performance calculations do not reflect charges or deductions under
the policies or the annuity contracts. These fees and expenses would lower
investment performance. The tables show how a portfolio's average annual
returns for the periods indicated compare to those of a broad measure of market
performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL LKCM STRATEGIC TOTAL RETURN
- - --------------------------------------------------------------------------------
TOTAL RETURN
(PER CALENDAR YEAR)
- - -------------------------------------------------------
[GRAPHIC OMITTED]
(0,53)% 24.66% 15.00% 21.85% 9.64% 12.07%
1994 1995 1996 1997 1998 1999
- - --------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1994-1999)
- - -----------------------------------------
QUARTER ENDED
Highest 13.06 % 6/30/97
Lowest (8.05)% 9/30/98
- - ----------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - -------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (MARCH 1, 1993)
WRL LKCM Strategic
Total Return 12.07% 16.50% 13.82%
S&P 500 Index 21.04% 28.56% 21.70%
- - --------------------------------------------------------------
WRL J.P. MORGAN REAL ESTATE SECURITIES
TOTAL RETURN
(PER CALENDAR YEAR)
- - ---------------------
[GRAPHIC OMITTED]
(3.77)%
1999
- - ---------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1999)
- - -------------------------------------------
QUARTER ENDED
Highest 9.17 % 6/30/99
Lowest (11.64)% 9/30/98
- - -------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - ---------------------------------------------------------
SINCE
INCEPTION
1 YEAR (MAY 1, 1998)
WRL J.P. Morgan Real Estate
Securities (3.77)% (11.31)%
Morgan Stanley REIT (4.55)% (10.67)%
- - ---------------------------------------------------------
Prospectus 14
<PAGE>
- - --------------------------------------------------------------------------------
RISK/REWARD INFORMATION
- - --------------------------------------------------------------------------------
BEFORE YOU CHOOSE AN INVESTMENT PORTFOLIO, PLEASE CONSIDER . . .
All of the investment portfolios involve risk, but there is also the potential
for reward. You can lose money -- and you can make money. The Fund portfolios
are structured so that each offers a slightly different degree of risk and
reward than others.
In this prospectus, we've arranged the portfolios in order of risk/
reward from highest to lowest. Notice the scale at the right. It covers the
full spectrum of risk/reward of the portfolios described in this prospectus.
WHAT RISK/REWARD LEVEL IS FOR YOU? ASK YOURSELF THE FOLLOWING:
(1) HOW WELL DO I HANDLE FLUCTUATIONS IN MY ACCOUNT VALUE?
The higher a portfolio is on the risk/reward spectrum, the more its
price is likely to move up and down on a day to day basis. If this makes
you uncomfortable, you may prefer an investment at the lower end of the
scale that may not fluctuate in price as much.
(2) AM I LOOKING FOR A HIGHER RATE OF RETURN?
Generally, the higher the potential return, the higher the risk. If you
find the potential to make money is worth the possibility of losing
more, then a portfolio at the higher end of the spectrum may be right
for you.
A final note: These portfolios are designed for long-term investment.
Each portfolio has an investment objective that it tries to achieve by
following certain investment strategies and techniques. The objective can be
changed without shareholder vote.
---------------------
Aggressive Equity
---------------------
WRL ALGER AGGRESSIVE GROWTH
----------------------
Foreign Equity
---------------------
WRL JANUS GLOBAL
---------------------
Growth Equity
---------------------
WRL JANUS GROWTH
RISK REWARD
---------------------
Balanced
---------------------
WRL LKCM STRATEGIC TOTAL RETURN
WRL J.P. MORGAN REAL
ESTATE SECURITIES
---------------------
Fixed-Income
---------------------
---------------------
Capital Preservation
---------------------
LOWER
Prospectus 15
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS
- - --------------------------------------------------------------------------------
HOW TO USE THIS SECTION
In the discussions of the individual portfolios on pages 2 through 14, you
found descriptions of the strategies and risks associated with each. In those
pages, you were referred to this section for a more complete description of the
risks. For best understanding, first read the description of the portfolio
you're interested in. Then refer to this section and read about the risks
particular to that portfolio. For even more discussions of strategies and
risks, see the SAI, which is available upon request. See the back cover of this
prospectus for information on how to order the SAI.
/chess piece/
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 WRL J.P. Morgan Real Estate Securities) 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):
o 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.
o 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
would cause the portfolio's holdings of that issuer to amount to more than 5%
of the portfolio's total assets.
o 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 WRL J.P. Morgan Real Estate Securities reserves the right to become a
diversified investment company (as defined by the 1940 Act).
/warning sign/
I
NVESTING IN COMMON STOCKS. Many factors cause common stocks to go up and down
in price. A major one is the financial performance of the company that issues
the stock. Other factors include the overall economy, conditions in a
particular industry, and monetary factors like interest rates. When your
portfolio holds stocks, there's a risk that some or all of them may be down in
price when you choose to sell, causing you to lose money. This is called MARKET
RISK.
/warning sign/
INVESTING IN PREFERRED STOCKS. Because these stocks come with a promise to pay
a stated dividend, their price depends more on the size of the dividend than on
the company's performance. But if a company fails to pay the dividend, its
preferred stock is likely to drop in price. Changes in interest rates can also
affect their price. (See "Investing in Bonds," below.)
/warning sign/
INVESTING IN CONVERTIBLE SECURITIES, PREFERRED STOCKS, AND BONDS. Since
preferred stocks and corporate bonds pay a stated return, their prices usually
don't depend on the price of the company's common stock. But some companies
issue preferred stocks and bonds that are CONVERTIBLE into their common stocks.
Linked to the common stock in this way, convertible securities go up and down
in price as the common stock does, adding to their market risk.
/warning sign/
VOLATILITY. The more an investment goes up and down in price, the more VOLATILE
it is. Volatility increases the market risk because even though your portfolio
may go UP more than the market in good times, it may also go
Prospectus 16
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS (CONTINUED)
- - --------------------------------------------------------------------------------
DOWN more than the market in bad times. If you decide to sell when a volatile
portfolio is down, you could lose more.
/warning sign/
INVESTING IN BONDS. Like common stocks, bonds fluctuate in value, though the
factors causing this fluctuation are different, including:
o CHANGES IN INTEREST RATES. Bond prices tend to move the opposite of interest
rates. Why? Because when interest rates on new bond issues go up, rates on
existing bonds stay the same and they become less desirable. When rates go
down, the reverse happens. This is also true for most preferred stocks and
some convertible securities.
o LENGTH OF TIME TO MATURITY. When a bond matures, the issuer must pay the owner
its face value. If the maturity date is a long way off, many things can affect
its value, so a bond is more volatile the farther it is from maturity. As that
date approaches, fluctuations usually become smaller and the price gets closer
to face value.
o DEFAULTS. All bond issuers make at least two promises: (1) to pay interest
during the bond's term and (2) to return principal when it matures. If an
issuer fails to keep one or both of these promises, the bond will probably
drop in price dramatically, and may even become worthless. Changes in
financial condition and general economic conditions can affect the ability to
honor financial obligations and therefore credit quality. A security's price
may be adversely affected by the market's opinion of the security's credit
quality level even if the issuer or counterparty has suffered no degradation
in ability to honor the obligation.
o DECLINES IN RATINGS. At the time of issue, most bonds are rated by
professional rating services, such as Moody's Investors Service, Inc.
(Moody's) and Standard & Poor's Corporation (S&P). The stronger the financial
backing behind the bond, the higher the rating. If this backing is weakened or
lost, the rating service may downgrade the bond's rating. This is virtually
certain to cause the bond to drop in price. Bonds that are rated below BBB by
S&P, and below Ba by Moody's, are considered to be below investment grade.
Moody's rates bonds in nine categories, from Aaa to C, with Aaa being the
highest with least risk. S&P rates bonds in six categories, from AAA to D,
with AAA being the highest.
o LOW RATING. High-yield/high-risk fixed-income securities (commonly known as
"junk bonds") have greater credit risk, are more sensitive to interest rate
movements, are considered more speculative than higher rated bonds, have a
greater vulnerability to economic changes and are less liquid. The market for
such securities may be less active than for higher rated securities, which can
adversely affect the price at which these securities may be sold and may
diminish a portfolio's ability to obtain accurate market quotations when
valuing the portfolio securities and calculating the portfolio's net asset
value.
o LACK OF RATING. Some bonds are considered speculative, or for other reasons
are not rated. Such bonds must pay a higher interest rate in order to attract
investors. They're considered riskier because of the higher possibility of
default or loss of liquidity.
o LOSS OF LIQUIDITY. If a bond is downgraded, or for other reasons drops in
price, the market demand for it may "dry up". In that case, the bond may be
hard to sell or "liquidate" (convert to cash).
/warning sign/
INVESTING IN FOREIGN SECURITIES. These are investments offered by foreign
companies, governments and government agencies. They involve risks not usually
associated with U.S. securities, including:
o CHANGES IN CURRENCY VALUES. Foreign securities are sold in currencies other
than U.S. dollars. If a currency's value drops, the value of the securities
held by a portfolio could drop too, even if the securities are strong. In
turn, the value of the shares of the portfolio could also drop. Dividend and
interest payments may be lower. Factors affecting exchange rates are:
differing interest rates among countries; balances of trade; amount of a
country's overseas investments; and any currency manipulation by banks.
o CURRENCY SPECULATION. The foreign currency market is largely unregulated and
subject to speculation.
o ADRS/ADSS. Some portfolios also invest in American Depositary Receipts (ADRs)
and American
Prospectus 17
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS (CONTINUED)
- - --------------------------------------------------------------------------------
Depositary Shares (ADSs). They represent securities of foreign companies
traded on U.S. exchanges, and their values are expressed in U.S. dollars.
Changes in the value of the underlying foreign currency will change the value
of the ADR or ADS. A portfolio incurs costs when it converts other currencies
into dollars, and vice-versa.
o EURO CONVERSION. On January 1, 1999, certain participating countries in the
European Economic Monetary Union adopted the "Euro" as their official
currency. Other EU member countries may convert to the Euro at a later date.
As of January 1, 1999, governments in participating countries issued new debt
and redenominated existing debt in Euros; corporations chose to issue stocks
or bonds in Euros or national currency. The new European Central Bank (the
"ECB") will assume responsibility for a uniform monetary policy in
participating countries. Euro conversion risks that could affect a portfolio's
foreign investments include: (1) the readiness of Euro payment, clearing, and
other operational systems; (2) the legal treatment of debt instruments and
financial contracts in existing national currencies rather than the Euro; (3)
exchange-rate fluctuations between the Euro and non-Euro currencies during the
transition period of January 1, 1999 through December 31, 2002 and beyond; (4)
potential U.S. tax issues with respect to portfolio securities; and (5) the
ECB's abilities to manage monetary policies among the participating countries;
and (6) the ability of financial institution systems to process Euro
transactions. o Different accounting and reporting practices. Foreign tax laws
are different, as are laws, practices and standards for accounting, auditing
and reporting data to investors. o LESS INFORMATION AVAILABLE TO THE PUBLIC.
Foreign companies usually make less information available to the public. o
LESS REGULATION. Securities regulations in many foreign countries are more lax
than in the U.S. o MORE COMPLEX NEGOTIATIONS. Because of differing business
and legal procedures, a portfolio may find it hard to enforce obligations or
negotiate favorable brokerage commission rates. o LESS LIQUIDITY/MORE
VOLATILITY. Some foreign securities are harder to convert to cash than U.S.
securities, and their prices may fluctuate more dramatically.
o SETTLEMENT DELAYS. "Settlement" is the process of completing a securities
transaction. In many countries, this process takes longer than it does in the
U.S.
o HIGHER CUSTODIAL CHARGES. Fees charged by the Fund's custodian for holding
shares are higher for foreign securities than that of domestic securities.
o HIGHER TRANSACTION COSTS. Fees charged by securities brokers are often higher
for transactions involving foreign securities than domestic securities. Higher
expenses, such as brokerage fees, may reduce the return a portfolio might
otherwise achieve.
o VULNERABILITY TO SEIZURE AND TAXES. Some governments can seize assets. They
may also limit movement of assets from the country. A portfolio's interest,
dividends and capital gains may be subject to foreign withholding taxes.
o POLITICAL INSTABILITY AND SMALL EMERGING MARKETS. Developing countries can be
politically unstable. Economies can be dominated by a few industries, and
markets may trade a small number of securities. Regulations of banks and
capital markets can be weak.
o DIFFERENT MARKET TRADING DAYS. Foreign markets may not be open for trading
when U.S. markets are and asset values can change before your transaction
occurs.
o HEDGING. A portfolio may, but will not necessarily, enter into forward
currency contracts to hedge against declines in the value of securities
denominated in, or whose value is tied to, a currency other than the U.S.
dollar or to reduce the impact of currency fluctuation on purchases, and sales
of such securities.
/warning sign/
INVESTING IN FUTURES, OPTIONS AND DERIVATIVES. Besides conventional securities,
your portfolio may seek to increase returns by investing in financial contracts
related to its primary investments. Such contracts involve additional risks and
costs. Risks include:
o INACCURATE MARKET PREDICTIONS. If the sub-adviser is wrong in its expectation,
for example, with respect to interest rates, securities prices or currency
markets, the contracts could produce losses instead of gains.
o PRICES MAY NOT MATCH. Movements in the price of the financial contracts may be
used to offset
Prospectus 18
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS (CONTINUED)
- - --------------------------------------------------------------------------------
movements in the price of other securities you own. If those prices don't
correlate or match closely, the benefits of the transaction might be
diminished.
o ILLIQUID MARKETS. If there's no market for the contracts, the portfolio may
not be able to control losses.
o TAX CONSEQUENCES. Sometimes the possibility of incurring high taxes on a
transaction may delay closing out a position and limit the gains it would have
produced.
/warning sign/
INVESTING IN SPECIAL SITUATIONS. Each portfolio may invest in "special
situations" from time to time. Special situations arise when, in the opinion of
a portfolio manager, a company's securities may be undervalued, then increase
considerably in price, due to:
o A NEW PRODUCT OR PROCESS
o A MANAGEMENT CHANGE
o A TECHNOLOGICAL BREAKTHROUGH
o AN EXTRAORDINARY CORPORATE EVENT
o A TEMPORARY IMBALANCE IN THE SUPPLY OF, AND DEMAND FOR, THE
SECURITIES OF AN ISSUER
Investing in a special situation carries an additional risk of loss if the
expected development does not happen or does not attract the expected
attention. The impact of special situation investing to a portfolio will depend
on the size of a portfolio's investment in a situation.
/chess piece/
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 short-term debt securities that
are considered cash equivalents. This may be done as a temporary 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.
/question mark/
PORTFOLIO TURNOVER
A portfolio turnover rate is, in general, the percentage calculated by taking
the lesser of purchases or sales of portfolio securities (excluding short-term
securities) for a year and dividing it by the monthly average of the market
value of such securities during the year.
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 unforeseen developments.
The rate of portfolio turnover will not be a limiting factor when short-term
investing is considered appropriate. Increased turnover rates result in higher
brokerage costs and other transaction based expenses for a portfolio. These
charges are ultimately borne by the shareholders.
/question mark/
SHORT SALES
A 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 convertible into, or exchangeable without
further consideration for, securities of the same issue as the securities sold
short.
/question mark/
INVESTMENT STRATEGIES
A portfolio is permitted to use other securities and investment strategies in
pursuit of its investment objective, subject to limits established by the
Fund's Board of Directors. No portfolio is under any obligation to use any of
the techniques or strategies at any given time or under any particular economic
condition. Certain instruments and investment strategies may expose the
portfolios to other risks and considerations, which are discussed in the Fund's
SAI.
Prospectus 19
<PAGE>
- - --------------------------------------------------------------------------------
HOW THE FUND IS MANAGED AND ORGANIZED
- - --------------------------------------------------------------------------------
/question mark/
HOW THE FUND IS MANAGED AND ORGANIZED
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.
WRL Investment Management, Inc. (WRL Management) located at 570 Carillon
Parkway, St. Petersburg, Florida 33716, has served as the Fund's investment
adviser since 1997. Prior to this date, Western Reserve served as investment
adviser to the Fund. The investment adviser had no prior experience as an
adviser. The investment adviser is a direct, wholly-owned subsidiary of Western
Reserve Life Assurance Co. of Ohio (Western Reserve), which is wholly-owned by
First AUSA Life Insurance Company, a stock life insurance company, which is
wholly-owned by AEGON USA, Inc. AEGON 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
N.V., a Netherlands corporation which is a publicly traded international
insurance group.
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.
The Fund has received an order from the Securities and Exchange Commission that
will permit the Fund and the investment adviser, subject to certain conditions,
and without the approval of shareholders to: (1) employ a new unafilliated
sub-adviser for a portfolio pursuant to the terms of a new investment
sub-advisory agreement, either as a replacement for an existing sub-adviser or
as an additional sub-adviser; (2) materially change the terms of any
sub-advisory agreement; and (3) continue the employment of an existing
sub-adviser on the same sub-advisory contract terms where a contract has been
assigned because of a change in control of the sub-adviser. In such
circumstances, shareholders would receive notice and information about the new
sub-adviser within ninety (90) days after the hiring of any new sub-adviser.
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 advisory fees for each portfolio are:
ADVISORY
PORTFOLIO FEE
WRL Janus Growth* 0.80%
WRL LKCM Strategic Total Return 0.80%
WRL Alger Aggressive Growth 0.80%
WRL J.P. Morgan Real
Estate Securities 0.80%
WRL Janus Global** 0.80%
* WRL Management currently waives 0.025% of its advisory fee for the first $3
billion of the portfolio's average daily net assets (net fee -- 0.775%); and
0.05% of assets above $3 billion (net fee -- 0.75%). This waiver will terminate
on June 25, 2000.
** WRL Management currently waives 0.025% of its advisory fee for the
portfolio's average daily net assets above $2 billion (net fee -- 0.775%). This
waiver will terminate on June 25, 2000.
EXPENSE REIMBURSEMENT
WRL Management has entered into an expense limitation agreement with the Fund
on behalf of each applicable portfolio, pursuant to which WRL Management has
agreed to reimburse a portfolio for certain operating expenses so that the
total operating expenses of each applicable portfolio do not exceed the total
operating expenses specified for that portfolio (expense cap) in the
portfolio's then-current SAI. The Fund, on behalf of an applicable portfolio,
will at a later date reimburse WRL Management for operation
Prospectus 20
<PAGE>
- - --------------------------------------------------------------------------------
HOW THE FUND IS MANAGED AND ORGANIZED
- - --------------------------------------------------------------------------------
expenses previously paid on behalf of such portfolio during the previous 36
months, but only if, after such reimbursement, the portfolio's expense ratio
does not exceed the expense cap. The agreement has an initial term through
April 30, 2001, and will automatically renew for one-year terms unless WRL
Management provides written notice to the Fund at least 30 days prior to the
end of the then-current term. In addition, the agreement will terminate upon
termination of the Investment Advisory Agreeement, or may be terminated by the
Fund, without payment of any penalty, upon ninety (90) days' prior written
notice to WRL Management.
Here is a listing of the Sub-Advisers and the portfolios they manage:
SUB-ADVISER PORTFOLIO
Janus WRL Janus Global
WRL Janus Growth
LKCM WRL LKCM Strategic
Total Return
Alger WRL Alger Aggressive Growth
J.P. Morgan WRL J.P. Morgan Real
Estate Securities
DAY-TO-DAY MANAGEMENT OF THE INVESTMENTS IN EACH PORTFOLIO IS THE
RESPONSIBILITY OF THE PORTFOLIO MANAGER. THE PORTFOLIO MANAGERS OF THE FUND
ARE:
WRL JANUS GLOBAL
HELEN YOUNG HAYES, CFA and LAURENCE CHANG, CFA have served as co-portfolio
managers of this portfolio since January 2000. Ms. Hayes previously served as
manager of this portfolio since its inception. She has been employed by Janus
since 1987.
Mr. Chang has been employed by Janus since 1993. Before joining Janus, Mr.
Chang was a project director at the National Security Archive.
WRL JANUS GROWTH
EDWARD KEELY has served as manager of this portfolio since January 2000. He
previously served as co-portfolio manager of this portfolio since January 1999.
Prior to joining Janus in 1998, Mr. Keely was a senior vice president of
investments at Founders.
WRL LKCM STRATEGIC
TOTAL RETURN
LUTHER KING, JR., CFA and SCOT C. HOLLMANN, CFA have co-managed this portfolio
since its inception.
Mr. King has been the president of Luther King since 1979.
Mr. Hollmann has been a vice president of Luther King since 1983.
WRL J.P. MORGAN REAL
ESTATE SECURITIES
DANIEL P. O'CONNOR serves as portfolio manager of this portfolio.
Mr. O'Connor has served as the sole manager of this portfolio since its
inception. Prior to joining J.P. Morgan in 1996, Mr. O'Connor served two years
as Director of Real Estate Securities at INVESCO.
WRL ALGER AGGRESSIVE GROWTH
DAVID D. ALGER has been employed by Alger since 1971 and has served as
president since 1995. He has managed this portfolio since inception.
DAVID HYUN has served as co-manager of this portfolio since February 1998. He
has been employed by Alger as a senior research analyst since 1991, a portfolio
manager since 1997 and as a senior vice president since 1998.
Prospectus 21
<PAGE>
- - --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- - --------------------------------------------------------------------------------
The Fund may include quotations of a portfolio's total return in connection
with the total return for the appropriate separate account, in advertisements,
sales literature or reports to policyowners or to prospective investors. Total
return for a portfolio reflect only the performance of a hypothetical
investment in the portfolio during the particular time period shown as
calculated based on the historical performance of the portfolio during that
period. Such quotations do not in any way indicate or project future
performance. Quotations of total return will not reflect charges or deductions
against the separate accounts or charges and deductions against the policies or
the annuity contracts. Where relevant, the prospectuses for the policies and
the annuity contracts contain performance information which show total return
and yield information for the separate accounts, policies or annuity contracts.
TOTAL RETURN
Total return refers to the average annual percentage change in value of an
investment in a portfolio held for a stated period of time as of a stated
ending date. When a portfolio has been in operation for the stated period, the
total return for such period will be provided if performance information is
quoted. Total return quotations are expressed as average annual compound rates
of return for each of the periods quoted. They also reflect the deduction of a
proportionate share of a portfolio's investment advisory fees and direct
portfolio expenses, and assume that all dividends and capital gains
distributions during the period are reinvested in the portfolio when made.
SIMILAR 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. Each portfolio's future performance may be
greater or less than the historical performance of the corresponding Similar
Sub-Adviser Fund. There can be no assurance, and no representation is made,
that the investment results of any portfolio will be comparable to the results
of any of the Similar Sub-Adviser Funds as any other fund managed by WRL
Management or any sub-adviser.
Prospectus 22
<PAGE>
- - --------------------------------------------------------------------------------
PERFORMANCE INFORMATION (CONTINUED)
- - --------------------------------------------------------------------------------
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, 1999. 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.
SIMILAR SUB-ADVISER FUND PERFORMANCE
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(WITH SALES LOADS)
---------------------------------
SIMILAR 10 YEARS
SUB-ADVISER INCEPTION TOTAL OR SINCE
WRL PORTFOLIO FUND DATE ASSETS 1 YEAR 5 YEARS INCEPTION
- - ------------------------------ ---------------------- ----------- ------------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
WRL Janus Global Janus Worldwide(1) 5/15/91 $33,802.9M 64.37% 30.88% 25.10%
WRL Alger Aggressive Growth The Alger Fund Class A $ 226.6 65.74% N/A 40.59%
Capital Appreciation 12/31/96 million
Class A Shares(2) (Net)
</TABLE>
(1) The Janus Worldwide Fund does not have a sales load.
(2) Total returns are for Class A shares of The Alger Fund Capital Appreciation
Portfolio and reflect a deduction of a 4.75% front end sales load. The
Portfolio also offers Class B and Class C shares with different sales
loads. Calculating total return with those sales loads may have resulted
in lower total returns. The inception dates for Class A, B and C shares
are 12/31/96, 10/29/93 and 8/1/97, respectively.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(WITHOUT SALES LOADS)
---------------------------------
SIMILAR 10 YEARS
SUB-ADVISER INCEPTION TOTAL OR SINCE
WRL PORTFOLIO FUND DATE ASSETS 1 YEAR 5 YEARS INCEPTION
- - ----------------------------- ---------------------- ----------- ------------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
WRL Janus Global Janus Worldwide(1) 5/15/91 $33,802.9M 64.37% 30.88% 25.10%
WRL Alger Aggressive Growth The Alger Fund Class A $ 226.6 74.01% N/A 42.89%
Capital Appreciation 12/31/96 (Net)
</TABLE>
(1) The Janus Worldwide Fund does not have a sales load.
THE PERFORMANCE OF SIMILAR SUB-ADVISER FUNDS DOES NOT REFLECT ANY OF THE
CHARGES, FEES, AND EXPENSES IMPOSED UNDER THE POLICIES OR 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-ADVISERS FUNDS AS "SIMILAR SUB-ADVISED FUNDS.")
(See the SAI for more information about the portfolios' performance.)
Prospectus 23
<PAGE>
- - --------------------------------------------------------------------------------
OTHER INFORMATION
- - --------------------------------------------------------------------------------
/question mark/ PURCHASE AND REDEMPTION OF SHARES
As described earlier in the prospectus, shares of the portfolios are sold
exclusively to certain separate accounts of Western Reserve Life Assurance Co.
of Ohio, PFL Life Insurance Company, AUSA Life Insurance Company, Inc. and
Peoples Benefit Life Insurance Company, and are not offered to the public.
Shares are sold and redeemed at their net asset value without the imposition of
any sales commission or redemption charge. (However, certain sales or other
charges may apply to the policies or annuity contracts, as described in the
product prospectus.)
/question mark/ 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 (NYSE) (usually 4:00 p.m., Eastern Time), on each day the exchange is
open.
- - --------------------------------------------------------------------------------
WHAT IS NET ASSET VALUE?
The 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.
- - --------------------------------------------------------------------------------
Net asset value (NAV) 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. Share prices for any transaction are those next calculated after
receipt of an order.
If your order is received by closing time of the NYSE, you will pay, or you
will receive, that day's NAV. Share prices may change when a portfolio holds
shares in companies traded on foreign exchanges that are open on the days the
NYSE is closed.
Except for money market instruments maturing in 60 days or less, securities
held by portfolios are valued at market value. If market values are not readily
available, securities are valued at fair value as determined by the Fund's
Valuation Committee under the supervision of the Fund's Board.
/question mark/ 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.
/dollar sign/ TAXES
Each portfolio has qualified and expects to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended ("Code"). As qualified, a portfolio is not subject to federal income
tax on that part of its taxable income that it distributes to you. Taxable
income consists generally of net investment income, and any capital gains. It
is each portfolio's intention to distribute all such income and gains.
Shares of each portfolio are offered only to the separate accounts of Western
Reserve and its affiliates. Separate accounts 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 Income Tax Considerations" included in the respective prospectuses for
the policies and the annuity contracts.
Section 817(h) of the Code and the regulations thereunder impose
"diversification" requirements on each portfolio. Each portfolio intends to
comply with the diversification requirements. These requirements are in
addition to the diversification requirements imposed on each portfolio by
Subchapter M and the 1940 Act. The 817(h) requirements place certain
limitations on the assets of each separate account that may be invested in
securities of a single issuer. Specifically, the regulations provide that,
except as permitted by "safe harbor," rules described below, as of the end of
each calendar quarter
Prospectus 24
<PAGE>
- - --------------------------------------------------------------------------------
OTHER INFORMATION (CONTINUED)
- - --------------------------------------------------------------------------------
or within 30 days thereafter, no more than 55% of the portfolio's total assets
may be represented by any one investment, no more than 70% by any two
investments, no more than 80% by any three investments, and no more than 90% by
any four investments.
Section 817(h) also 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, and all interests in the same comodity 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. If a portfolio does
not satisfy the section 817(h) requirements, the separate accounts, the
insurance companies, the policies and the annuity contracts may be taxable. See
the prospectuses for the policies and annuity contracts.
The foregoing is only a summary of some of the important federal income tax
considerations generally affecting a portfolio and you; see the SAI for a more
detailed discussion. You are urged to consult your tax advisors.
/question mark/ REPORT TO POLICYHOLDERS
The fiscal year of each portfolio ends on December 31 of each year. The Fund
will send to you, at least semi-annually, reports which show the portfolios'
composition and other information. An annual report, with audited financial
information, will be sent to you each year.
/question mark/ DISTRIBUTION AND SERVICE PLANS
The Fund has adopted a plan pursuant to Rule 12b-1 under the 1940 Act (the
"Plan") and pursuant to the Plan, entered into a Distribution Agreement with
AFSG Securities Corporation (AFSG) located at 4333 Edgewood Road NE, Cedar
Rapids, Iowa 52499. AFSG is an affiliate of the investment adviser, and serves
as principal underwriter for the Fund. The Plan permits the use of Fund assets
to help finance the distribution of the shares of the portfolios. Under the
Plan, the Fund, on behalf of the portfolios, is permitted to pay to various
service providers up to 0.15% of the average daily net assets of each portfolio
as payment for actual expenses incurred in connection with the distribution of
the shares of the portfolios. Because these fees are paid out of Fund assets on
an on-going basis, over time these costs will increase the cost of your
investment and may cost you more than other types of sales charges.
As of the date of this prospectus, the Fund has not paid any distribution fees
under the Plan and does not intend to do so before April 30, 2001. You will
receive written notice prior to the payment of any fees under the Plan.
Prospectus 25
<PAGE>
FINANCIAL HIGHLIGHTS*
THE FINANCIAL HIGHLIGHTS TABLE IS INTENDED TO HELP YOU UNDERSTAND A PORTFOLIO'S
FINANCIAL PERFORMANCE FOR THE PAST 5 YEARS (OR, IF SHORTER, THE PERIOD OF THE
PORTFOLIO'S OPERATIONS). CERTAIN INFORMATION REFLECTS FINANCIAL RESULTS FOR A
SINGLE PORTFOLIO SHARE. THE TOTAL RETURNS IN THE TABLE REPRESENT THE RATE AN
INVESTOR WOULD HAVE EARNED (OR LOST) ON AN INVESTMENT IN EACH PORTFOLIO
(ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS). THIS INFORMATION HAS BEEN DERIVED
FROM FINANCIAL STATEMENTS AUDITED BY PRICEWATERHOUSECOOPERS LLP, INDEPENDENT
ACCOUNTANTS, WHOSE REPORT, ALONG WITH THE FUND'S FINANCIAL STATEMENTS, IS
INCLUDED IN THE FUND'S ANNUAL REPORT, WHICH IS AVAILABLE UPON REQUEST BY
CALLING THE FUND AT 1-800-851-9777.
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL JANUS GROWTH
---------------------------------
DECEMBER 31,
---------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Net asset value, beginning of year .................................. $ 59.94 $ 36.84
Income from operations:
Net investment income (loss) ...................................... (0.04) 0.12
Net realized and unrealized gain (loss) on investments ............ 34.02 23.49
---------- ----------
Net income (loss) from operations ................................ 33.98 23.61
---------- ----------
Distributions:
Dividends from net investment income .............................. 0.00 (0.09)
Dividends in excess of net investment income ...................... (1.17) 0.00
Distributions from net realized gains on investments .............. (14.75) (0.42)
Distributions in excess of net realized gains on investments ...... 0.00 0.00
---------- ----------
Total distributions .............................................. (15.92) (0.51)
---------- ----------
Net asset value, end of year ........................................ $ 78.00 $ 59.94
========== ==========
Total return ........................................................ 59.67% 64.47%
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $4,141,240 $ 3,086,057
Ratio of expenses to average net assets ........................... 0.82% 0.83%
Ratio of net investment income (loss) to average net assets ....... (0.05)% 0.25%
Portfolio turnover rate ........................................... 70.95% 35.29%
<CAPTION>
WRL JANUS GROWTH
--------------------------------------------------
DECEMBER 31,
--------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net asset value, beginning of year .................................. $ 35.00 $ 31.66 $ 23.81
Income from operations:
Net investment income (loss) ...................................... 0.31 0.34 0.26
Net realized and unrealized gain (loss) on investments ............ 5.88 5.35 10.97
---------- ---------- ----------
Net income (loss) from operations ................................ 6.19 5.69 11.23
---------- ---------- ----------
Distributions:
Dividends from net investment income .............................. (0.26) (0.35) (0.24)
Dividends in excess of net investment income ...................... 0.00 (0.01) 0.00
Distributions from net realized gains on investments .............. (4.09) (1.99) (3.14)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00
---------- ---------- ----------
Total distributions .............................................. (4.35) (2.35) (3.38)
---------- ---------- ----------
Net asset value, end of year ........................................ $ 36.84 $ 35.00 $ 31.66
========== ========== ==========
Total return ........................................................ 17.54% 17.96% 47.12%
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $1,839,453 $1,527,409 $1,195,174
Ratio of expenses to average net assets ........................... 0.87% 0.88% 0.86%
Ratio of net investment income (loss) to average net assets ....... 0.80% 0.98% 0.90%
Portfolio turnover rate ........................................... 85.88% 45.21% 130.48%
</TABLE>
<TABLE>
<CAPTION>
WRL JANUS GLOBAL
---------------------------------
DECEMBER 31,
---------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Net asset value, beginning of year .................................. $ 23.71 $ 19.04
Income from operations:
Net investment income (loss) ...................................... (0.04) 0.05
Net realized and unrealized gain (loss) on investments ............ 16.42 5.61
---------- ----------
Net income (loss) from operations ................................ 16.38 5.66
---------- ----------
Distributions:
Dividends from net investment income .............................. 0.00 (0.13)
Dividends in excess of net investment income ...................... 0.00 0.00
Distributions from net realized gains on investments .............. (2.63) (0.80)
Distributions in excess of net realized gains on investments ...... 0.00 (0.06)
---------- ----------
Total distributions .............................................. (2.63) (0.99)
---------- ----------
Net asset value, end of year ........................................ $ 37.46 $ 23.71
========== ==========
Total return ........................................................ 71.10 % 30.01%
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $1,926,210 $1,069,765
Ratio of expenses to average net assets ........................... 0.92% 0.95%
Ratio of net investment income (loss) to average net assets ....... (0.14)% 0.23%
Portfolio turnover rate ........................................... 68.10% 87.36%
<CAPTION>
WRL JANUS GLOBAL
--------------------------------------------
DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net asset value, beginning of year .................................. $ 18.12 $ 15.52 $ 13.12
Income from operations:
Net investment income (loss) ...................................... 0.08 0.08 0.10
Net realized and unrealized gain (loss) on investments ............ 3.32 4.20 2.91
-------- -------- --------
Net income (loss) from operations ................................ 3.40 4.28 3.01
-------- -------- --------
Distributions:
Dividends from net investment income .............................. (0.13) (0.04) 0.00
Dividends in excess of net investment income ...................... (1.01) (0.17) 0.00
Distributions from net realized gains on investments .............. (1.34) (1.47) (0.61)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00
-------- -------- --------
Total distributions .............................................. (2.48) (1.68) (0.61)
-------- -------- --------
Net asset value, end of year ........................................ $ 19.04 $ 18.12 $ 15.52
======== ======== ========
Total return ........................................................ 18.75% 27.74% 23.06%
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $785,966 $534,820 $289,506
Ratio of expenses to average net assets ........................... 1.00% 0.99% 0.99%
Ratio of net investment income (loss) to average net assets ....... 0.41% 0.46% 0.75%
Portfolio turnover rate ........................................... 97.54% 88.31% 130.60%
</TABLE>
Prospectus 26
<PAGE>
FINANCIAL HIGHLIGHTS*
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL LKCM STRATEGIC TOTAL
RETURN
-----------------------------
DECEMBER 31,
-----------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Net asset value, beginning of year .................................. $ 16.40 $ 15.62
Income from operations:
Net investment income (loss) ...................................... 0.34 0.39
Net realized and unrealized gain (loss) on investments ............ 1.59 1.09
-------- --------
Net income (loss) from operations ................................ 1.93 1.48
-------- --------
Distributions:
Dividends from net investment income .............................. (0.35) (0.38)
Dividends in excess of net investment income ...................... 0.00 0.00
Distributions from net realized gains on investments .............. (1.13) (0.32)
Distributions in excess of net realized gains on investments ...... 0.00 0.00
-------- --------
Total distributions .............................................. (1.48) (0.70)
-------- --------
Net asset value, end of year ........................................ $ 16.85 $ 16.40
======== ========
Total return ........................................................ 12.07% 9.64%
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $624,416 $592,312
Ratio of expenses to average net assets ........................... 0.86% 0.86%
Ratio of net investment income (loss) to average net assets ....... 2.02% 2.43%
Portfolio turnover rate ........................................... 45.42% 49.20%
<CAPTION>
WRL LKCM STRATEGIC TOTAL RETURN
--------------------------------------------
DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net asset value, beginning of year .................................. $ 13.97 $ 12.86 $ 10.90
Income from operations:
Net investment income (loss) ...................................... 0.37 0.37 0.37
Net realized and unrealized gain (loss) on investments ............ 2.68 1.56 2.33
-------- -------- --------
Net income (loss) from operations ................................ 3.05 1.93 2.70
-------- -------- --------
Distributions:
Dividends from net investment income .............................. (0.35) (0.32) (0.37)
Dividends in excess of net investment income ...................... (0.03) 0.00 0.00
Distributions from net realized gains on investments .............. (1.02) (0.50) (0.37)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00
-------- -------- --------
Total distributions .............................................. (1.40) (0.82) (0.74)
-------- -------- --------
Net asset value, end of year ........................................ $ 15.62 $ 13.97 $ 12.86
======== ======== ========
Total return ........................................................ 21.85% 15.00% 24.66%
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $526,577 $390,141 $256,806
Ratio of expenses to average net assets ........................... 0.88% 0.91% 0.87%
Ratio of net investment income (loss) to average net assets ....... 2.43% 2.72% 3.07%
Portfolio turnover rate ........................................... 48.20% 49.32% 52.59%
</TABLE>
<TABLE>
<CAPTION>
WRL ALGER AGGRESSIVE GROWTH
-------------------------------
DECEMBER 31,
-------------------------------
1999 1998
---------------- --------------
<S> <C> <C>
Net asset value, beginning of year .................................. $ 22.44 $ 16.04
Income from operations:
Net investment income (loss) ...................................... (0.15) (0.04)
Net realized and unrealized gain (loss) on investments ............ 14.95 7.68
---------- --------
Net income (loss) from operations ................................ 14.80 7.64
---------- --------
Distributions:
Dividends from net investment income .............................. (0.16) 0.00
Dividends in excess of net investment income ...................... (1.38) (0.05)
Distributions from net realized gains on investments .............. (2.42) (1.19)
Distributions in excess of net realized gains on investments ...... 0.00 0.00
---------- --------
Total distributions .............................................. (3.96) (1.24)
---------- --------
Net asset value, end of year ........................................ $ 33.28 $ 22.44
========== ========
Total return ........................................................ 69.02% 48.69%
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $1,117,511 $574,164
Ratio of expenses to average net assets ........................... 0.89% 0.91%
Ratio of net investment income (loss) to average net assets ....... (0.56)% (0.21)%
Portfolio turnover rate ........................................... 101.71% 117.44%
<CAPTION>
WRL ALGER AGGRESSIVE GROWTH
--------------------------------------------
DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net asset value, beginning of year .................................. $ 14.18 $ 13.25 $ 9.86
Income from operations:
Net investment income (loss) ...................................... (0.01) (0.01) (0.06)
Net realized and unrealized gain (loss) on investments ............ 3.44 1.38 3.96
-------- -------- --------
Net income (loss) from operations ................................ 3.43 1.37 3.90
-------- -------- --------
Distributions:
Dividends from net investment income .............................. 0.00 0.00 0.00
Dividends in excess of net investment income ...................... (0.42) (0.19) 0.00
Distributions from net realized gains on investments .............. (1.15) (0.25) (0.51)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00
-------- -------- --------
Total distributions .............................................. (1.57) (0.44) (0.51)
-------- -------- --------
Net asset value, end of year ........................................ $ 16.04 $ 14.18 $ 13.25
======== ======== ========
Total return ........................................................ 24.25% 10.45% 38.02%
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $336,166 $220,552 $158,534
Ratio of expenses to average net assets ........................... 0.96% 0.98% 1.07%
Ratio of net investment income (loss) to average net assets ....... (0.06)% (0.10)% (0.48)%
Portfolio turnover rate ........................................... 136.18% 101.28% 108.04%
</TABLE>
Prospectus 27
<PAGE>
FINANCIAL HIGHLIGHTS*
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL J.P. MORGAN
REAL ESTATE SECURITIES
---------------------------
DECEMBER 31,
---------------------------
1999 1998(F)
------------ ------------
<S> <C> <C>
Net asset value, beginning of year ................................... $ 8.51 $ 10.00
Income from operations:
Net investment income (loss) ....................................... 0.49 0.36
Net realized and unrealized gain (loss) on investments ............. (0.79) (1.85)
Net income (loss) from operations ................................. (0.30) (1.49)
-------- --------
Distributions:
Dividends from net investment income ............................... (0.15) 0.00
Dividends in excess of net investment income ....................... 0.00 0.00
Distributions from net realized gains on investments ............... 0.00 0.00
Distributions in excess of net realized gains on investments ....... 0.00 0.00
-------- --------
Total distributions ............................................... (0.15) 0.00
-------- --------
Net asset value, end of year ......................................... $ 8.06 $ 8.51
======== ========
Total return ......................................................... (3.77)% (14.93)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................... $ 3,199 $ 2,414
Ratio of expenses to average net assets ............................ 1.00% 1.00%
Ratio of net investment income (loss) to average net assets ........ 5.91% 6.03%
Portfolio turnover rate ............................................ 189.80% 100.80%
</TABLE>
Prospectus 28
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS
Per share information has been computed using average shares outstanding
throughout each period. Total return reflects all Portfolio expenses and
includes reinvestment of dividends and capital gains; it does not reflect the
charges and deductions under the policies or annuity contracts. Total return
and portfolio turnover rate are not annualized for periods of less than one
year. Ratio of expenses and ratio of net investment income (loss) to average
net assets are annualized for periods of less than one year. For the year ended
December 31, 1999, ratio of expenses to average net assets is net of the
advisory fee waiver. For the years prior to 1999, ratio of expenses to average
net assets is net of the advisory fee waiver and fees paid indirectly. Without
the advisory fee waived by WRL Management and the fees paid indirectly, ratio
of expenses to average net assets for each period presented would be as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
PORTFOLIO 1999 1998 1997 1996 1995
- - ----------------------------------------- -------- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
WRL Janus Growth ........................ 0.82% * * * *
WRL Janus Global ........................ * * * * *
WRL LKCM Strategic Total Return ......... * * * * *
WRL Alger Aggressive Growth ............. * * * * *
</TABLE>
* Ratio difference less than 0.01%.
Prospectus 29
<PAGE>
- - --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT THESE PORTFOLIOS IS CONTAINED IN THE
STATEMENT OF ADDITIONAL INFORMATION, DATED MAY 1, 2000, AND IN THE
FUND'S ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS, WHICH ARE
INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. IN THE FUND'S
ANNUAL REPORT, YOU WILL FIND A DISCUSSION OF THE MARKET CONDITIONS
AND INVESTMENT STRATEGIES THAT SIGNIFICANTLY AFFECTED THE FUND'S
PERFORMANCE DURING THE LAST FISCAL YEAR.
YOU MAY ALSO CALL 1-800-851-9777 TO REQUEST THIS ADDITIONAL
INFORMATION ABOUT THE FUND WITHOUT CHARGE OR TO MAKE SHAREHOLDER
INQUIRIES.
OTHER INFORMATION ABOUT THESE PORTFOLIOS HAS BEEN FILED WITH AND
IS AVAILABLE FROM THE U.S. SECURITIES AND EXCHANGE COMMISSION.
INFORMATION ABOUT THE FUND (INCLUDING THE SAI) CAN BE REVIEWED AND
COPIED AT THE SECURITIES AND EXCHANGE COMMISSION'S PUBLIC
REFERENCE ROOM IN WASHINGTON, D.C. INFORMATION ON THE OPERATION OF
THE PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE
COMMISSION AT 202-942-8090. INFORMATION MAY BE OBTAINED, UPON
PAYMENT OF A DUPLICATING FEE BY WRITING THE PUBLIC REFERENCE
SECTION OF THE COMMISSION, WASHINGTON, D.C. 20549-6009.
REPORTS AND OTHER INFORMATION ABOUT THE FUND ARE ALSO AVAILABLE ON
THE COMMISSION'S INTERNET SITE AT HTTP://WWW.SEC.GOV.
(WRL SERIES FUND FILE NO. 811-4419.)
FOR MORE INFORMATION ABOUT THESE PORTFOLIOS, YOU MAY OBTAIN A COPY
OF THE SAI OR THE ANNUAL OR SEMI-ANNUAL REPORTS WITHOUT CHARGE, OR
TO MAKE OTHER INQUIRIES ABOUT THIS FUND, CALL THE NUMBER LISTED
ABOVE.
(WRL SERIES FUND FILE NO. 811-4419.)
- - --------------------------------------------------------------------------------
<PAGE>
WRL SERIES FUND, INC.
AGGRESSIVE EQUITY PORTFOLIO
o WRL VKAM EMERGING GROWTH
o WRL ALGER AGGRESSIVE GROWTH
o FOREIGN EQUITY PORTFOLIO
o WRL JANUS GLOBAL
o GROWTH EQUITY PORTFOLIO
o WRL JANUS GROWTH
PROSPECTUS
The Securities and Exchange Commission
has not approved or disapproved these
securities or passed upon the adequacy
of this prospectus.
Any representation to the contrary is a criminal offense.
May 1, 2000
<PAGE>
- - --------------------------------------------------------------------------------
TABLE OF CONTENTS
- - --------------------------------------------------------------------------------
INVESTOR INFORMATION .......................... 1
ALL ABOUT THE FUND
AGGRESSIVE EQUITY PORTFOLIO
WRL VKAM EMERGING GROWTH ................... 2
WRL ALGER AGGRESSIVE GROWTH ................ 3
FOREIGN EQUITY PORTFOLIO
WRL JANUS GLOBAL ........................... 6
GROWTH EQUITY PORTFOLIO
WRL JANUS GROWTH ........................... 9
RISK/REWARD INFORMATION ....................... 12
EXPLANATION OF STRATEGIES AND RISKS ........... 13
HOW THE FUND IS MANAGED AND ORGANIZED ......... 17
PERFORMANCE INFORMATION ....................... 19
OTHER INFORMATION ............................. 21
FINANCIAL HIGHLIGHTS .......................... 23
WRL Series Fund, Inc. (Fund) currently offers twenty-six separate series
or investment portfolios. This prospectus includes 4 of those portfolios.
The Fund is an open-end management investment company, more commonly known
as a mutual fund.
Shares of these portfolios are currently only sold to separate accounts of
Western Reserve Life Assurance Co. of Ohio, PFL Life Insurance Company,
AUSA Life Insurance Company, Peoples Benefit Life Insurance Company and
Transamerica Occidental Life Insurance Company to fund the benefits under
certain individual flexible premium variable life insurance policies and
individual and group variable annuity contracts.
A particular portfolio of the Fund may not be available under the policy
or annuity contract you have chosen. The prospectus or disclosure document
for your policy or annuity contract shows the portfolios available to you.
Please read this prospectus carefully before selecting a portfolio. It
provides information to assist you in your decision. If you would like
additional information about a portfolio, please request a copy of the
Statement of Additional Information (SAI) (see back cover). The SAI is
incorporated by reference into this prospectus.
Prospectus
<PAGE>
- - --------------------------------------------------------------------------------
INVESTOR INFORMATION
- - --------------------------------------------------------------------------------
TO HELP YOU UNDERSTAND . . .
In this prospectus, you will see the symbols below.
These are "icons" which serve as tools to direct you to the type of information
that is included in the accompanying paragraphs.
The icons are for your convenience and to assist you as you read this
prospectus.
/BULLSEYE/ The target directs you to a portfolio's goals or objective.
/ROOK/ The chess piece indicates discussion about a portfolio's strategies.
/WARNING SIGN/ The warning sign indicates the risks of investing in a
portfolio.
/GRAPH/ The graph indicates investment performance.
/QUESTION MARK/ The question mark provides additional information about the
Fund or may direct you on how to obtain further information.
SHARES OF A PORTFOLIO ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY
BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT.
Prospectus 1
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
WRL VKAM EMERGING GROWTH
WRL ALGER AGGRESSIVE GROWTH
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES YOUR AGGRESSIVE EQUITY PORTFOLIO OF
THE FUND AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIO. FOR FURTHER
INFORMATION ON THIS PORTFOLIO, PLEASE READ THE SECTION ENTITLED "EXPLANATION OF
STRATEGIES AND RISKS," BEGINNING ON PAGE 13 AND THE FUND'S SAI.
/BULLSEYE/ OBJECTIVES
WRL EMERGING GROWTH
This portfolio seeks capital appreciation by investing primarily in common
stocks of small and medium-sized companies.
WRL ALGER AGGRESSIVE GROWTH
This portfolio seeks long-term capital appreciation.
- - --------------------------------------------------------------------------------
WHAT IS AN AGGRESSIVE EQUITY PORTFOLIO?
Aggressive Equity Portfolio seeks maximum capital appreciation (a rise in
the share price/value). Current income is not a significant factor. Some
portfolios that are included in this category may invest in out-of-the
main-stream stocks, such as those of fledging or struggling companies, or
those in new or currently out-of-favor industries. Some portfolios in this
category may also use specialized investment techniques such as options or
short-term investing. For these reasons, these portfolios usually entail
greater risk than the overall equity portfolio category.
- - --------------------------------------------------------------------------------
/ROOK/ POLICIES AND STRATEGIES
WRL VKAM EMERGING GROWTH
The portfolio's sub-adviser, Van Kampen Asset Management Inc. (VKAM), seeks to
achieve the portfolio's objective by investing;
o At least 65% of the portfolio's total assets in common stocks of emerging
growth companies. Emerging growth companies are those companies in the
early stages of their life cycles that the portfolio's sub-adviser believes
have the potential to become major enterprises.
o Options
o Futures
VKAM invests at least 65% of the portfolio's assets (under normal market
conditions) in common stocks of companies that are in the early stages of their
life cycle, and are believed by VKAM to have the potential to become major
enterprises. Some securities may have above average price volatility. VKAM
attempts to reduce overall exposure to risk from declines in the security
prices by spreading the portfolio's investments over many different companies
in a variety of industries.
VKAM will utilize options on securities, futures contracts and options thereon
in several different ways, depending upon the status of the portfolio's
investment portfolio and its expectations concerning the securities market.
In times of stable or rising stock prices, the portfolio generally seeks to be
fully invested. Even when the portfolio is fully invested, VKAM believes that
at least a small portfolio of assets will be held as cash or cash equivalents
to honor redemption requests and for other short-term needs.
The amount of portfolio assets 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 seek to "equalize" the cash portion of its assets
and obtain performance that is equivalent to investing 100% in equity
securities.
The portfolio may take a temporary defensive position when the securities
trading markets or the economy are experiencing volatility or a prolonged
general decline, or other adverse conditions exist. This may be inconsistent
with the portfolio's principal investment strategies. Under these conditions,
the portfolio will be unable to achieve its investment objective.
Prospectus 2
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIOS (CONTINUED)
- - --------------------------------------------------------------------------------
WRL ALGER AGGRESSIVE GROWTH
The portfolio's sub-adviser, Fred Alger Management, Inc. (Alger), seeks to
achieve the portfolio's objective by investing principally in:
o Equity securities such as common or preferred stocks
o Convertible securities (convertible securities are securities which can be
exchanged or converted into common stock of such companies)
To a lesser extent, the sub-adviser may invest portfolio assets in:
o U.S. dollar denominated securities of foreign issuers (American Depositary
Receipts (ADRs))
o Money market instruments
o Repurchase agreements
Under normal market conditions, the portfolio invests at least 85% of its
assets in common stocks, which may include stocks of developing companies, of
older companies that are entering a new stage of growth, and of companies whose
products or services have a high unit volume growth rate.
The portfolio may also use leveraging, a technique that involves borrowing
money to invest in an effort to enhance shareholder returns.
The portfolio's manager may take a temporary defensive position when the
securities trading markets or the economy are experiencing excessive volatility
or a prolonged general decline, or other adverse conditions exist. This may be
inconsistent with the portfolio's principal investment strategies. During this
time, the portfolio may invest up to 100% of its assets in money market
instruments and cash equivalents. Under these circumstances, the portfolio will
be unable to pursue its investment objective.
/WARNING SIGN/ RISKS OF INVESTING IN AN AGGRESSIVE EQUITY PORTFOLIO
The principal risks of investing in an Aggressive Equity Portfolio are
described below. Please note that there are many other circumstances which
could adversely affect your investment and prevent your portfolio from
achieving its objective, which are not described here. Please refer to the
section entitled "Explanation of Strategies and Risks" beginning on page 13 and
the Fund's SAI for more information about the risks of investing in an
Aggressive Equity Portfolio.
PORTFOLIO
-----------------------------------
WRL WRL
VKAM EMERGING ALGER AGGRESSIVE
RISKS GROWTH GROWTH
- - --------------------- --------------- -----------------
Stocks X X
Investing X X
Aggressively X
Futures & Options X
Foreign Securities X
Depositary Receipts X
Convertibles X
Leveraging X
Value Investing X
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the short term. These
price movements may result from factors affecting individual companies, certain
industries or the securities market as a whole.
Because the stocks a portfolio holds fluctuate in price, the value of your
investment in the portfolio will go up and down.
o INVESTING AGGRESSIVELY
o The value of developing-company stocks may be very volatile, and
can drop significantly in a short period of time
o Rights, options and futures contracts may not be exercised and
may expire worthless
o Warrants and rights may be less liquid than stocks
o Use of futures and other derivatives may make the portfolio more
volatile
o ADRS
Many securities of foreign issuers are represented by American Depositary
Receipts (ADRs). While ADRs principally are traded on domestic securities
exchanges, investing in ADRs involves many of the same risks associated with
foreign securities in general. These risks include:
o Changes in currency value
Prospectus 3
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO (CONTINUED)
- - --------------------------------------------------------------------------------
o Currency speculation
o Currency trading costs
o More fluctuations in market prices
o Less information available
o LEVERAGING
Leveraging by a portfolio involves special risks:
o Leveraging practices may make a portfolio more volatile
o Leveraging may exaggerate the effect on net asset value of any
increase or decrease in the market value of the portfolio's securities
o Money borrowed for leveraging is subject to interest costs
o Minimum average balances may need to be maintained or a line of
credit in connection with borrowing may be necessary resulting in an
increase in the cost of borrowing over the stated interest rate
o CONVERTIBLES
As with all debt securities, the market value of convertibles tends to decline
as interest rates increase and, conversely, to increase as interest rates
decline.
o VALUE INVESTING RISK
Undervalued stocks may not realize their perceived value for extended periods
of time. Value stocks may respond differently to market and other developments
than other types of stocks. Value oriented portfolios will typically
underperform when growth investing is in favor.
o FOREIGN SECURITIES
Investments in foreign securities involve risks relating to political, social
and economic developments abroad as well as risks resulting from differences in
regulations to which U.S. and foreign issuers and markets are subject. To the
extent a portfolio invests in emerging markets, these risks would be greater.
These risks include:
o Changes in currency values
o Currency speculation
o Currency trading costs
o Different accounting and reporting practices
o Less information available to the public
o Less (or different) regulation of securities markets
o Greater complex business negotiations
o Less liquidity
o More fluctuations in prices
o Delays in settling foreign securities transactions
o Higher costs for holding shares (custodial fees)
o Higher transaction costs
o Vulnerability to seizure and taxes
o Political instability and small markets
o Different market trading days
o Forward foreign currency contracts for hedging
o FUTURES AND OPTIONS
Futures and options involve additional investment risks and transactional
costs, and draw upon skills and experience which are different than those
needed to pick other securities. Special risks include:
o Inaccurate market predictions
o Imperfect correlation
o Illiquidity
o Tax considerations
The portfolios are not required to hedge their investments.
YOU MAY LOSE MONEY IF YOU INVEST IN AN AGGRESSIVE EQUITY PORTFOLIO.
/ROOK/ INVESTOR PROFILE
WRL ALGER AGGRESSIVE GROWTH
For the investor who seeks capital growth aggressively, and can tolerate wide
swings in the value of their investment.
WRL VKAM EMERGING GROWTH
May be appropriate for the investor who seeks capital appreciation over the
long term; is willing to take on the increased risks of investing in small and
medium-sized, less established companies in exchange for potentially higher
capital appreciation; can withstand substantial volatility in the value of
their shares of the portfolio; and wish to add to their personal holdings a
portfolio that invests primarily in common stocks of emerging growth companies.
Prospectus 4
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO (CONTINUED)
- - --------------------------------------------------------------------------------
/GRAPH/ PORTFOLIO PERFORMANCE
The bar charts and tables below give an indication of the portfolios' risks and
performance. The charts show changes in the portfolios' performance from year
to year. The performance calculations do not reflect charges or deductions
under the policies or the annuity contracts. These fees would lower investment
performance. The tables show how a portfolios' average annual returns for the
periods indicated compare to those of a broad measure of market performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL ALGER AGGRESSIVE GROWTH
- - --------------------------------------------------------------------------------
TOTAL RETURN
(PER CALENDAR YEAR)
38.02% 10.45% 24.25% 48.69% 69.02%
1995 1996 1997 1998 1999
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(QUARTERLY 1995-1999)
- - -------------------------------------------
QUARTER ENDED
Highest 44.67 % 12/31/99
Lowest (9.72)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 1999)
- - ----------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (MARCH 1, 1994)
WRL Alger
Aggressive Growth 69.02% 36.62% 30.35%
S&P 500 Index 21.04% 28.56% 24.15%
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
WRL VKAM EMERGING GROWTH
- - --------------------------------------------------------------------------------
TOTAL RETURN
(PER CALENDAR YEAR)
(7.36)% 46.79% 18.88% 21.45% 37.33% 105.16%
1994 1995 1996 1997 1998 1999
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(QUARTERLY 1994-1999)
- - -------------------------------------------
QUARTER ENDED
Highest 62.73 % 12/31/99
Lowest (12.53)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 1999)
- - ---------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (MARCH 1, 1993)
WRL VKAM
Emerging Growth 105.16% 42.96% 32.64%
S&P 500 Index 21.04% 28.56% 21.70%
- - --------------------------------------------------------------------------------
Prospectus 5
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
WRL JANUS GLOBAL (FORMERLY GLOBAL PORTFOLIO)
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES YOUR FOREIGN EQUITY PORTFOLIO AND
THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIO. FOR FURTHER INFORMATION ON
THIS PORTFOLIO, PLEASE READ THE SECTION ENTITLED "EXPLANATION OF STRATEGIES AND
RISKS," BEGINNING ON PAGE 13 AND THE FUND'S SAI.
/BULLSEYE/ OBJECTIVES
WRL JANUS GLOBAL
This Portfolio seeks long-term growth of capital in a manner consistent with
the preservation of capital.
- - --------------------------------------------------------------------------------
WHAT IS A FOREIGN EQUITY PORTFOLIO?
This type of portfolio principally invests in equity securities of
companies located outside the U.S.
- - --------------------------------------------------------------------------------
/ROOK/ POLICIES AND STRATEGIES
WRL JANUS GLOBAL
The portfolio's sub-adviser, Janus Capital Corporation (Janus), seeks to
achieve the portfolio's investment objective by investing principally in:
o Common stocks of foreign and domestic issuers
o Depositary receipts including ADRs, Global Depositary Receipts (GDRs)
and European Depositary Receipts (EDRs)
The portfolio may also use forward foreign currency contracts for hedging.
Janus' main strategy is to use a "bottom up" approach to build the portfolio's
portfolio. They seek to identify individual companies with earnings growth
potential that may not be recognized by the market at large.
Foreign securities are generally selected on a stock-by-stock basis without
regard to defined allocation among countries or geographic regions.
When evaluating foreign investments, Janus (in addition to looking at
individual companies) considers such factors as:
o Expected levels of inflation in various countries
o Government policies that might affect business conditions
o The outlook for currency relationships
o Prospects for economic growth among countries, regions or
geographic areas
- - --------------------------------------------------------------------------------
WHAT IS A "BOTTOM-UP" APPROACH?
When portfolio managers use a "bottom-up" approach, they look primarily at
individual companies against the context of broader market factors.
- - --------------------------------------------------------------------------------
/WARNING SIGN/ RISKS OF INVESTING IN A FOREIGN EQUITY PORTFOLIO
The principal risks of investing in a Foreign Equity Portfolio that may
adversely affect your investment are described below. Please note that there
are many other circumstances which could adversely affect your investment and
prevent your portfolio from achieving its objective, which are not described
here. Please refer to the section entitled "Explanation of Strategies and
Risks" beginning on page 13, and the Fund's SAI for more information about the
risks associated with investing in a Foreign Equity Portfolio.
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
certain industries or the securities market as a whole.
Because the stocks the portfolio holds fluctuate in price, the value of your
investment in the portfolio will go up and down.
o FOREIGN SECURITIES
Investments in foreign securities involve risks relating to political, social
and economic developments abroad as well as risks resulting from differences in
regulations to which U.S. and foreign issuers and markets are subject. To the
extent a portfolio invests in emerging markets, these risks would be greater.
These risks include:
o Changes in currency values
o Currency speculation
o Currency trading costs
Prospectus 6
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIO (CONTINUED)
- - --------------------------------------------------------------------------------
o Different accounting and reporting practices
o Less information available to the public
o Less (or different) regulation of securities markets
o Greater complex business negotiations
o Less liquidity
o More fluctuations in prices
o Delays in settling foreign securities transactions
o Higher costs for holding shares (custodial fees)
o Higher transaction costs
o Vulnerability to seizure and taxes
o Political instability and small markets
o Different market trading days
o Forward foreign currency contracts for hedging
o FORWARD FOREIGN CURRENCY CONTRACTS
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of portfolio securities decline.
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 the portfolio's
limitation on investing in illiquid securities.
If the portfolio manager's judgment of markets proves incorrect or the strategy
does not correlate well with a portfolio's investment, the use of such hedging
transactions could result in a loss regardless of whether the intent was to
reduce risk or increase return and may increase a portfolio's volatility. In
addition, in the event that non-exchange traded forward currency contracts are
used, such transactions could result in a loss if the counterparty to the
transaction does not perform as promised.
o EMERGING MARKETS RISK
Investing in the securities of issuers located in or principally doing business
in emerging markets bear foreign risks as discussed above. In addition, the
risks associated with investing in emerging markets are often greater than
investing in developed foreign markets. Specifically, the economic structures
in emerging markets countries are less diverse and mature than those in
developed countries, and their political systems are less stable. Investments
in emerging markets countries may be affected by national policies that
restrict foreign investments. Emerging market countries may have less developed
legal structures, and the small size of their securities markets and low
trading volumes can make investments illiquid and more volatile than
investments in developed countries. As a result, a portfolio investing in
emerging market countries may be required to establish special custody or other
arrangements before investing.
o WARRANTS AND RIGHTS
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.
o DEPOSITARY RECEIPTS
Depositary receipts represent interests in an account at a bank or trust
company which holds equity securities. They are subject to some of the same
risks as direct investments in foreign securities, including currency risk. The
regulatory requirements with respect to depositary receipts that are issued in
sponsored and unsponsored programs are generally similar, but the issuers of
unsponsored depositary receipts 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 depositary receipts.
YOU MAY LOSE MONEY IF YOU INVEST IN A FOREIGN EQUITY PORTFOLIO.
/ROOK/ INVESTOR PROFILE
WRL JANUS GLOBAL
For the investor who seeks capital growth without being limited to investments
in U.S. securities, and who can tolerate the significant risks associated with
foreign investing.
Prospectus 7
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIO (CONTINUED)
- - --------------------------------------------------------------------------------
/GRAPH/ PORTFOLIO PERFORMANCE
The bar charts and tables below give an indication of the portfolios' risks and
performance. The charts show changes in a portfolio's performance from year to
year. The performance calculations do not reflect charges or deductions under
the policies on the annuity contracts. These fees and expenses would lower
investment performance. The tables show how a portfolio's average annual
returns for the periods indicated compare to those of a broad measure of market
performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL JANUS GLOBAL
- - --------------------------------------------------------------------------------
35.05% 0.25% 23.06% 27.74% 18.75% 30.01% 71.10%
1993 1994 1995 1996 1997 1998 1999
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(QUARTERLY 1993-1999)
- - --------------------------------------------
QUARTER ENDED
Highest 46.11 % 12/31/99
Lowest (16.52)% 9/30/98
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 1999)
- - ----------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (DECEMBER 3, 1992)
WRL Janus Global 71.10% 32.94% 27.91%
Morgan Stanley
Capital
International
World Index 24.93% 20.08% 18.23%
- - --------------------------------------------------------------------------------
Prospectus 8
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
WRL JANUS GROWTH
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES YOUR GROWTH EQUITY PORTFOLIO AND THE
PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIO. FOR FURTHER INFORMATION ON THIS
PORTFOLIO, PLEASE READ THE SECTION ENTITLED "EXPLANATION OF STRATEGIES AND
RISKS," BEGINNING ON PAGE 13, AND THE FUND'S SAI.
/BULLSEYE/ OBJECTIVES
WRL JANUS GROWTH
This portfolio seeks growth of capital.
- - --------------------------------------------------------------------------------
WHAT IS A GROWTH EQUITY PORTFOLIO?
A growth equity portfolio invests in the common stock of companies that
offer potentially rising share prices. These portfolios primarily aim to
provide capital appreciation (a rise in share price) rather than steady
income.
- - --------------------------------------------------------------------------------
/ROOK/ POLICIES AND STRATEGIES
WRL JANUS GROWTH
The portfolio's sub-adviser, Janus Capital Corporation (Janus), seeks to
achieve the portfolio's objective by investing principally in:
o Common stocks
The portfolio's strategy is to invest almost all of its assets in common stock
at times when Janus believes the market environment favors such investing.
Janus generally takes a "bottom-up" approach to building the stock portfolio.
In other words, Janus seeks to identify individual companies with earnings
growth potential that may not be recognized by the stock market at large.
Although themes may emerge in the portfolio, securities are generally selected
without regard to any defined industry sector or other similarly defined
selection procedure. Realization of income is not a significant investment
consideration for the portfolio and any income realized on the portfolio's
investments is incidental to its objective.
Janus may take a temporary defensive position when the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse market conditions exist. This may be
inconsistent with the portfolio's principal investment strategies. Under these
circumstances, the portfolio may be unable to achieve its investment objective.
/WARNING SIGN/ RISKS
The principal risks of investing in a Growth Equity Portfolio that may
adversely affect your investment are described below. Please note that there
are many other circumstances which could adversely affect your investment and
prevent a portfolio from achieving its objective, which are not described here.
Please refer to the section entitled "Explanation of Strategies and Risks,"
beginning on page 13, and the Fund's SAI for more information about the risks
associated with investing in a Growth Equity Portfolio.
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
industries, or the securities market as a whole.
Because the stocks the portfolio holds fluctuate in price, the value of your
investment in the portfolio go up and down.
o STYLE RISK
Securities with different characteristics tend to shift in and out of favor
depending upon market and economic conditions as well as investor sentiment. A
portfolio may underperform other portfolios that employ a different style. A
portfolio also may employ a combination of styles that impact its risk
characteristics. Examples of different styles include growth and value
investing, as well as those focusing on large, medium, or small company
securities.
o FUTURES AND OPTIONS
Futures and options involve additional investment risks and transactional
costs, and draw upon skills and
Prospectus 9
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
experience which are different than those needed to pick other securities.
Special risks include:
o Inaccurate market predictions
o Imperfect correlation
o Illiquidity
o Tax considerations
The portfolios are not required to hedge their investments.
o WARRANTS AND RIGHTS
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.
o DEPOSITARY RECEIPTS
Depositary receipts represent interests in an account at a bank or trust
company which holds equity securities. They are subject to some of the same
risks as direct investments in foreign securities, including currency risk. The
regulatory requirements with respect to depositary receipts that are issued in
sponsored and unsponsored programs are generally similar, but the issuers of
unsponsored depositary receipts 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 depositary receipts.
YOU MAY LOSE MONEY IF YOU INVEST IN A GROWTH EQUITY PORTFOLIO.
/ROOK/ INVESTOR PROFILE
WRL JANUS GROWTH
For the investor who wants capital growth in a broadly diversified stock
portfolio, and who can tolerate significant fluctuations in value.
Prospectus 10
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIO (CONTINUED)
- - --------------------------------------------------------------------------------
/GRAPH/ PORTFOLIO PERFORMANCE
The bar chart and table below gives an indication of the portfolio's risks and
performance. The chart shows changes in the portfolio's performance from year
to year. The performance calculations do not reflect charges or deductions
under the policies or the annuity contracts. These fees and expenses would
lower investment performance. The tables show how the portfolio's average
annual returns for the periods indicated compare to those of a broad measure of
market performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL JANUS GROWTH
- - --------------------------------------------------------------------------------
(0.22)% 59.79% 2.35% 3.97% (8.31)% 47.12% 17.97% 17.54% 64.47% 59.67%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(QUARTERLY 1990-1999)
- - --------------------------------------------
QUARTER ENDED
Highest 33.08 % 12/31/99
Lowest (16.60)% 9/30/90
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 1999)
- - ---------------------------------------------
1 YEAR 5 YEARS 10 YEARS
WRL Janus Growth 59.67% 39.89% 23.62%
S&P 500 Index 21.04% 28.56% 18.21%
- - --------------------------------------------------------------------------------
Prospectus 11
<PAGE>
- - --------------------------------------------------------------------------------
RISK/REWARD INFORMATION
- - --------------------------------------------------------------------------------
BEFORE YOU CHOOSE AN INVESTMENT PORTFOLIO,
PLEASE CONSIDER . . .
All of the investment portfolios involve risk, but there is also the potential
for reward. You can lose money -- and you can make money. The Fund portfolios
are structured so that each offers a slightly different degree of risk and
reward than others.
In this prospectus, we've arranged the portfolios in order of risk/
reward from highest to lowest. Notice the scale at the right. It covers the
full spectrum of risk/reward of the portfolios described in this prospectus.
WHAT RISK/REWARD LEVEL IS FOR YOU? ASK YOURSELF THE FOLLOWING:
(1) HOW WELL DO I HANDLE FLUCTUATIONS IN MY ACCOUNT VALUE? The higher a
portfolio is on the risk/reward spectrum, the more its price is likely to
move up and down on a day to day basis. If this makes you uncomfortable,
you may prefer an investment at the lower end of the scale that may not
fluctuate in price as much.
(2) AM I LOOKING FOR A HIGHER RATE OF RETURN? Generally, the higher the
potential return, the higher the risk. If you find the potential to make
money is worth the possibility of losing more, then a portfolio at the
higher end of the spectrum may be right for you.
A final note: These portfolios are designed for long-term investment.
Each portfolio has an investment objective that it tries to achieve by
following certain investment strategies and techniques. The objective can be
changed without shareholder vote.
HIGHER
WRL VKAM EMERGING GROWTH AGGRESSIVE
WRL ALGER AGGRESSIVE GROWTH EQUITY
WRL JANUS GLOBAL FOREIGN EQUITY
WRL JANUS GROWTH GROWTH EQUITY
RISK/REWARD
BALANCED
FIXED-INCOME
CAPITAL
PRESERVATION
LOWER
Prospectus 12
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS
- - --------------------------------------------------------------------------------
HOW TO USE THIS SECTION
In the discussions of the individual portfolios on pages 2 through 11, you
found descriptions of the strategies and risks associated with each. In those
pages, you were referred to this section for a more complete description of the
risks. For best understanding, first read the description of the portfolio
you're interested in. Then refer to this section and read about the risks
particular to that portfolio. For even more discussions of strategies and
risks, see the SAI, which is available upon request. See the back cover of this
prospectus for information on how to order the SAI.
/ROOK/
DIVERSIFICATION AND CONCENTRATION. The 1940 Act classifies investment companies
as either diversified or non-diversified.
Diversification is the practice of spreading a portfolio's assets over a number
of investments, investment types, industries or countries to reduce risk. A
non-diversified portfolio has the ability to take larger positions in fewer
issuers. Because the appreciation or depreciation of a single security may have
a greater impact on the net asset value of a non-diversified portfolio, its
share price can be expected to fluctuate more than a comparable portfolio.
All of the portfolios qualify as diversified funds under the 1940 Act. The
diversified portfolios are subject to the following diversification
requirements (which are set forth in full in the SAI):
o 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.
o 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
would cause the portfolio's holdings of that issuer to amount to more than
5% of the portfolio's total assets.
o 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.
/WARNING SIGN/
INVESTING IN COMMON STOCKS. Many factors cause common stocks to go up and down
in price. A major one is the financial performance of the company that issues
the stock. Other factors include the overall economy, conditions in a
particular industry, and monetary factors like interest rates. When your
portfolio holds stocks, there's a risk that some or all of them may be down in
price when you choose to sell, causing you to lose money. This is called MARKET
RISK.
/WARNING SIGN/
INVESTING IN PREFERRED STOCKS. Because these stocks come with a promise to pay
a stated dividend, their price depends more on the size of the dividend than on
the company's performance. But if a company fails to pay the dividend, its
preferred stock is likely to drop in price. Changes in interest rates can also
affect their price. (See "Investing in Bonds," below.)
/WARNING SIGN/
INVESTING IN CONVERTIBLE SECURITIES, PREFERRED STOCKS, AND BONDS. Since
preferred stocks and corporate bonds pay a stated return, their prices usually
don't depend on the price of the company's common stock. But some companies
issue preferred stocks and bonds that are CONVERTIBLE into their common stocks.
Linked to the common stock in this way, convertible securities go up and down
in price as the common stock does, adding to their market risk.
/WARNING SIGN/
VOLATILITY. The more an investment goes up and down in price, the more VOLATILE
it is. Volatility increases the market risk because even though your portfolio
may go UP more than the market in good times, it may also go DOWN more than the
market in bad times. If you decide to sell when a volatile portfolio is down,
you could lose more.
Prospectus 13
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS (CONTINUED)
- - --------------------------------------------------------------------------------
/WARNING SIGN/
INVESTING IN BONDS. Like common stocks, bonds fluctuate in value, though the
factors causing this fluctuation are different, including:
o CHANGES IN INTEREST RATES. Bond prices tend to move the opposite of
interest rates. Why? Because when interest rates on new bond issues go up,
rates on existing bonds stay the same and they become less desirable. When
rates go down, the reverse happens. This is also true for most preferred
stocks and some convertible securities.
o LENGTH OF TIME TO MATURITY. When a bond matures, the issuer must pay the
owner its face value. If the maturity date is a long way off, many things
can affect its value, so a bond is more volatile the farther it is from
maturity. As that date approaches, fluctuations usually become smaller and
the price gets closer to face value.
o DEFAULTS. All bond issuers make at least two promises: (1) to pay interest
during the bond's term and (2) to return principal when it matures. If an
issuer fails to keep one or both of these promises, the bond will probably
drop in price dramatically, and may even become worthless. Changes in
financial condition and general economic conditions can affect the ability
to honor financial obligations and therefore credit quality. A security's
price may be adversely affected by the market's opinion of the security's
credit quality level even if the issuer or counterparty has suffered no
degradation in ability to honor the obligation.
o DECLINES IN RATINGS. At the time of issue, most bonds are rated by
professional rating services, such as Moody's Investors Service, Inc.
(Moody's) and Standard & Poor's Corporation (S&P). The stronger the
financial backing behind the bond, the higher the rating. If this backing
is weakened or lost, the rating service may downgrade the bond's rating.
This is virtually certain to cause the bond to drop in price. Bonds that
are rated below BBB by S&P, and below Ba by Moody's, are considered to be
below investment grade. Moody's rates bonds in nine categories, from Aaa to
C, with Aaa being the highest with least risk. S&P rates bonds in six
categories, from AAA to D, with AAA being the highest.
o LOW RATING. High-yield/high-risk fixed-income securities (commonly known as
"junk bonds") have greater credit risk, are more sensitive to interest rate
movements, are considered more speculative than higher rated bonds, have a
greater vulnerability to economic changes and are less liquid. The market
for such securities may be less active than for higher rated securities,
which can adversely affect the price at which these securities may be sold
and may diminish a portfolio's ability to obtain accurate market quotations
when valuing the portfolio securities and calculating the portfolio's net
asset value.
o LACK OF RATING. Some bonds are considered speculative, or for other reasons
are not rated. Such bonds must pay a higher interest rate in order to
attract investors. They're considered riskier because of the higher
possibility of default or loss of liquidity.
o LOSS OF LIQUIDITY. If a bond is downgraded, or for other reasons drops in
price, the market demand for it may "dry up". In that case, the bond may be
hard to sell or "liquidate" (convert to cash).
/WARNING SIGN/
INVESTING IN FOREIGN SECURITIES. These are investments offered by foreign
companies, governments and government agencies. They involve risks not usually
associated with U.S. securities, including:
o CHANGES IN CURRENCY VALUES. Foreign securities are sold in currencies other
than U.S. dollars. If a currency's value drops, the value of the securities
held by a portfolio could drop too, even if the securities are strong. In
turn, the value of the shares of the portfolio could also drop. Dividend
and interest payments may be lower. Factors affecting exchange rates are:
differing interest rates among countries; balances of trade; amount of a
country's overseas investments; and any currency manipulation by banks.
o CURRENCY SPECULATION. The foreign currency market is largely unregulated
and subject to speculation.
o ADRs/ADSs. Some portfolios also invest in American Depositary Receipts
(ADRs) and American Depositary Shares (ADSs). They represent securities of
foreign companies traded on U.S. exchanges, and their values are expressed
in U.S. dollars. Changes in the value of the underlying foreign currency
will
Prospectus 14
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS (CONTINUED)
- - --------------------------------------------------------------------------------
change the value of the ADR or ADS. A portfolio incurs costs when it
converts other currencies into dollars, and vice-versa.
o EURO CONVERSION. On January 1, 1999, certain participating countries in the
European Economic Monetary Union adopted the "Euro" as their official
currency. Other EU member countries may convert to the Euro at a later
date. As of January 1, 1999, governments in participating countries issued
new debt and redenominated existing debt in Euros; corporations chose to
issue stocks or bonds in Euros or national currency. The new European
Central Bank (the "ECB") will assume responsibility for a uniform monetary
policy in participating countries. Euro conversion risks that could affect
a portfolio's foreign investments include: (1) the readiness of Euro
payment, clearing, and other operational systems; (2) the legal treatment
of debt instruments and financial contracts in existing national currencies
rather than the Euro; (3) exchange-rate fluctuations between the Euro and
non-Euro currencies during the transition period of January 1, 1999 through
December 31, 2002 and beyond; (4) potential U.S. tax issues with respect to
portfolio securities; and (5) the ECB's abilities to manage monetary
policies among the participating countries; and (6) the ability of
financial institution systems to process Euro transactions.
o Different accounting and reporting practices. Foreign tax laws are
different, as are laws, practices and standards for accounting, auditing
and reporting data to investors.
o LESS INFORMATION AVAILABLE TO THE PUBLIC. Foreign companies usually make
less information available to the public.
o LESS REGULATION. Securities regulations in many foreign countries are more
lax than in the U.S.
o MORE COMPLEX NEGOTIATIONS. Because of differing business and legal
procedures, a portfolio may find it hard to enforce obligations or
negotiate favorable brokerage commission rates.
o LESS LIQUIDITY/MORE VOLATILITY. Some foreign securities are harder to
convert to cash than U.S. securities, and their prices may fluctuate more
dramatically.
o SETTLEMENT DELAYS. "Settlement" is the process of completing a securities
transaction. In many countries, this process takes longer than it does in
the U.S.
o HIGHER CUSTODIAL CHARGES. Fees charged by the Fund's custodian for holding
shares are higher for foreign securities than that of domestic securities.
o HIGHER TRANSACTION COSTS. Fees charged by securities brokers are often
higher for transactions involving foreign securities than domestic
securities. Higher expenses, such as brokerage fees, may reduce the return
a portfolio might otherwise achieve.
o VULNERABILITY TO SEIZURE AND TAXES. Some governments can seize assets. They
may also limit movement of assets from the country. A portfolio's interest,
dividends and capital gains may be subject to foreign withholding taxes.
o POLITICAL INSTABILITY AND SMALL EMERGING MARKETS. Developing countries can
be politically unstable. Economies can be dominated by a few industries,
and markets may trade a small number of securities. Regulations of banks
and capital markets can be weak.
o DIFFERENT MARKET TRADING DAYS. Foreign markets may not be open for trading
when U.S. markets are and asset values can change before your transaction
occurs.
o HEDGING. A portfolio may, but will not necessarily, enter into forward
currency contracts to hedge against declines in the value of securities
denominated in, or whose value is tied to, a currency other than the U.S.
dollar or to reduce the impact of currency fluctuation on purchases, and
sales of such securities.
/WARNING SIGN/
INVESTING IN FUTURES, OPTIONS AND DERIVATIVES. Besides conventional securities,
your portfolio may seek to increase returns by investing in financial contracts
related to its primary investments. Such contracts involve additional risks and
costs. Risks include:
o INACCURATE MARKET PREDICTIONS. If the sub-adviser is wrong in its
expectation, for example, with respect to interest rates, securities prices
or currency markets, the contracts could produce losses instead of gains.
Prospectus 15
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS (CONTINUED)
- - --------------------------------------------------------------------------------
o PRICES MAY NOT MATCH. Movements in the price of the financial contracts may
be used to offset movements in the price of other securities you own. If
those prices don't correlate or match closely, the benefits of the
transaction might be diminished.
o ILLIQUID MARKETS. If there's no market for the contracts, the portfolio may
not be able to control losses.
o TAX CONSEQUENCES. Sometimes the possibility of incurring high taxes on a
transaction may delay closing out a position and limit the gains it would
have produced.
/WARNING SIGN/
INVESTING IN SPECIAL SITUATIONS. Each portfolio may invest in "special
situations" from time to time. Special situations arise when, in the opinion of
a portfolio manager, a company's securities may be undervalued, then increase
considerably in price, due to:
o A NEW PRODUCT OR PROCESS
o A MANAGEMENT CHANGE
o A TECHNOLOGICAL BREAKTHROUGH
o AN EXTRAORDINARY CORPORATE EVENT
o A TEMPORARY IMBALANCE IN THE SUPPLY OF, AND DEMAND FOR, THE SECURITIES OF
AN ISSUER
Investing in a special situation carries an additional risk of loss if the
expected development does not happen or does not attract the expected
attention. The impact of special situation investing to a portfolio will depend
on the size of a portfolio's investment in a situation.
/ROOK/
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 short-term debt securities that
are considered cash equivalents. This may be done as a temporary 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.
/QUESTION MARK/
PORTFOLIO TURNOVER
A portfolio turnover rate is, in general, the percentage calculated by taking
the lesser of purchases or sales of portfolio securities (excluding short-term
securities) for a year and dividing it by the monthly average of the market
value of such securities during the year.
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 unforeseen developments.
The rate of portfolio turnover will not be a limiting factor when short-term
investing is considered appropriate. Increased turnover rates result in higher
brokerage costs and other transaction based expenses for a portfolio. These
charges are ultimately borne by the shareholders.
/ROOK/
SHORT SALES
A 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 convertible into, or exchangeable without
further consideration for, securities of the same issue as the securities sold
short.
/QUESTION MARK/
INVESTMENT STRATEGIES
A portfolio is permitted to use other securities and investment strategies in
pursuit of its investment objective, subject to limits established by the
Fund's Board of Directors. No portfolio is under any obligation to use any of
the techniques or strategies at any given time or under any particular economic
condition. Certain instruments and investment strategies may expose the
portfolios to other risks and considerations, which are discussed in the Fund's
SAI.
Prospectus 16
<PAGE>
- - --------------------------------------------------------------------------------
HOW THE FUND IS MANAGED AND ORGANIZED
- - --------------------------------------------------------------------------------
/QUESTION MARK/
HOW THE FUND IS MANAGED
AND ORGANIZED
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.
WRL Investment Management, Inc. (WRL Management) located at 570 Carillon
Parkway, St. Petersburg, Florida 33716, has served as the Fund's investment
adviser since 1997. Prior to this date, Western Reserve served as investment
adviser to the Fund. The investment adviser had no prior experience as an
adviser. The investment adviser is a direct, wholly-owned subsidiary of Western
Reserve Life Assurance Co. of Ohio (Western Reserve), which is wholly-owned by
First AUSA Life Insurance Company, a stock life insurance company, which is
wholly-owned by AEGON USA, Inc. AEGON 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
N.V., a Netherlands corporation which is a publicly traded international
insurance group.
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.
The Fund has received an order from the Securities and Exchange Commission that
will permit the Fund and the investment adviser, subject to certain conditions,
and without the approval of shareholders to: (1) employ a new unaffiliated
sub-adviser for a portfolio pursuant to the terms of a new investment
sub-advisory agreement, either as a replacement for an existing sub-adviser or
as an additional sub-adviser; (2) materially change the terms of any
sub-advisory agreement; and (3) continue the employment of an existing
sub-adviser on the same sub-advisory contract terms where a contract has been
assigned because of a change in control of the sub-adviser. In such
circumstances, shareholders would receive notice and information about the new
sub-adviser within ninety (90) days after the hiring of any new sub-adviser.
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 advisory fees for each portfolio are:
ADVISORY
PORTFOLIO FEE
WRL Janus Growth* 0.80%
WRL Alger Aggressive Growth 0.80%
WRL Janus Global** 0.80%
WRL VKAM Emerging Growth 0.80%
* WRL Management currently waives 0.025% of its advisory fee for the first $3
billion of the portfolio's average daily net assets (net fee -- 0.775%); and
0.05% of assets above $3 billion (net fee -- 0.75%). This waiver will terminate
on June 25, 2000.
** WRL Management currently waives 0.025% of its advisory fee for the
portfolio's average daily net assets above $2 billion (net fee -- 0.775%). This
waiver will terminate on June 25, 2000.
EXPENSE REIMBURSEMENT
WRL Management has entered into an expense limitation agreement with the Fund
on behalf of each applicable portfolio, pursuant to which WRL Management has
agreed to reimburse a portfolio for certain operating expenses so that the
total annual operating expenses of each applicable portfolio do not exceed the
total operating expenses specified for that portfolio (expense cap) in the
portfolio's then-current SAI. The Fund, on behalf of an applicable portfolio,
will at a later date reimburse WRL Management for operating expenses previously
paid on behalf of such portfolio during the previous 36 months, but only if,
Prospectus 17
<PAGE>
- - --------------------------------------------------------------------------------
HOW THE FUND IS MANAGED AND ORGANIZED
- - --------------------------------------------------------------------------------
after such reimbursement, the portfolio's expense ratio does not exceed the
expense cap. The agreement has an initial term through April 30, 2001, and will
automatically renew for one-year terms unless WRL Management provides written
notice to the Fund at least 30 days prior to the end of the then-current term.
In addition, the agreement will terminate upon termination of the Investment
Advisory Agreement, or may be terminated by the Fund, without payment of any
penalty, upon ninety (90) days' prior written notice to WRL Management.
Here is a listing of the SUB-ADVISERS and the portfolios they manage:
SUB-ADVISER PORTFOLIO
Janus WRL Janus Global
WRL Janus Growth
Alger WRL Alger Aggressive Growth
VKAM WRL VKAM Emerging
Growth
DAY-TO-DAY MANAGEMENT OF THE INVESTMENTS IN EACH PORTFOLIO IS THE
RESPONSIBILITY OF THE PORTFOLIO MANAGER. THE PORTFOLIO MANAGERS OF THE FUND
ARE:
WRL JANUS GLOBAL
HELEN YOUNG HAYES, CFA and LAURENCE CHANG, CFA have served as co-portfolio
managers of this portfolio since January 2000. Ms. Hayes previously served as
manager of this portfolio since its inception. She has been employed by Janus
since 1987.
Mr. Chang has been employed by Janus since 1993. Before joining Janus, Mr.
Chang was a project director at the National Security Archive.
WRL JANUS GROWTH
EDWARD KEELY has served as manager of this portfolio since January 2000. He
previously served as co-portfolio manager of this portfolio since January 1999.
Prior to joining Janus in 1998, Mr. Keely was a senior vice president of
investments at Founders.
WRL VKAM EMERGING GROWTH
GARY M. LEWIS leads an investment team and is primarily responsible for the day
to day management of this portfolio. Mr. Lewis has been senior vice president
of VKAM since October, 1995. Previously, he served as vice president/portfolio
manager of VKAM from 1989 to October 1995.
WRL ALGER AGGRESSIVE GROWTH
DAVID D. ALGER has been employed by Alger since 1971 and has served as
president since 1995. He has managed this portfolio since inception.
DAVID HYUN has served as co-manager of this portfolio since February 1998. He
has been employed by Alger as a senior research analyst since 1991, a portfolio
manager since 1997 and as a senior vice president since 1998.
Prospectus 18
<PAGE>
- - --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- - --------------------------------------------------------------------------------
The Fund may include quotations of a portfolio's total return in connection
with the total return for the appropriate separate account, in advertisements,
sales literature or reports to policyowners or to prospective investors. Total
return for a portfolio reflect only the performance of a hypothetical
investment in the portfolio during the particular time period shown as
calculated based on the historical performance of the portfolio during that
period. Such quotations do not in any way indicate or project future
performance. Quotations of total return will not reflect charges or deductions
against the separate accounts or charges and deductions against the policies or
the annuity contracts. Where relevant, the prospectuses for the policies and
the annuity contracts contain performance information which show total return
and yield information for the separate accounts, policies or annuity contracts.
TOTAL RETURN
Total return refers to the average annual percentage change in value of an
investment in a portfolio held for a stated period of time as of a stated
ending date. When a portfolio has been in operation for the stated period, the
total return for such period will be provided if performance information is
quoted. Total return quotations are expressed as average annual compound rates
of return for each of the periods quoted. They also reflect the deduction of a
proportionate share of a portfolio's investment advisory fees and direct
portfolio expenses, and assume that all dividends and capital gains
distributions during the period are reinvested in the portfolio when made.
SIMILAR 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. Each portfolio's future performance may be
greater or less than the historical performance of the corresponding Similar
Sub-Adviser Fund. There can be no assurance, and no representation is made,
that the investment results of any portfolio will be comparable to the results
of any of the Similar Sub-Adviser Funds as any other fund managed by WRL
Management or any sub-adviser.
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, 1999. 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.
Prospectus 19
<PAGE>
- - --------------------------------------------------------------------------------
SIMILAR SUB-ADVISER FUND PERFORMANCE
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(WITH SALES LOADS)
-----------------------------
SIMILAR 10 YEARS
SUB-ADVISER INCEPTION TOTAL OR SINCE
WRL PORTFOLIO FUND DATE ASSETS 1 YEAR 5 YEARS INCEPTION
- - ---------------------- -------------------------------- ----------- -------------------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
WRL Janus Global Janus Worldwide(1) 5/15/91 $ 33,802.9M 64.37% 30.88% 25.10%
WRL Alger Aggressive The Alger Fund Class A $ 226.6M 65.74% N/A 40.59%
Growth Capital Appreciation Portfolio 12/31/96 (Net)
Class A Shares(2)
WRL VKAM Emerging Van Kampen Emerging Class A $113,175,800,000 92.01% 39.86% 27.16%
Growth Growth(3) 10/02/70
</TABLE>
(1) The Janus Worldwide Fund does not have a sales load.
(2) Total returns are for Class A shares of The Alger Fund Capital Appreciation
Portfolio and reflect a deduction of a 4.75% front end sales load. The
Portfolio also offers Class B and Class C shares with different sales
loads. Calculating total return with those sales loads may have resulted
in lower total returns. The inception dates for Class A, B and C shares
are 12/31/96, 10/29/93 and 8/1/97, respectively.
(3) Total Returns are for Class A shares of the Van Kampen Emerging Growth Fund
and reflect a deduction of a 5.75% front end sales load and an annual
12b-1 fee of up to 0.25%. The fund also has Class B and Class C shares
with different sales loads and annual 12b-1 fees. Calculating total
returns with those sales loads may have resulted in lower returns. The
Fund's performance during the one-year period ended December 31, 1999 is
largely attributable to investments in the technology sector, which
performed favorably for the period. This performance was achieved during a
rising market, and there is no guarantee that this performance record or
the circumstances leading to it can be replicated in the future. As the
Fund expects to have a substantial portion of its assets invested in
equity securities of emerging growth companies, the Fund will be subject
to more volatility and erratic movements than the market in general.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(WITHOUT SALES LOADS)
--------------------------------
SIMILAR 10 YEARS
SUB-ADVISER INCEPTION TOTAL OR SINCE
WRL PORTFOLIO FUND DATE ASSETS 1 YEAR 5 YEARS INCEPTION
- - ---------------------- -------------------------------- ----------- -------------------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
WRL Janus Global Janus Worldwide(2) 5/15/91 $ 33,802.9M 64.37% 30.88% 25.10%
WRL Alger Aggressive The Alger Fund Class A $ 226.6M 74.01% N/A 42.89%
Growth Capital Appreciation Portfolio 12/31/96 (Net)
WRL VKAM Emerging Van Kampen Emerging Class A $113,175,800,000 103.72% 41.53% 27.92%
Growth Growth(1) 10/02/70
</TABLE>
(1) The fund offers Class B and Class C shares as well. Returns for those
classes may differ from those of Class A shares due to differing fee
structures. The Fund's performance during the one-year period ended
December 31, 1999 is largely attributable to investments in the technology
sector, which performed favorably for the period. This performance was
achieved during a rising market, and there is no guarantee that this
performance record or the circumstances leading to it can be replicated in
the future. As the Fund expects to have a substantial portion of its
assets invested in equity securities of emerging growth companies, the
Fund will be subject to more volatility and erratic movements than the
market in general.
(2) Janus Worldwide Fund does not have a sales load.
THE PERFORMANCE OF SIMILAR SUB-ADVISER FUNDS DOES NOT REFLECT ANY OF THE
CHARGES, FEES, AND EXPENSES IMPOSED UNDER THE POLICIES OR 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-ADVISERS FUNDS AS "SIMILAR SUB-ADVISED FUNDS.")
(See the SAI for more information about the portfolios' performance.)
Prospectus 20
<PAGE>
- - --------------------------------------------------------------------------------
OTHER INFORMATION
- - --------------------------------------------------------------------------------
/QUESTION MARK/ PURCHASE AND REDEMPTION OF SHARES
As described earlier in the prospectus, shares of the portfolios are sold
exclusively to certain separate accounts of Western Reserve Life Assurance Co.
of Ohio, PFL Life Insurance Company, AUSA Life Insurance Company, Inc. and
Peoples Benefit Life Insurance Company, and are not offered to the public.
Shares are sold and redeemed at their net asset value without the imposition of
any sales commission or redemption charge. (However, certain sales or other
charges may apply to the policies or annuity contracts, as described in the
product prospectus.)
/QUESTION MARK/ 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 (NYSE) (usually 4:00 p.m., Eastern Time), on each day the exchange is
open.
- - --------------------------------------------------------------------------------
WHAT IS NET ASSET VALUE?
The 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.
- - --------------------------------------------------------------------------------
Net asset value (NAV) 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. Share prices for any transaction are those next calculated after
receipt of an order.
If your order is received by closing time of the NYSE, you will pay, or you
will receive, that day's NAV. Share prices may change when a portfolio holds
shares in companies traded on foreign exchanges that are open on the days the
NYSE is closed.
Except for money market instruments maturing in 60 days or less, securities
held by portfolios are valued at market value. If market values are not readily
available, securities are valued at fair value as determined by the Fund's
Valuation Committee under the supervision of the Fund's Board.
[GRAPHIC OMITTED]
/QUESTION MARK/ 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.
/DOLLAR SIGN/ TAXES
Each portfolio has qualified and expects to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended ("Code"). As qualified, a portfolio is not subject to federal income
tax on that part of its taxable income that it distributes to you. Taxable
income consists generally of net investment income, and any capital gains. It
is each portfolio's intention to distribute all such income and gains.
Shares of each portfolio are offered only to the separate accounts of Western
Reserve and its affiliates. Separate accounts 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 Income Tax Considerations" included in the respective prospectuses for
the policies and the annuity contracts.
Section 817(h) of the Code and the regulations thereunder impose
"diversification" requirements on each portfolio. Each portfolio intends to
comply with the diversification requirements. These requirements are in
addition to the diversification requirements imposed on each portfolio by
Subchapter M and the 1940 Act. The 817(h) requirements place certain
limitations on the assets of each separate account that may be invested in
securities of a single issuer. Specifically, the regulations provide that,
except as permitted by "safe harbor," rules described below, as of the end of
each calendar quarter
Prospectus 21
<PAGE>
- - --------------------------------------------------------------------------------
OTHER INFORMATION (CONTINUED)
- - --------------------------------------------------------------------------------
or within 30 days thereafter, no more than 55% of the portfolio's total assets
may be represented by any one investment, no more than 70% by any two
investments, no more than 80% by any three investments, and no more than 90% by
any four investments.
Section 817(h) also 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, 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. If a portfolio does
not satisfy the section 817(h) requirements, the separate accounts, the
insurance companies, the policies and the annuity contracts may be taxable. See
the prospectuses for the policies and annuity contracts.
The foregoing is only a summary of some of the important federal income tax
considerations generally affecting a portfolio and you; see the SAI for a more
detailed discussion. You are urged to consult your tax advisors.
/QUESTION MARK/ REPORT TO POLICYHOLDERS
The fiscal year of each portfolio ends on December 31 of each year. The Fund
will send to you, at least semi-annually, reports which show the portfolios'
composition and other information. An annual report, with audited financial
information, will be sent to you each year.
/QUESTION MARK/ DISTRIBUTION AND SERVICE PLANS
The Fund has adopted a plan pursuant to Rule 12b-1 under the 1940 Act (the
"Plan") and pursuant to the Plan, entered into a Distribution Agreement with
AFSG Securities Corporation (AFSG) located at 4333 Edgewood Road NE, Cedar
Rapids, Iowa 52499. AFSG is an affiliate of the investment adviser, and serves
as principal underwriter for the Fund. The Plan permits the use of Fund assets
to help finance the distribution of the shares of the portfolios. Under the
Plan, the Fund, on behalf of the portfolios, is permitted to pay to various
service providers up to 0.15% of the average daily net assets of each portfolio
as payment for actual expenses incurred in connection with the distribution of
the shares of the portfolios. Because these fees are paid out of Fund assets on
an on-going basis, over time these costs will increase the cost of your
investment and may cost you more than other types of sales charges.
As of the date of this prospectus, the Fund has not paid any distribution fees
under the Plan and does not intend to do so before April 30, 2001. You will
receive written notice prior to the payment of any fees under the Plan.
Prospectus 22
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
THE FINANCIAL HIGHLIGHTS TABLE IS INTENDED TO HELP YOU UNDERSTAND A PORTFOLIO'S
FINANCIAL PERFORMANCE FOR THE PAST 5 YEARS (OR, IF SHORTER, THE PERIOD OF THE
PORTFOLIO'S OPERATIONS). CERTAIN INFORMATION REFLECTS FINANCIAL RESULTS FOR A
SINGLE PORTFOLIO SHARE. THE TOTAL RETURNS IN THE TABLE REPRESENT THE RATE AN
INVESTOR WOULD HAVE EARNED (OR LOST) ON AN INVESTMENT IN EACH PORTFOLIO
(ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS). THIS INFORMATION HAS BEEN DERIVED
FROM FINANCIAL STATEMENTS AUDITED BY PRICEWATERHOUSECOOPERS LLP, INDEPENDENT
ACCOUNTANTS, WHOSE REPORT, ALONG WITH THE FUND'S FINANCIAL STATEMENTS, IS
INCLUDED IN THE FUND'S ANNUAL REPORT, WHICH IS AVAILABLE UPON REQUEST BY
CALLING THE FUND AT 1-800-851-9777.
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL JANUS GROWTH
=================================
DECEMBER 31,
---------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Net asset value, beginning of year .................................. $ 59.94 $ 36.84
Income from operations:
Net investment income (loss) ...................................... (0.04) 0.12
Net realized and unrealized gain (loss) on investments ............ 34.02 23.49
---------- ----------
Net income (loss) from operations ................................ 33.98 23.61
---------- ----------
Distributions:
Dividends from net investment income .............................. 0.00 (0.09)
Dividends in excess of net investment income ...................... (1.17) 0.00
Distributions from net realized gains on investments .............. (14.75) (0.42)
Distributions in excess of net realized gains on investments ...... 0.00 0.00
---------- ----------
Total distributions .............................................. (15.92) (0.51)
---------- ----------
Net asset value, end of year ........................................ $ 78.00 $ 59.94
========== ==========
Total return ........................................................ 59.67 % 64.47 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 4,141,240 $ 3,086,057
Ratio of expenses to average net assets ........................... 0.82 % 0.83 %
Ratio of net investment income (loss) to average net assets ....... (0.05)% 0.25 %
Portfolio turnover rate ........................................... 70.95 % 35.29 %
<CAPTION>
WRL JANUS GROWTH
==================================================
DECEMBER 31,
--------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net asset value, beginning of year .................................. $ 35.00 $ 31.66 $ 23.81
Income from operations:
Net investment income (loss) ...................................... 0.31 0.34 0.26
Net realized and unrealized gain (loss) on investments ............ 5.88 5.35 10.97
---------- ---------- ----------
Net income (loss) from operations ................................ 6.19 5.69 11.23
---------- ---------- ----------
Distributions:
Dividends from net investment income .............................. (0.26) (0.35) (0.24)
Dividends in excess of net investment income ...................... 0.00 (0.01) 0.00
Distributions from net realized gains on investments .............. (4.09) (1.99) (3.14)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00
---------- ---------- ----------
Total distributions .............................................. (4.35) (2.35) (3.38)
---------- ---------- ----------
Net asset value, end of year ........................................ $ 36.84 $ 35.00 $ 31.66
========== ========== ==========
Total return ........................................................ 17.54 % 17.96 % 47.12 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 1,839,453 $ 1,527,409 $ 1,195,174
Ratio of expenses to average net assets ........................... 0.87 % 0.88 % 0.86 %
Ratio of net investment income (loss) to average net assets ....... 0.80 % 0.98 % 0.90 %
Portfolio turnover rate ........................................... 85.88 % 45.21 % 130.48 %
</TABLE>
<TABLE>
<CAPTION>
WRL JANUS GLOBAL
=================================
DECEMBER 31,
---------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Net asset value, beginning of year .................................. $ 23.71 $ 19.04
Income from operations:
Net investment income (loss) ...................................... (0.04) 0.05
Net realized and unrealized gain (loss) on investments ............ 16.42 5.61
---------- ----------
Net income (loss) from operations ................................ 16.38 5.66
---------- ----------
Distributions:
Dividends from net investment income .............................. 0.00 (0.13)
Dividends in excess of net investment income ...................... 0.00 0.00
Distributions from net realized gains on investments .............. (2.63) (0.80)
Distributions in excess of net realized gains on investments ...... 0.00 (0.06)
---------- ----------
Total distributions .............................................. (2.63) (0.99)
---------- ----------
Net asset value, end of year ........................................ $ 37.46 $ 23.71
========== ==========
Total return ........................................................ 71.10 % 30.01 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 1,926,210 $ 1,069,765
Ratio of expenses to average net assets ........................... 0.92 % 0.95 %
Ratio of net investment income (loss) to average net assets ....... (0.14)% 0.23 %
Portfolio turnover rate ........................................... 68.10 % 87.36 %
<CAPTION>
WRL JANUS GLOBAL
============================================
DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net asset value, beginning of year .................................. $ 18.12 $ 15.52 $ 13.12
Income from operations:
Net investment income (loss) ...................................... 0.08 0.08 0.10
Net realized and unrealized gain (loss) on investments ............ 3.32 4.20 2.91
-------- -------- --------
Net income (loss) from operations ................................ 3.40 4.28 3.01
-------- -------- --------
Distributions:
Dividends from net investment income .............................. (0.13) (0.04) 0.00
Dividends in excess of net investment income ...................... (1.01) (0.17) 0.00
Distributions from net realized gains on investments .............. (1.34) (1.47) (0.61)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00
-------- -------- --------
Total distributions .............................................. (2.48) (1.68) (0.61)
-------- -------- --------
Net asset value, end of year ........................................ $ 19.04 $ 18.12 $ 15.52
======== ======== ========
Total return ........................................................ 18.75 % 27.74 % 23.06 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 785,966 $ 534,820 $ 289,506
Ratio of expenses to average net assets ........................... 1.00 % 0.99 % 0.99 %
Ratio of net investment income (loss) to average net assets ....... 0.41 % 0.46 % 0.75 %
Portfolio turnover rate ........................................... 97.54 % 88.31 % 130.60 %
</TABLE>
Prospectus 23
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL VKAM EMERGING GROWTH
===============================
DECEMBER 31,
-------------------------------
1999 1998
---------------- --------------
<S> <C> <C>
Net asset value, beginning of year .................................. $ 26.92 $ 20.37
Income from operations:
Net investment income (loss) ...................................... (0.15) (0.08)
Net realized and unrealized gain (loss) on investments ............ 26.83 7.56
---------- --------
Net income (loss) from operations ................................ 26.68 7.48
---------- --------
Distributions: .....................................................
Dividends from net investment income .............................. 0.00 0.00
Dividends in excess of net investment income ...................... (0.21) 0.00
Distributions from net realized gains on investments .............. (7.38) (0.93)
Distributions in excess of net realized gains on investments ...... 0.00 0.00
---------- --------
Total distributions .............................................. (7.59) (0.93)
---------- --------
Net asset value, end of year ........................................ $ 46.01 $ 26.92
========== ========
Total return ........................................................ 105.16 % 37.33 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 1,916,025 $ 853,440
Ratio of expenses to average net assets ........................... 0.87 % 0.89 %
Ratio of net investment income (loss) to average net assets ....... (0.44)% (0.36)%
Portfolio turnover rate ........................................... 117.72 % 99.50 %
<CAPTION>
WRL VKAM EMERGING GROWTH
============================================
DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net asset value, beginning of year .................................. $ 18.46 $ 16.25 $ 11.55
Income from operations:
Net investment income (loss) ...................................... (0.05) (0.04) 0.01
Net realized and unrealized gain (loss) on investments ............ 4.03 3.10 5.42
-------- -------- --------
Net income (loss) from operations ................................ 3.98 3.06 5.43
-------- -------- --------
Distributions: .....................................................
Dividends from net investment income .............................. 0.00 0.00 0.00
Dividends in excess of net investment income ...................... 0.00 0.00 0.00
Distributions from net realized gains on investments .............. (2.07) (0.85) (0.73)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00
-------- -------- --------
Total distributions .............................................. (2.07) (0.85) (0.73)
-------- -------- --------
Net asset value, end of year ........................................ $ 20.37 $ 18.46 $ 16.25
======== ======== ========
Total return ........................................................ 21.45 % 18.88 % 46.79 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 592,003 $ 431,454 $ 288,519
Ratio of expenses to average net assets ........................... 0.93 % 0.94 % 0.91 %
Ratio of net investment income (loss) to average net assets ....... (0.27)% (0.24)% 0.03 %
Portfolio turnover rate ........................................... 99.78 % 80.02 % 124.13 %
</TABLE>
<TABLE>
<CAPTION>
WRL ALGER AGGRESSIVE GROWTH
===============================
DECEMBER 31,
-------------------------------
1999 1998
---------------- --------------
<S> <C> <C>
Net asset value, beginning of year .................................. $ 22.44 $ 16.04
Income from operations:
Net investment income (loss) ...................................... (0.15) (0.04)
Net realized and unrealized gain (loss) on investments ............ 14.95 7.68
---------- --------
Net income (loss) from operations ................................ 14.80 7.64
---------- --------
Distributions:
Dividends from net investment income .............................. (0.16) 0.00
Dividends in excess of net investment income ...................... (1.38) (0.05)
Distributions from net realized gains on investments .............. (2.42) (1.19)
Distributions in excess of net realized gains on investments ...... 0.00 0.00
---------- --------
Total distributions .............................................. (3.96) (1.24)
---------- --------
Net asset value, end of year ........................................ $ 33.28 $ 22.44
========== ========
Total return ........................................................ 69.02 % 48.69 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 1,117,511 $ 574,164
Ratio of expenses to average net assets ........................... 0.89 % 0.91 %
Ratio of net investment income (loss) to average net assets ....... (0.56)% (0.21)%
Portfolio turnover rate ........................................... 101.71 % 117.44 %
<CAPTION>
WRL ALGER AGGRESSIVE GROWTH
============================================
DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net asset value, beginning of year .................................. $ 14.18 $ 13.25 $ 9.86
Income from operations:
Net investment income (loss) ...................................... (0.01) (0.01) (0.06)
Net realized and unrealized gain (loss) on investments ............ 3.44 1.38 3.96
-------- -------- --------
Net income (loss) from operations ................................ 3.43 1.37 3.90
-------- -------- --------
Distributions:
Dividends from net investment income .............................. 0.00 0.00 0.00
Dividends in excess of net investment income ...................... (0.42) (0.19) 0.00
Distributions from net realized gains on investments .............. (1.15) (0.25) (0.51)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00
-------- -------- --------
Total distributions .............................................. (1.57) (0.44) (0.51)
-------- -------- --------
Net asset value, end of year ........................................ $ 16.04 $ 14.18 $ 13.25
======== ======== ========
Total return ........................................................ 24.25 % 10.45 % 38.02 %
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $ 336,166 $ 220,552 $ 158,534
Ratio of expenses to average net assets ........................... 0.96 % 0.98 % 1.07 %
Ratio of net investment income (loss) to average net assets ....... (0.06)% (0.10)% (0.48)%
Portfolio turnover rate ........................................... 136.18 % 101.28 % 108.04 %
</TABLE>
Prospectus 24
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS
Per share information has been computed using average shares outstanding
throughout each period. Total return reflects all Portfolio expenses and
includes reinvestment of dividends and capital gains; it does not reflect the
charges and deductions under the policies or annuity contracts. Total return
and portfolio turnover rate are not annualized for periods of less than one
year. Ratio of expenses and ratio of net investment income (loss) to average
net assets are annualized for periods of less than one year. For the year ended
December 31, 1999, ratio of expenses to average net assets is net of the
advisory fee waiver. For the years prior to 1999, ratio of expenses to average
net assets is net of the advisory fee waiver and fees paid indirectly. Without
the advisory fee waived by WRL Management and the fees paid indirectly, ratio
of expenses to average net assets for each period presented would be as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
PORTFOLIO 1999 1998 1997 1996 1995
- - ------------------------------------- -------- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
WRL Janus Growth .................... 0.82 % * * * *
WRL Janus Global .................... * * * * *
WRL VKAM Emerging Growth ............ * * * * *
WRL Alger Aggressive Growth ......... * * * * *
</TABLE>
* Ratio difference less than 0.01%.
Prospectus 25
<PAGE>
ADDITIONAL INFORMATION ABOUT THESE PORTFOLIOS IS CONTAINED IN THE
STATEMENT OF ADDITIONAL INFORMATION, DATED MAY 1, 2000, AND IN THE
FUND'S ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS, WHICH ARE
INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. IN THE FUND'S
ANNUAL REPORT, YOU WILL FIND A DISCUSSION OF THE MARKET CONDITIONS
AND INVESTMENT STRATEGIES THAT SIGNIFICANTLY AFFECTED THE FUND'S
PERFORMANCE DURING THE LAST FISCAL YEAR.
YOU MAY ALSO CALL 1-800-851-9777 TO REQUEST THIS ADDITIONAL
INFORMATION ABOUT THE FUND WITHOUT CHARGE OR TO MAKE SHAREHOLDER
INQUIRIES.
OTHER INFORMATION ABOUT THESE PORTFOLIOS HAS BEEN FILED WITH AND
IS AVAILABLE FROM THE U.S. SECURITIES AND EXCHANGE COMMISSION.
INFORMATION ABOUT THE FUND (INCLUDING THE SAI) CAN BE REVIEWED AND
COPIED AT THE SECURITIES AND EXCHANGE COMMISSION'S PUBLIC
REFERENCE ROOM IN WASHINGTON, D.C. INFORMATION ON THE OPERATION OF
THE PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE
COMMISSION AT 202-942-8090. INFORMATION MAY BE OBTAINED, UPON
PAYMENT OF A DUPLICATING FEE BY WRITING THE PUBLIC REFERENCE
SECTION OF THE COMMISSION, WASHINGTON, D.C. 20549-6009.
REPORTS AND OTHER INFORMATION ABOUT THE FUND ARE ALSO AVAILABLE ON
THE COMMISSION'S INTERNET SITE AT HTTP://WWW.SEC.GOV.
(WRL SERIES FUND FILE NO. 811-4419.)
FOR MORE INFORMATION ABOUT THESE PORTFOLIOS, YOU MAY OBTAIN A COPY
OF THE SAI OR THE ANNUAL OR SEMI-ANNUAL REPORTS WITHOUT CHARGE, OR
TO MAKE OTHER INQUIRIES ABOUT THIS FUND, CALL THE NUMBER LISTED
ABOVE.
(WRL SERIES FUND FILE NO. 811-4419.)
<PAGE>
WRL SERIES FUND, INC.
AGGRESSIVE EQUITY PORTFOLIO
o WRL VKAM EMERGING GROWTH
FOREIGN EQUITY PORTFOLIO
o WRL JANUS GLOBAL
GROWTH EQUITY PORTFOLIO
o WRL JANUS GROWTH
Prospectus
The Securities and Exchange Commission
has not approved or disapproved these
securities or passed upon the adequacy
of this prospectus.
Any representation to the contrary is a criminal offense.
May 1, 2000
<PAGE>
TABLE OF CONTENTS
INVESTOR INFORMATION .......................... 1
ALL ABOUT THE FUND
AGGRESSIVE EQUITY PORTFOLIO
WRL VKAM EMERGING GROWTH ................... 2
FOREIGN EQUITY PORTFOLIO
WRL JANUS GLOBAL ........................... 5
GROWTH EQUITY PORTFOLIO
WRL JANUS GROWTH ........................... 8
RISK/REWARD INFORMATION ....................... 11
EXPLANATION OF STRATEGIES AND RISKS ........... 12
HOW THE FUND IS MANAGED AND ORGANIZED ......... 16
PERFORMANCE INFORMATION ....................... 18
OTHER INFORMATION ............................. 20
FINANCIAL HIGHLIGHTS .......................... 22
- - --------------------------------------------------------------------------------
WRL Series Fund, Inc. (Fund) currently offers of twenty-six separate
series or investment portfolios. This prospectus includes three of those
portfolios. The Fund is an open-end management investment company, more
commonly known as a mutual fund.
Shares of these portfolios are currently only sold to separate accounts of
Western Reserve Life Assurance Co. of Ohio, PFL Life Insurance Company,
AUSA Life Insurance Company, Peoples Benefit Life Insurance Company and
Transamerica Occidental Life Insurance Company to fund the benefits under
certain individual flexible premium variable life insurance policies and
individual and group variable annuity contracts.
A particular portfolio of the Fund may not be available under the policy
or annuity contract you have chosen. The prospectus or disclosure document
for your policy or annuity contract shows the portfolios available to you.
Please read this prospectus carefully before selecting a portfolio. It
provides information to assist you in your decision. If you would like
additional information about a portfolio, please request a copy of the
Statement of Additional Information (SAI) (see back cover). The SAI is
incorporated by reference into this prospectus.
- - --------------------------------------------------------------------------------
Prospectus
<PAGE>
- - --------------------------------------------------------------------------------
INVESTOR INFORMATION
- - --------------------------------------------------------------------------------
TO HELP YOU UNDERSTAND . . .
In this prospectus, you will see the symbols below.
These are "icons" which serve as tools to direct you to the type of information
that is included in the accompanying paragraphs.
The icons are for your convenience and to assist you as you read this
prospectus.
/target/ The target directs you to a portfolio's goals or objective.
/chess piece/ The chess piece indicates discussion about a portfolio's
strategies.
/warning sign/ The warning sign indicates the risks of investing in a portfolio.
/graph/ The graph indicates investment performance.
/question mark/ The question mark provides additional information about the Fund
or may direct you on how to obtain further information.
SHARES OF A PORTFOLIO ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY
BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT.
Prospectus 1
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
WRL VKAM EMERGING GROWTH
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES YOUR AGGRESSIVE EQUITY PORTFOLIO OF
THE FUND AND THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIO. FOR FURTHER
INFORMATION ON THIS PORTFOLIO, PLEASE READ THE SECTION ENTITLED "EXPLANATION OF
STRATEGIES AND RISKS," BEGINNING ON PAGE 12 AND THE FUND'S SAI.
/target/ OBJECTIVES
WRL VKAM EMERGING GROWTH
This portfolio seeks capital appreciation by investing primarily in common
stocks of small and medium-sized companies.
- - --------------------------------------------------------------------------------
WHAT IS AN AGGRESSIVE EQUITY PORTFOLIO?
Aggressive Equity Portfolio seeks maximum capital appreciation (a rise in
the share price/value). Current income is not a significant factor. Some
portfolios that are included in this category may invest in out-of-the
main-stream stocks, such as those of fledging or struggling companies, or
those in new or currently out-of-favor industries. Some portfolios in this
category may also use specialized investment techniques such as options or
short-term investing. For these reasons, these portfolios usually entail
greater risk than the overall equity portfolio category.
- - --------------------------------------------------------------------------------
/chess piece/ POLICIES AND STRATEGIES
WRL VKAM EMERGING GROWTH
The portfolio's sub-adviser, Van Kampen Asset Management Inc. (VKAM), seeks to
achieve the portfolio's objective by investing:
o At least 65% of the portfolio's total assets in common stocks of
emerging growth companies. Emerging growth companies are those companies
in the early states of their life cycles that the portfolio's sub-adviser
believes have the potential to become major enterprises.
o Options
o Futures
VKAM invests at least 65% of the portfolio's assets (under normal market
conditions) in common stocks of companies that are in the early stages of their
life cycle, and are believed by VKAM to have the potential to become major
enterprises. Some securities may have above average price volatility. VKAM
attempts to reduce overall exposure to risk from declines in the security prices
by spreading the portfolio's investments over many different companies in a
variety of industries.
VKAM will utilize options on securities, futures contracts and options thereon
in several different ways, depending upon the status of the portfolio's
investment portfolio and its expectations concerning the securities market.
VKAM will invest up to 20% of the portfolio's total assets in securities of
foreign issuers.
In times of stable or rising stock prices, the portfolio generally seeks to be
fully invested. Even when the portfolio is fully invested, VKAM believes that
at least a small portfolio of assets will be held as cash or cash equivalents
to honor redemption requests and for other short-term needs.
The amount of portfolio assets 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 seek to "equalize" the cash portion of its assets
and obtain performance that is equivalent to investing 100% in equity
securities.
The portfolio may take a temporary defensive position when the securities
trading markets or the economy are experiencing volatility or a prolonged
general decline, or other adverse conditions exist. This may be inconsistent
with the portfolio's principal investment strategies. Under these conditions,
the portfolio will be unable to achieve its investment objective.
/warning sign/ RISKS OF INVESTING IN AN AGGRESSIVE EQUITY PORTFOLIO
The principal risks of investing in an Aggressive Equity Portfolio that may
adversely affect your investment are described below. Please note that there are
many other
Prospectus 2
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
circumstances which could adversely affect your investment and prevent your
portfolio from achieving its objective, which are not described here. Please
refer to the section entitled "Explanation of Strategies and Risks" beginning
on page 12 and the Fund's SAI for more information about the risks of investing
in an Aggressive Equity Portfolio.
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the short term. These
price movements may result from factors affecting individual companies, certain
industries or the securities market as a whole.
Because the stocks a portfolio holds fluctuate in price, the value of your
investment in the portfolio will go up and down.
o FOREIGN SECURITIES
Investments in foreign securities involve risks relating to political, social
and economic developments abroad as well as risks resulting from differences in
regulations to which U.S. and foreign issuers and markets are subject. To the
extent a portfolio invests in emerging markets, these risks would be greater.
These risks include:
o Changes in currency values
o Currency speculation
o Currency trading costs
o Different accounting and reporting practices
o Less information available to the public
o Less (or different) regulation of securities markets
o Greater complex business negotiations
o Less liquidity
o More fluctuations in prices
o Delays in settling foreign securities transactions
o Higher costs for holding shares (custodial fees)
o Higher transaction costs
o Vulnerability to seizure and taxes
o Political instability and small markets
o Different market trading days
o Forward foreign currency contracts for hedging
o INVESTING AGGRESSIVELY
o The value of developing-company stocks may be very volatile, and can drop
significantly in a short period of time
o Rights, options and futures contracts may not be exercised and may expire
worthless
o Warrants and rights may be less liquid than stocks
o Use of futures and other derivatives may make the portfolio more volatile
o FUTURES AND OPTIONS
Futures and options involve additional investment risks and transactional
costs, and draw upon skills and experience which are different than those
needed to pick other securities. Special risks include:
o Inaccurate market predictions
o Imperfect correlation
o Illiquidity
o Tax considerations
The portfolios are not required to hedge their investments.
YOU MAY LOSE MONEY IF YOU INVEST IN AN AGGRESSIVE EQUITY PORTFOLIO.
/chess piece/ INVESTOR PROFILE
WRL VKAM EMERGING GROWTH
May be appropriate for the investor who seeks capital appreciation over the
long term; is willing to take on the increased risks of investing in smaller
and medium-sized, less established companies in exchange for potentially higher
capital appreciation; can withstand substantial volatility in the value of
their shares of the portfolio; and wish to add to their personal holdings a
portfolio that invests primarily in common stocks of emerging growth companies.
Prospectus 3
<PAGE>
- - --------------------------------------------------------------------------------
AGGRESSIVE EQUITY PORTFOLIO (CONTINUED)
- - --------------------------------------------------------------------------------
/graph/ PORTFOLIO PERFORMANCE
The bar chart and table below give an indication of the portfolio's risks and
performance. The chart shows changes in the portfolio's performance from year
to year. The performance calculations do not reflect charges or deductions
under the policies or the annuity contracts. These fees and expenses would
lower investment performance. The table shows how the portfolio's average
annual returns for the periods indicated compare to those of a broad measure of
market performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL VKAM EMERGING GROWTH
- - --------------------------------------------------------------------------------
TOTAL RETURN
(PER CALENDAR YEAR)
- - ----------------------------------------------------------
[GRAPHIC OMITTED]
(7.36)% 46.79% 18.88% 21.45% 37.33% 105.16%
1994 1995 1996 1997 1998 1999
- - ----------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1994-1999)
- - -------------------------------------------
QUARTER ENDED
Highest 62.73 % 12/31/99
Lowest (12.53)% 9/30/98
- - --------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- - -----------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (MARCH 1, 1993)
WRL VKAM
Emerging Growth 105.16% 42.96% 32.64%
S&P 500 Index 21.04% 28.56% 21.70%
- - -------------------------------------------------------------------
Prospectus 4
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
WRL JANUS GLOBAL
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES YOUR FOREIGN EQUITY PORTFOLIO AND
THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIO. FOR FURTHER INFORMATION ON
THIS PORTFOLIO, PLEASE READ THE SECTION ENTITLED "EXPLANATION OF STRATEGIES AND
RISKS," BEGINNING ON PAGE 12 AND THE FUND'S SAI.
/TARGET/ OBJECTIVES
WRL JANUS GLOBAL
This portfolio seeks long-term growth of capital in a manner consistent with
the preservation of capital.
- - --------------------------------------------------------------------------------
WHAT IS A FOREIGN EQUITY PORTFOLIO?
This type of portfolio principally invests in equity securities of
companies located outside the U.S.
- - --------------------------------------------------------------------------------
/chess piece/ POLICIES AND STRATEGIES
WRL JANUS GLOBAL
The portfolio's sub-adviser, Janus Capital Corporation (Janus), seeks to
achieve the portfolio's investment objective by investing principally in:
o Common stocks of foreign and domestic issuers
o Depositary receipts including ADRs, Global Depositary Receipts
(GDRs) and European Depositary Receipts (EDRs)
The portfolio may also use forward foreign currency contracts for hedging.
Janus' main strategy is to use a "bottom up" approach to build the portfolio's
portfolio. They seek to identify individual companies with earnings growth
potential that may not be recognized by the market at large.
Foreign securities are generally selected on a stock-by-stock basis without
regard to defined allocation among countries or geographic regions.
When evaluating foreign investments, Janus (in addition to looking at
individual companies) considers such factors as:
o Expected levels of inflation in various countries
o Government policies that might affect business conditions
o The outlook for currency relationships
o Prospects for economic growth among countries, regions or geographic
areas
- - --------------------------------------------------------------------------------
WHAT IS A "BOTTOM-UP" APPROACH?
When portfolio managers use a "bottom-up" approach, they look primarily at
individual companies against the context of broader market factors.
- - --------------------------------------------------------------------------------
/warning sign/ RISKS OF INVESTING IN A FOREIGN EQUITY PORTFOLIO
The principal risks of investing in a Foreign Equity Portfolio that may
adversely affect your investment are described below. Please note that there
are many other circumstances which could adversely affect your investment and
prevent your portfolio from achieving its objective, which are not described
here. Please refer to the section entitled "Explanation of Strategies and
Risks" beginning on page 12, and the Fund's SAI for more information about the
risks associated with investing in a Foreign Equity Portfolio.
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
certain industries or the securities market as a whole.
Because the stocks the portfolio holds fluctuate in price, the value of your
investment in the portfolio will go up and down.
o FOREIGN SECURITIES
Investments in foreign securities involve risks relating to political, social
and economic developments abroad as well as risks resulting from differences in
regulations to which U.S. and foreign issuers and markets are subject.
Prospectus 5
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIO (CONTINUED)
- - --------------------------------------------------------------------------------
To the extent a portfolio invests in emerging markets, these risks would be
greater. These risks include:
o Changes in currency values
o Currency speculation
o Currency trading costs
o Different accounting and reporting practices
o Less information available to the public
o Less (or different) regulation of securities markets
o Greater complex business negotiations
o Less liquidity
o More fluctuations in prices
o Delays in settling foreign securities transactions
o Higher costs for holding shares (custodial fees)
o Higher transaction costs
o Vulnerability to seizure and taxes
o Political instability and small markets
o Different market trading days
o Forward foreign currency contracts for hedging
o EMERGING MARKETS RISK
Investing in the securities of issuers located in or principally doing business
in emerging markets bear foreign risks as discussed above. In addition, the
risks associated with investing in emerging markets are often greater than
investing in developed foreign markets. Specifically, the economic structures
in emerging markets countries are less diverse and mature than those in
developed countries, and their political systems are less stable. Investments
in emerging markets countries may be affected by national policies that
restrict foreign investments. Emerging market countries may have less developed
legal structures, and the small size of their securities markets and low
trading volumes can make investments illiquid and more volatile than
investments in developed countries. As a result, a portfolio investing in
emerging market countries may be required to establish special custody or other
arrangements before investing.
o FORWARD FOREIGN CURRENCY CONTRACTS
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of portfolio securities decline.
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 the portfolio's
limitation on investing in illiquid securities.
If the portfolio managers' judgment of markets proves incorrect or the strategy
does not correlate well with a portfolio's investment, the use of such hedging
transactions could result in a loss regardless of whether the intent was to
reduce risk or increase return and may increase a portfolio's volatility. In
addition, in the event that non-exchange traded forward currency contracts are
used, such transactions could result in a loss if the counterparty to the
transaction does not perform as promised.
o DEPOSITARY RECEIPTS
Depositary receipts represent interests in an account at a bank or trust
company which holds equity securities. They are subject to some of the same
risks as direct investments in foreign securities, including currency risk. The
regulatory requirements with respect to depositary receipts that are issued in
sponsored and unsponsored programs are generally similar, but the issuers of
unsponsored depositary receipts are not obligated to disclose material
information in the U.S., and, therefore, such information may not be reflected
in the market value of depositary receipts.
YOU MAY LOSE MONEY IF YOU INVEST IN A FOREIGN EQUITY PORTFOLIO.
/chess piece/ INVESTOR PROFILE
WRL JANUS GLOBAL
For the investor who seeks capital growth without being limited to investments
in U.S. securities, and who can tolerate the significant risks associated with
foreign investing.
Prospectus 6
<PAGE>
- - --------------------------------------------------------------------------------
FOREIGN EQUITY PORTFOLIO (CONTINUED)
- - --------------------------------------------------------------------------------
/graph/ PORTFOLIO PERFORMANCE
The bar chart and table below give an indication of the portfolio's risks and
performance. The chart shows changes in the portfolio's performance from year
to year. The performance calculations do not reflect charges or deductions
under the policies or the annuity contracts. These fees and expenses would
lower investment performance. The table shows how the portfolio's average
annual returns for the periods indicated compare to those of a broad measure of
market performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL JANUS GLOBAL
- - --------------------------------------------------------------------------------
TOTAL RETURN
(PER CALENDAR YEAR)
- - ----------------------------------------------------------
[GRAPHIC OMITTED]
35.05% 0.25% 23.06% 27.74% 18.75% 71.10%
1993 1994 1995 1996 1997 19998
- - ----------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1993-1999)
- - --------------------------------------------
QUARTER ENDED
Highest 46.11 % 12/31/99
Lowest (16.52)% 9/30/98
- - ---------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1998-1999)
- - ---------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (DECEMBER 3, 1992)
WRL Janus Global 71.10% 32.94% 27.91%
Morgan Stanley
Capital
International
World Index 24.93% 20.08% 18.23%
- - --------------------------------------------------------------------------------
Prospectus 7
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
WRL JANUS GROWTH
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES YOUR GROWTH EQUITY PORTFOLIO AND THE
PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIO. FOR FURTHER INFORMATION ON THIS
PORTFOLIO, PLEASE READ THE SECTION ENTITLED "EXPLANATION OF STRATEGIES AND
RISKS," BEGINNING ON PAGE 12, AND THE FUND'S SAI.
/target/ OBJECTIVES
WRL JANUS GROWTH
This portfolio seeks growth of capital.
- - --------------------------------------------------------------------------------
WHAT IS A GROWTH EQUITY PORTFOLIO?
A growth equity portfolio invests in the common stock of companies that
offer potentially rising share prices. These portfolios primarily aim to
provide capital appreciation (a rise in share price) rather than steady
income.
- - --------------------------------------------------------------------------------
/chess piece/ POLICIES AND STRATEGIES
WRL JANUS GROWTH
The portfolio's sub-adviser, Janus Capital Corporation (Janus), seeks to
achieve the portfolio's objective by investing principally in:
o Common stocks
The portfolio's strategy is to invest almost all of its assets in common stock
at times when Janus believes the market environment favors such investing.
Janus generally takes a "bottom-up" approach to building the stock portfolio.
In other words, Janus seeks to identify individual companies with earnings
growth potential that may not be recognized by the stock market at large.
Although themes may emerge in the portfolio, securities are generally selected
without regard to any defined industry sector or other similarly defined
selection procedure. Realization of income is not a significant investment
consideration for the portfolio and any income realized on the portfolio's
investments is incidental to its objective.
Janus may take a temporary defensive position when the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse market conditions exist. This may be
inconsistent with the portfolio's principal investment strategies. Under these
circumstances, the portfolio may be unable to achieve its investment objective.
/caution/ RISKS
The principal risks of investing in a Growth Equity Portfolio that may
adversely affect your investment are described below. Please note that there
are many other circumstances which could adversely affect your investment and
prevent a portfolio from achieving its objective, which are not described here.
Please refer to the section entitled "Explanation of Strategies and Risks,"
beginning on page 12, and the Fund's SAI for more information about the risks
associated with investing in a Growth Equity Portfolio.
o STOCKS
While stocks have historically outperformed other investments over the long
term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
industries, or the securities market as a whole.
Because the stocks the portfolio holds fluctuate in price, the value of your
investment in the portfolio go up and down.
o FUTURES AND OPTIONS
Futures and options involve additional investment risks and transactional
costs, and draw upon skills and experience which are different than those
needed to pick other securities. Special risks include:
o Inaccurate market predictions
o Imperfect correlation
o Illiquidity
o Tax considerations
Prospectus 8
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIO
- - --------------------------------------------------------------------------------
The portfolios are not required to hedge their investments.
o STYLE RISK
Securities with different characteristics tend to shift in and out of favor
depending upon market and economic conditions as well as investor sentiment. A
portfolio may underperform other portfolios that employ a different style. A
portfolio also may employ a combination of styles that impact its risk
characteristics. Examples of different styles include growth and value
investing, as well as those focusing on large, medium, or small company
securities.
o GROWTH INVESTING RISK
Growth stocks may be more volatile than other stocks because they are
more sensitive to investor perceptions of the issuing company's growth
potential. Growth oriented funds will typically underperform when value
investing is in favor.
YOU MAY LOSE MONEY IF YOU INVEST IN A GROWTH EQUITY PORTFOLIO.
/chess piece/ INVESTOR PROFILE
WRL JANUS GROWTH
For the investor who wants capital growth in a broadly diversified stock
portfolio, and who can tolerate significant fluctuations in value.
Prospectus 9
<PAGE>
- - --------------------------------------------------------------------------------
GROWTH EQUITY PORTFOLIO (CONTINUED)
- - --------------------------------------------------------------------------------
/graph/ PORTFOLIO PERFORMANCE
The bar chart and table below gives an indication of the portfolio's risks and
performance. The chart shows changes in the portfolio's performance from year
to year. The performance calculations do not reflect charges or deductions
under the policies of the annuity contracts. These fees and expenses would
lower investment performance. The table shows how the portfolio's average
annual returns for the periods indicated compare to those of a broad measure of
market performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A PORTFOLIO'S
PERFORMANCE IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A PORTFOLIO
WILL DO IN THE FUTURE.
- - --------------------------------------------------------------------------------
WRL JANUS GROWTH
- - --------------------------------------------------------------------------------
TOTAL RETURN
(PER CALENDAR YEAR)
- - --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
(0.22)% 59.79% 2.35% 3.97% (8.31)% 47.12% 17.96% 15.74% 64.47% 59.67%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- - --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1990-1999)
- - ---------------------------------------
QUARTER ENDED
Highest 33.08 % 12/31/99
Lowest (16.60)% 9/30/90
- - ---------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1998-1999)
- - -----------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
WRL Janus Growth 59.67% 39.89% 23.62%
S&P 500 Index 21.04% 28.56% 18.21%
- - -----------------------------------------------------
Prospectus 10
<PAGE>
- - --------------------------------------------------------------------------------
RISK/REWARD INFORMATION
- - --------------------------------------------------------------------------------
BEFORE YOU CHOOSE AN INVESTMENT PORTFOLIO,
PLEASE CONSIDER . . .
All of the investment portfolios involve risk, but there is also the potential
for reward. You can lose money -- and you can make money. The Fund portfolios
are structured so that each offers a slightly different degree of risk and
reward than others.
In this prospectus, we've arranged the portfolios in order of risk/
reward from highest to lowest. Notice the scale at the right. It covers the
full spectrum of risk/reward of the portfolios described in this prospectus.
WHAT RISK/REWARD LEVEL IS FOR YOU? ASK YOURSELF THE FOLLOWING:
(1) HOW WELL DO I HANDLE FLUCTUATIONS IN MY ACCOUNT VALUE?
The higher a portfolio is on the risk/reward spectrum, the more its
price is likely to move up and down on a day to day basis. If this makes
you uncomfortable, you may prefer an investment at the lower end of the
scale that may not fluctuate in price as much.
(2) AM I LOOKING FOR A HIGHER RATE OF RETURN?
Generally, the higher the potential return, the higher the risk. If you
find the potential to make money is worth the possibility of losing
more, then a portfolio at the higher end of the spectrum may be right
for you.
A final note: These portfolios are designed for long-term investment.
Each portfolio has an investment objective that it tries to achieve by
following certain investment strategies and techniques. The objective can be
changed without shareholder vote.
---------------------
Aggressive Equity
---------------------
WRL VKAM EMERGING GROWTH HIGHER
---------------------
Foreign Equity
---------------------
WRL JANUS GLOBAL
---------------------
Growth Equity
---------------------
WRL JANUS GROWTH RISK REWARD
---------------------
Balanced
---------------------
---------------------
Fixed-Income
---------------------
---------------------
Capital Preservation
---------------------
LOWER
Prospectus 11
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS
- - --------------------------------------------------------------------------------
HOW TO USE THIS SECTION
In the discussions of the individual portfolios on pages 2 through 10, you
found descriptions of the strategies and risks associated with each. In those
pages, you were referred to this section for a more complete description of the
risks. For best understanding, first read the description of the portfolio
you're interested in. Then refer to this section and read about the risks
particular to that portfolio. For even more discussions of strategies and
risks, see the SAI, which is available upon request. See the back cover of this
prospectus for information on how to order the SAI.
/chess piece/
DIVERSIFICATION AND CONCENTRATION. The 1940 Act classifies investment companies
as either diversified or non-diversified.
Diversification is the practice of spreading a portfolio's assets over a number
of investments, investment types, industries or countries to reduce risk. A
non-diversified portfolio has the ability to take larger positions in fewer
issuers. Because the appreciation or depreciation of a single security may have
a greater impact on the net asset value of a non-diversified portfolio, its
share price can be expected to fluctuate more than a comparable portfolio.
All of the portfolios qualify as diversified funds under the 1940 Act. The
diversified portfolios are subject to the following diversification
requirements (which are set forth in full in the SAI):
o 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.
o 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
would cause the portfolio's holdings of that issuer to amount to more than 5%
of the portfolio's total assets.
o 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.
/caution/
INVESTING IN COMMON STOCKS. Many factors cause common stocks to go up and down
in price. A major one is the financial performance of the company that issues
the stock. Other factors include the overall economy, conditions in a
particular industry, and monetary factors like interest rates. When your
portfolio holds stocks, there's a risk that some or all of them may be down in
price when you choose to sell, causing you to lose money. This is called MARKET
RISK.
/caution/
INVESTING IN PREFERRED STOCKS. Because these stocks come with a promise to pay
a stated dividend, their price depends more on the size of the dividend than on
the company's performance. But if a company fails to pay the dividend, its
preferred stock is likely to drop in price. Changes in interest rates can also
affect their price. (See "Investing in Bonds," below.)
/caution/
INVESTING IN CONVERTIBLE SECURITIES, PREFERRED STOCKS, AND BONDS. Since
preferred stocks and corporate bonds pay a stated return, their prices usually
don't depend on the price of the company's common stock. But some companies
issue preferred stocks and bonds that are CONVERTIBLE into their common stocks.
Linked to the common stock in this way, convertible securities go up and down
in price as the common stock does, adding to their market risk.
/caution/
VOLATILITY. The more an investment goes up and down in price, the more VOLATILE
it is. Volatility increases the market risk because even though your portfolio
may go UP more than the market in good times, it may also go DOWN more than the
market in bad times. If you decide to sell when a volatile portfolio is down,
you could lose more.
Prospectus 12
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS (CONTINUED)
- - --------------------------------------------------------------------------------
/caution/
INVESTING IN BONDS. Like common stocks, bonds fluctuate in value, though the
factors causing this fluctuation are different, including:
o CHANGES IN INTEREST RATES. Bond prices tend to move the opposite of interest
rates. Why? Because when interest rates on new bond issues go up, rates on
existing bonds stay the same and they become less desirable. When rates go
down, the reverse happens. This is also true for most preferred stocks and
some convertible securities.
o LENGTH OF TIME TO MATURITY. When a bond matures, the issuer must pay the owner
its face value. If the maturity date is a long way off, many things can affect
its value, so a bond is more volatile the farther it is from maturity. As that
date approaches, fluctuations usually become smaller and the price gets closer
to face value.
o DEFAULTS. All bond issuers make at least two promises: (1) to pay interest
during the bond's term and (2) to return principal when it matures. If an
issuer fails to keep one or both of these promises, the bond will probably
drop in price dramatically, and may even become worthless. Changes in
financial condition and general economic conditions can affect the ability to
honor financial obligations and therefore credit quality. A security's price
may be adversely affected by the market's opinion of the security's credit
quality level even if the issuer or counterparty has suffered no degradation
in ability to honor the obligation.
o DECLINES IN RATINGS. At the time of issue, most bonds are rated by
professional rating services, such as Moody's Investors Service, Inc.
(Moody's) and Standard & Poor's Corporation (S&P). The stronger the financial
backing behind the bond, the higher the rating. If this backing is weakened or
lost, the rating service may downgrade the bond's rating. This is virtually
certain to cause the bond to drop in price. Bonds that are rated below BBB by
S&P, and below Ba by Moody's, are considered to be below investment grade.
Moody's rates bonds in nine categories, from Aaa to C, with Aaa being the
highest with least risk. S&P rates bonds in six categories, from AAA to D,
with AAA being the highest.
o LOW RATING. High-yield/high-risk fixed-income securities (commonly known as
"junk bonds") have greater credit risk, are more sensitive to interest rate
movements, are considered more speculative than higher rated bonds, have a
greater vulnerability to economic changes and are less liquid. The market for
such securities may be less active than for higher rated securities, which can
adversely affect the price at which these securities may be sold and may
diminish a portfolio's ability to obtain accurate market quotations when
valuing the portfolio securities and calculating the portfolio's net asset
value.
o LACK OF RATING. Some bonds are considered speculative, or for other reasons
are not rated. Such bonds must pay a higher interest rate in order to attract
investors. They're considered riskier because of the higher possibility of
default or loss of liquidity.
o LOSS OF LIQUIDITY. If a bond is downgraded, or for other reasons drops in
price, the market demand for it may "dry up". In that case, the bond may be
hard to sell or "liquidate" (convert to cash).
/caution/
INVESTING IN FOREIGN SECURITIES. These are investments offered by foreign
companies, governments and government agencies. They involve risks not usually
associated with U.S. securities, including:
o CHANGES IN CURRENCY VALUES. Foreign securities are sold in currencies other
than U.S. dollars. If a currency's value drops, the value of the securities
held by a portfolio could drop too, even if the securities are strong. In
turn, the value of the shares of the portfolio could also drop. Dividend and
interest payments may be lower. Factors affecting exchange rates are:
differing interest rates among countries; balances of trade; amount of a
country's overseas investments; and any currency manipulation by banks.
o CURRENCY SPECULATION. The foreign currency market is largely unregulated and
subject to speculation.
o ADRS/ADSS. Some portfolios also invest in American Depositary Receipts (ADRs)
and American Depositary Shares (ADSs). They represent securities of foreign
companies traded on U.S. exchanges, and their values are expressed in U.S.
dollars. Changes in the value of the underlying foreign currency will change
the value of the ADR or ADS. A portfolio incurs costs when it converts other
currencies into dollars, and vice-versa.
Prospectus 13
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS (CONTINUED)
- - --------------------------------------------------------------------------------
o EURO CONVERSION. On January 1, 1999, certain participating countries in the
European Economic Monetary Union adopted the "Euro" as their official
currency. Other EU member countries may convert to the Euro at a later date.
As of January 1, 1999, governments in participating countries issued new debt
and redenominated existing debt in Euros; corporations chose to issue stocks
or bonds in Euros or national currency. The new European Central Bank (the
"ECB") will assume responsibility for a uniform monetary policy in
participating countries. Euro conversion risks that could affect a portfolio's
foreign investments include: (1) the readiness of Euro payment, clearing, and
other operational systems; (2) the legal treatment of debt instruments and
financial contracts in existing national currencies rather than the Euro; (3)
exchange-rate fluctuations between the Euro and non-Euro currencies during the
transition period of January 1, 1999 through December 31, 2002 and beyond; (4)
potential U.S. tax issues with respect to portfolio securities; and (5) the
ECB's abilities to manage monetary policies among the participating countries;
and (6) the ability of financial institution systems to process Euro
transactions.
o DIFFERENT ACCOUNTING AND REPORTING PRACTICES. Foreign tax laws are different,
as are laws, practices and standards for accounting, auditing and reporting
data to investors.
o LESS INFORMATION AVAILABLE TO THE PUBLIC. Foreign companies usually make less
information available to the public.
o LESS REGULATION. Securities regulations in many foreign countries are more lax
than in the U.S.
o MORE COMPLEX NEGOTIATIONS. Because of differing business and legal procedures,
a portfolio may find it hard to enforce obligations or negotiate favorable
brokerage commission rates.
o LESS LIQUIDITY/MORE VOLATILITY. Some foreign securities are harder to convert
to cash than U.S. securities, and their prices may fluctuate more
dramatically.
o SETTLEMENT DELAYS. "Settlement" is the process of completing a securities
transaction. In many countries, this process takes longer than it does in the
U.S.
o HIGHER CUSTODIAL CHARGES. Fees charged by the Fund's custodian for holding
shares are higher for foreign securities than that of domestic securities.
o HIGHER TRANSACTION COSTS. Fees charged by securities brokers are often higher
for transactions involving foreign securities than domestic securities. Higher
expenses, such as brokerage fees, may reduce the return a portfolio might
otherwise achieve.
o VULNERABILITY TO SEIZURE AND TAXES. Some governments can seize assets. They
may also limit movement of assets from the country. A portfolio's interest,
dividends and capital gains may be subject to foreign withholding taxes.
o POLITICAL INSTABILITY AND SMALL EMERGING MARKETS. Developing countries can be
politically unstable. Economies can be dominated by a few industries, and
markets may trade a small number of securities. Regulations of banks and
capital markets can be weak.
o DIFFERENT MARKET TRADING DAYS. Foreign markets may not be open for trading
when U.S. markets are and asset values can change before your transaction
occurs.
o HEDGING. A portfolio may, but will not necessarily, enter into forward
currency contracts to hedge against declines in the value of securities
denominated in, or whose value is tied to, a currency other than the U.S.
dollar or to reduce the impact of currency fluctuation on purchases, and sales
of such securities.
/caution/
INVESTING IN FUTURES, OPTIONS AND DERIVATIVES. Besides conventional securities,
your portfolio may seek to increase returns by investing in financial contracts
related to its primary investments. Such contracts involve additional risks and
costs. Risks include:
o INACCURATE MARKET PREDICTIONS. If the sub-adviser is wrong in its expectation,
for example, with respect to interest rates, securities prices or currency
markets, the contracts could produce losses instead of gains.
o PRICES MAY NOT MATCH. Movements in the price of the financial contracts may be
used to offset movements in the price of other securities you own.
Prospectus 14
<PAGE>
- - --------------------------------------------------------------------------------
EXPLANATION OF STRATEGIES AND RISKS (CONTINUED)
- - --------------------------------------------------------------------------------
If those prices don't correlate or match closely, the benefits of the
transaction might be diminished.
o ILLIQUID MARKETS. If there's no market for the contracts, the portfolio may
not be able to control losses.
o TAX CONSEQUENCES. Sometimes the possibility of incurring high taxes on a
transaction may delay closing out a position and limit the gains it would have
produced.
/caution/
INVESTING IN SPECIAL SITUATIONS. Each portfolio may invest in "special
situations" from time to time. Special situations arise when, in the opinion of
a portfolio manager, a company's securities may be undervalued, then increase
considerably in price, due to:
o A NEW PRODUCT OR PROCESS
o A MANAGEMENT CHANGE
o A TECHNOLOGICAL BREAKTHROUGH
o AN EXTRAORDINARY CORPORATE EVENT
o A TEMPORARY IMBALANCE IN THE SUPPLY OF, AND DEMAND FOR, THE SECURITIES OF AN
ISSUER
Investing in a special situation carries an additional risk of loss if the
expected development does not happen or does not attract the expected
attention. The impact of special situation investing to a portfolio will depend
on the size of a portfolio's investment in a situation.
/chess piece/
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 short-term debt securities that
are considered cash equivalents. This may be done as a temporary 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.
/question mark/
PORTFOLIO TURNOVER
A portfolio turnover rate is, in general, the percentage calculated by taking
the lesser of purchases or sales of portfolio securities (excluding short-term
securities) for a year and dividing it by the monthly average of the market
value of such securities during the year.
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 unforeseen developments.
The rate of portfolio turnover will not be a limiting factor when short-term
investing is considered appropriate. Increased turnover rates result in higher
brokerage costs and other transaction based expenses for a portfolio. These
charges are ultimately borne by the shareholders.
/chess piece/
SHORT SALES
A 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 convertible into, or exchangeable without
further consideration for, securities of the same issue as the securities sold
short.
/question mark/
INVESTMENT STRATEGIES
A portfolio is permitted to use other securities and investment strategies in
pursuit of its investment objective, subject to limits established by the
Fund's Board of Directors. No portfolio is under any obligation to use any of
the techniques or strategies at any given time or under any particular economic
condition. Certain instruments and investment strategies may expose the
portfolios to other risks and considerations, which are discussed in the Fund's
SAI.
Prospectus 15
<PAGE>
- - --------------------------------------------------------------------------------
HOW THE FUND IS MANAGED AND ORGANIZED
- - --------------------------------------------------------------------------------
/question mark/
HOW THE FUND IS MANAGED AND ORGANIZED
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.
WRL Investment Management, Inc. (WRL Management) located at 570 Carillon
Parkway, St. Petersburg, Florida 33716, has served as the Fund's investment
adviser since 1997. Prior to this date, Western Reserve served as investment
adviser to the Fund. The investment adviser had no prior experience as an
adviser. The investment adviser is a direct, wholly-owned subsidiary of Western
Reserve Life Assurance Co. of Ohio (Western Reserve), which is wholly-owned by
First AUSA Life Insurance Company, a stock life insurance company, which is
wholly-owned by AEGON USA, Inc. AEGON USA, Inc. is a financial services holding
company whose primary emphasis is on life and health insurance and annuity and
investment products. AEGON USA, Inc. is a wholly-owned indirect subsidiary of
AEGON N.V., a Netherlands corporation which is a publicly traded international
insurance group.
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.
The Fund has received an order from the Securities and Exchange Commission that
will permit the Fund and the investment adviser, subject to certain conditions,
and without the approval of shareholders to: (1) employ a new unaffiliated
sub-adviser for a portfolio pursuant to the terms of a new investment
sub-advisory agreement, either as a replacement for an existing sub-adviser or
as an additional sub-adviser; (2) materially change the terms of any
sub-advisory agreement; and (3) continue the employment of an existing
sub-adviser on the same sub-advisory contract terms where a contract has been
assigned because of a change in control of the sub-adviser. In such
circumstances, shareholders would receive notice and information about the new
sub-adviser within ninety (90) days after the hiring of any new sub-adviser.
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 advisory fees for each portfolio are:
ADVISORY
PORTFOLIO FEE
WRL VKAM Emerging Growth 0.80%
WRL Janus Global** 0.80%
WRL Janus Growth* 0.80%
* WRL Management currently waives 0.025% of its advisory fee for the first $3
billion of the portfolio's average daily net assets (net fee -- 0.775%); and
0.05% of assets above $3 billion (net fee -- 0.75%). This waiver will terminate
on June 25, 2000.
** WRL Management currently waives 0.025% of its advisory fee for the
portfolio's average daily net assets above $2 billion (net fee -- 0.775%). This
waiver will terminate on June 25, 2000.
EXPENSE REIMBURSEMENT
WRL Management has entered into an expense limitation agreement with the Fund
on behalf of each applicable portfolio, pursuant to which WRL Management has
agreed to reimburse a portfolio for certain operating expenses so that the
total annual operating expenses of each applicable portfolio do not exceed the
total operating expenses specified for that portfolio (expense cap) in the
portfolio's then-current SAI. The Fund on behalf of an applicable portfolio,
will at a later date reimburse WRL Management for operation expenses previously
paid on behalf of such portfolio during the previous 36 months, but only if,
after such reimbursement, the portfolio's expense ratio does not exceed the
expense cap. The agreement has an initial term through April 30, 2001, and will
Prospectus 16
<PAGE>
- - --------------------------------------------------------------------------------
HOW THE FUND IS MANAGED AND ORGANIZED
- - --------------------------------------------------------------------------------
automatically renew for one-year terms unless WRL Management provides written
notice to the Fund at least 30 days prior to the end of the then-current term.
In addition, the agreement will terminate upon termination of the Investment
Advisory Agreement, or may be terminated by the Fund, without payment of any
penalty, upon ninety (90) days' prior written notice to WRL Management.
SUB-ADVISERS
Here is a listing of the sub-advisers and the portfolios they manage:
SUB-ADVISER PORTFOLIO
VKAM WRL VKAM Emerging Growth
Janus WRL Janus Global
WRL Janus Growth
DAY-TO-DAY MANAGEMENT OF THE INVESTMENTS IN EACH PORTFOLIO IS THE
RESPONSIBILITY OF THE PORTFOLIO MANAGER. THE PORTFOLIO MANAGERS OF THE FUND
ARE:
WRL VKAM EMERGING GROWTH
GARY M. LEWIS leads an investment team and is primarily responsible for the day
to day management of this portfolio. Mr. Lewis has been senior vice president
of VKAM since October, 1995. Previously, he served as vice president/portfolio
manager of VKAM from 1989 to October 1995.
WRL JANUS GLOBAL
HELEN YOUNG HAYES, CFA and LAURENCE CHANG, CFA have served as co-portfolio
managers of this portfolio since January 2000. Ms. Hayes previously served as
manager of this portfolio since its inception. She has been employed by Janus
since 1987.
Mr. Chang has been employed by Janus since 1993. Before joining Janus, Mr.
Chang was a project director at the National Security Archive.
Prospectus 17
<PAGE>
- - --------------------------------------------------------------------------------
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 information for the separate
accounts, policies or annuity contracts.
TOTAL RETURN
Total return refers to the average annual percentage change in value of an
investment in a portfolio held for a stated period of time as of a stated
ending date. When a portfolio has been in operation for the stated period, the
total return for such period will be provided if performance information is
quoted. Total return quotations are expressed as average annual compound rates
of return for each of the periods quoted. They also reflect the deduction of a
proportionate share of a portfolio's investment advisory fees and direct
portfolio expenses, and assume that all dividends and capital gains
distributions during the period are reinvested in the portfolio when made.
SIMILAR 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. Each portfolio's future performance may be
greater or less than the historical performance of the corresponding Similar
Sub-Adviser Fund. There can be no assurance, and no representation is made,
that the investment results of any portfolio will be comparable to the results
of any of the Similar Sub-Adviser Funds as any other fund managed by WRL
Management or any sub-adviser.
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, 1998. 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.
Prospectus 18
<PAGE>
- - --------------------------------------------------------------------------------
PERFORMANCE (CONTINUED)
- - --------------------------------------------------------------------------------
SIMILAR SUB-ADVISER FUND PERFORMANCE
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(WITH SALES LOADS)
---------------------------------
SIMILAR 10 YEARS
SUB-ADVISER INCEPTION TOTAL OR SINCE
WRL PORTFOLIO FUND DATE ASSETS 1 YEAR 5 YEARS INCEPTION
- - -------------------------- -------------------- ----------- ------------------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
WRL Janus Global Janus Worldwide(1) 5/15/91 $ 33,802.9M 64.37% 30.88% 25.10%
WRL VKAM Emerging Growth Van Kampen Class A $113,175,800,000 92.01% 39.86% 27.16%
Emerging Growth(2) 10/2/70
</TABLE>
(1) The Janus Worldwide Fund does not have a sales load.
(2) Total returns are for Class A shares of the Van Kampen Emerging Growth Fund
and reflect a deduction of a 5.75% front end sales load and an annual
12b-1 fee of up to 0.25%. The fund also has Class B and Class C shares
with different sales loads and annual 12b-1 fees. Calculating total return
with those sales loads may have resulted in lower total returns. The
Fund's performance during the one-year period ended December 31, 1999 is
largely attributable to investments in the technology sector, which
performed favorably for the period. This performance was achieved during a
rising market, and there is no guarantee that this performance record or
the circumstances leading to it can be replicated in the future. As the
Fund expects to have a substantial portion of its assets invested in
equity securities of emerging growth companies, the Fund will be subject
to more volatility and erratic movements than the market in general.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(WITHOUT SALES LOADS)
------------------------------------
SIMILAR 10 YEARS
SUB-ADVISER INCEPTION TOTAL OR SINCE
WRL PORTFOLIO FUND DATE ASSETS 1 YEAR 5 YEARS INCEPTION
- - ------------------- -------------------- ----------- ------------------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
WRL Janus Global Janus Worldwide(1) 5/15/91 $ 33,802.9M 64.37% 30.88% 25.10%
WRL VKAM Emerging Van Kampen Class A $113,175,800,000 103.72% 41.53% 27.92%
Growth Emerging Growth(2) 10/2/70
</TABLE>
(1) The Janus Worldwide Fund does not have a sales load.
(2) The Fund's performance during the one-year period ended December 31, 1999
is largely attributable to investments in the technology sector, which
performed favorably for the period. This performance was achieved during a
rising market, and there is no guarantee that this performance record or
the circumstances leading to it can be replicated in the future. As the
Fund expects to have a substantial portion of its assets invested in
equity securities of emerging growth companies, the Fund will be subject
to more volatility and erratic movements than the market in general.
THE PERFORMANCE OF SIMILAR SUB-ADVISER FUNDS DOES NOT REFLECT ANY OF THE
CHARGES, FEES, AND EXPENSES IMPOSED UNDER THE POLICIES OR 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-ADVISERS FUNDS AS "SIMILAR SUB-ADVISED FUNDS.")
(See the SAI for more information about the portfolios' performance.)
Prospectus 19
<PAGE>
- - --------------------------------------------------------------------------------
OTHER INFORMATION
- - --------------------------------------------------------------------------------
/question mark/ PURCHASE AND REDEMPTION OF SHARES
As described earlier in the prospectus, shares of the portfolios are sold
exclusively to certain separate accounts of Western Reserve Life Assurance Co.
of Ohio, PFL Life Insurance Company, AUSA Life Insurance Company, Inc. and
Peoples Benefit Life Insurance Company, and are not offered to the public.
Shares are sold and redeemed at their net asset value without the imposition of
any sales commission or redemption charge. (However, certain sales or other
charges may apply to the policies or annuity contracts, as described in the
product prospectus.)
/question mark/ 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 (NYSE) (usually 4:00 p.m., Eastern time), on each day the exchange is
open.
- - --------------------------------------------------------------------------------
WHAT IS NET ASSET VALUE?
The 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.
- - --------------------------------------------------------------------------------
Net asset value (NAV) 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. Share prices for any transaction are those next calculated after
receipt of an order.
If your order is received by closing time of the NYSE, you'll pay, or you will
receive, that day's NAV. If later, it will be priced at the next day's NAV.
Share prices may change when a portfolio holds shares in companies traded on
foreign exchanges that are open on the days the NYSE is closed.
Except for money market instruments maturing in 60 days or less, securities
held by portfolios are valued at market value. If market values are not readily
available, securities are valued at fair value as determined by the Fund's
Valuation Committee under the supervision of the Fund's Board.
/question mark/ 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.
/dollar sign/ TAXES
Each portfolio has qualified and expects to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended ("Code"). As qualified, a portfolio is not subject to federal income
tax on that part of its taxable income that it distributes to you. Taxable
income consists generally of net investment income, and any capital gains. It
is each portfolio's intention to distribute all such income and gains.
Shares of each portfolio are offered only to the separate accounts of Western
Reserve and its affiliates. Separate accounts 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 Income Tax Considerations" included in the respective prospectuses for
the policies and the annuity contracts.
Section 817(h) of the Code and the regulations thereunder impose
"diversification" requirements on each portfolio. Each portfolio intends to
comply with the diversification requirements. These requirements are in
addition to the diversification requirements imposed on each portfolio by
Subchapter M and the 1940 Act. The 817(h) requirements place certain
limitations on the assets of each separate account that may be invested in
securities of a single issuer. Specifically, the regulations provide that,
except as permitted by "safe harbor," rules described below, as of the end of
each calendar quarter
Prospectus 20
<PAGE>
- - --------------------------------------------------------------------------------
OTHER INFORMATION (CONTINUED)
- - --------------------------------------------------------------------------------
or within 30 days thereafter, no more than 55% of the portfolio's total assets
may be represented by any one investment, no more than 70% by any two
investments, no more than 80% by any three investments, and no more than 90% by
any four investments.
Section 817(h) also 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, and all interests in the same comodity 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. If a portfolio does
not satisfy the section 817(h) requirements, the separate accounts, the
insurance companies, the policies and the annuity contracts may be taxable. See
the prospectuses for the policies and annuity contracts.
/question mark/
The foregoing is only a summary of some of the important federal income tax
considerations generally affecting a portfolio and you; see the SAI for a more
detailed discussion. You are urged to consult your tax advisor.
/question mark/ REPORT TO POLICYHOLDERS
The fiscal year of each portfolio ends on December 31 of each year. The Fund
will send to you, at least semi-annually, reports which show the portfolios'
composition and other information. An annual report, with audited financial
information, will be sent to you each year.
/question mark/ DISTRIBUTION AND SERVICE PLANS
The Fund has adopted a plan pursuant to Rule 12b-1 under the 1940 Act (the
"Plan") and pursuant to the Plan, entered into a Distribution Agreement with
AFSG Securities Corporation (AFSG) located at 4333 Edgewood Road NE, Cedar
Rapids, Iowa 52494. AFSG is an affiliate of the investment adviser, and serves
as principal underwriter for the Fund. The Plan permits the use of Fund assets
to help finance the distribution of the shares of the portfolios. Under the
Plan, the Fund, on behalf of the portfolios, is permitted to pay to various
service providers up to 0.15% of the average daily net assets of each portfolio
as payment for actual expenses incurred in connection with the distribution of
the shares of the portfolios. Because these fees are paid out of Fund assets on
an on-going basis, over time these costs will increase the cost of your
investment and may cost you more than other types of sales charges.
As of the date of this prospectus, the Fund has not paid any distribution fees
under the Plan and does not intend to do so before April 30, 2001. You will
receive written notice prior to the payment of any fees under the Plan.
Prospectus 21
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
THE FINANCIAL HIGHLIGHTS TABLE IS INTENDED TO HELP YOU UNDERSTAND A PORTFOLIO'S
FINANCIAL PERFORMANCE FOR THE PAST 5 YEARS (OR, IF SHORTER, THE PERIOD OF THE
PORTFOLIO'S OPERATIONS). CERTAIN INFORMATION REFLECTS FINANCIAL RESULTS FOR A
SINGLE PORTFOLIO SHARE. THE TOTAL RETURNS IN THE TABLE REPRESENT THE RATE AN
INVESTOR WOULD HAVE EARNED (OR LOST) ON AN INVESTMENT IN EACH PORTFOLIO
(ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS). THIS INFORMATION HAS BEEN DERIVED
FROM FINANCIAL STATEMENTS AUDITED BY PRICEWATERHOUSECOOPERS LLP, INDEPENDENT
ACCOUNTANTS, WHOSE REPORT, ALONG WITH THE FUND'S FINANCIAL STATEMENTS, IS
INCLUDED IN THE FUND'S ANNUAL REPORT, WHICH IS AVAILABLE UPON REQUEST BY
CALLING THE FUND AT 1-800-851-9777.
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL JANUS GROWTH
---------------------------------
DECEMBER 31,
---------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Net asset value, beginning of year .................................. $ 59.94 $ 36.84
Income from operations:
Net investment income (loss) ...................................... (0.04) 0.12
Net realized and unrealized gain (loss) on investments ............ 34.02 23.49
---------- ----------
Net income (loss) from operations ................................ 33.98 23.61
---------- ----------
Distributions:
Dividends from net investment income .............................. 0.00 (0.09)
Dividends in excess of net investment income ...................... (1.17) 0.00
Distributions from net realized gains on investments .............. (14.75) (0.42)
Distributions in excess of net realized gains on investments ...... 0.00 0.00
---------- ----------
Total distributions .............................................. (15.92) (0.51)
---------- ----------
Net asset value, end of year ........................................ $ 78.00 $ 59.94
========== ==========
Total return ........................................................ 59.67% 64.47%
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $4,141,240 $3,086,057
Ratio of expenses to average net assets ........................... 0.82% 0.83%
Ratio of net investment income (loss) to average net assets ....... (0.05)% 0.25%
Portfolio turnover rate ........................................... 70.95% 35.29%
<CAPTION>
WRL JANUS GROWTH
--------------------------------------------------
DECEMBER 31,
--------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net asset value, beginning of year .................................. $ 35.00 $ 31.66 $ 23.81
Income from operations:
Net investment income (loss) ...................................... 0.31 0.34 0.26
Net realized and unrealized gain (loss) on investments ............ 5.88 5.35 10.97
---------- ---------- ----------
Net income (loss) from operations ................................ 6.19 5.69 11.23
---------- ---------- ----------
Distributions:
Dividends from net investment income .............................. (0.26) (0.35) (0.24)
Dividends in excess of net investment income ...................... 0.00 (0.01) 0.00
Distributions from net realized gains on investments .............. (4.09) (1.99) (3.14)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00
---------- ---------- ----------
Total distributions .............................................. (4.35) (2.35) (3.38)
---------- ---------- ----------
Net asset value, end of year ........................................ $ 36.84 $ 35.00 $ 31.66
========== ========== ==========
Total return ........................................................ 17.54% 17.96% 47.12%
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $1,839,453 $1,527,409 $1,195,174
Ratio of expenses to average net assets ........................... 0.87% 0.88% 0.86%
Ratio of net investment income (loss) to average net assets ....... 0.80% 0.98% 0.90%
Portfolio turnover rate ........................................... 85.88% 45.21% 130.48%
</TABLE>
<TABLE>
<CAPTION>
WRL JANUS GLOBAL
---------------------------------
DECEMBER 31,
---------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Net asset value, beginning of year .................................. $ 23.71 $ 19.04
Income from operations:
Net investment income (loss) ...................................... (0.04) 0.05
Net realized and unrealized gain (loss) on investments ............ 16.42 5.61
---------- ----------
Net income (loss) from operations ................................ 16.38 5.66
---------- ----------
Distributions:
Dividends from net investment income .............................. 0.00 (0.13)
Dividends in excess of net investment income ...................... 0.00 0.00
Distributions from net realized gains on investments .............. (2.63) (0.80)
Distributions in excess of net realized gains on investments ...... 0.00 (0.06)
---------- ----------
Total distributions .............................................. (2.63) (0.99)
---------- ----------
Net asset value, end of year ........................................ $ 37.46 $ 23.71
========== ==========
Total return ........................................................ 71.10% 30.01%
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $1,926,210 $1,069,765
Ratio of expenses to average net assets ........................... 0.92% 0.95%
Ratio of net investment income (loss) to average net assets ....... (0.14)% 0.23%
Portfolio turnover rate ........................................... 68.10% 87.36%
<CAPTION>
WRL JANUS GLOBAL
--------------------------------------------
DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net asset value, beginning of year .................................. $ 18.12 $ 15.52 $ 13.12
Income from operations:
Net investment income (loss) ...................................... 0.08 0.08 0.10
Net realized and unrealized gain (loss) on investments ............ 3.32 4.20 2.91
-------- -------- --------
Net income (loss) from operations ................................ 3.40 4.28 3.01
-------- -------- --------
Distributions:
Dividends from net investment income .............................. (0.13) (0.04) 0.00
Dividends in excess of net investment income ...................... (1.01) (0.17) 0.00
Distributions from net realized gains on investments .............. (1.34) (1.47) (0.61)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00
-------- -------- --------
Total distributions .............................................. (2.48) (1.68) (0.61)
-------- -------- --------
Net asset value, end of year ........................................ $ 19.04 $ 18.12 $ 15.52
======== ======== ========
Total return ........................................................ 18.75% 27.74% 23.06%
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $785,966 $534,820 $289,506
Ratio of expenses to average net assets ........................... 1.00% 0.99% 0.99%
Ratio of net investment income (loss) to average net assets ....... 0.41% 0.46% 0.75%
Portfolio turnover rate ........................................... 97.54% 88.31% 130.60%
</TABLE>
Prospectus 22
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
WRL VKAM EMERGING GROWTH
-------------------------------
DECEMBER 31,
-------------------------------
1999 1998
---------------- --------------
<S> <C> <C>
Net asset value, beginning of year .................................. $ 26.92 $ 20.37
Income from operations:
Net investment income (loss) ...................................... (0.15) (0.08)
Net realized and unrealized gain (loss) on investments ............ 26.83 7.56
---------- --------
Net income (loss) from operations ................................ 26.68 7.48
---------- --------
Distributions: .....................................................
Dividends from net investment income .............................. 0.00 0.00
Dividends in excess of net investment income ...................... (0.21) 0.00
Distributions from net realized gains on investments .............. (7.38) (0.93)
Distributions in excess of net realized gains on investments ...... 0.00 0.00
---------- --------
Total distributions .............................................. (7.59) (0.93)
---------- --------
Net asset value, end of year ........................................ $ 46.01 $ 26.92
========== ========
Total return ........................................................ 105.16% 37.33%
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $1,916,025 $853,440
Ratio of expenses to average net assets ........................... 0.87% 0.89%
Ratio of net investment income (loss) to average net assets ....... (0.44)% (0.36)%
Portfolio turnover rate ........................................... 117.72% 99.50%
<CAPTION>
WRL VKAM EMERGING GROWTH
--------------------------------------------
DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net asset value, beginning of year .................................. $ 18.46 $ 16.25 $ 11.55
Income from operations:
Net investment income (loss) ...................................... (0.05) (0.04) 0.01
Net realized and unrealized gain (loss) on investments ............ 4.03 3.10 5.42
-------- -------- --------
Net income (loss) from operations ................................ 3.98 3.06 5.43
-------- -------- --------
Distributions: .....................................................
Dividends from net investment income .............................. 0.00 0.00 0.00
Dividends in excess of net investment income ...................... 0.00 0.00 0.00
Distributions from net realized gains on investments .............. (2.07) (0.85) (0.73)
Distributions in excess of net realized gains on investments ...... 0.00 0.00 0.00
-------- -------- --------
Total distributions .............................................. (2.07) (0.85) (0.73)
-------- -------- --------
Net asset value, end of year ........................................ $ 20.37 $ 18.46 $ 16.25
======== ======== ========
Total return ........................................................ 21.45% 18.88% 46.79%
Ratios and supplemental data:
Net assets at end of year (in thousands) .......................... $592,003 $431,454 $ 288,519
Ratio of expenses to average net assets ........................... 0.93% 0.94% 0.91%
Ratio of net investment income (loss) to average net assets ....... (0.27)% (0.24)% 0.03%
Portfolio turnover rate ........................................... 99.78% 80.02% 124.13%
</TABLE>
Prospectus 23
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS
Per share information has been computed using average shares outstanding
throughout each period. Total return reflects all Portfolio expenses and
includes reinvestment of dividends and capital gains; it does not reflect the
charges and deductions under the policies or annuity contracts. Total return
and portfolio turnover rate are not annualized for periods of less than one
year. Ratio of expenses and ratio of net investment income (loss) to average
net assets are annualized for periods of less than one year. For the year ended
December 31, 1999, ratio of expenses to average net assets is net of the
advisory fee waiver. For the years prior to 1999, ratio of expenses to average
net assets is net of the advisory fee waiver and fees paid indirectly. Without
the advisory fee waived by WRL Management and the fees paid indirectly, ratio
of expenses to average net assets for each period presented would be as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
PORTFOLIO 1999 1998 1997 1996 1995
- - ---------------------------------- -------- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
WRL Janus Growth ................. 0.82% * * * *
WRL Janus Global ................. * * * * *
WRL VKAM Emerging Growth ......... * * * * *
</TABLE>
* Ratio difference less than 0.01%.
Prospectus 24
<PAGE>
- - --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT THESE PORTFOLIOS IS CONTAINED IN THE
STATEMENT OF ADDITIONAL INFORMATION, DATED MAY 1, 2000, AND IN THE
FUND'S ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS, WHICH ARE
INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. IN THE FUND'S
ANNUAL REPORT, YOU WILL FIND A DISCUSSION OF THE MARKET CONDITIONS
AND INVESTMENT STRATEGIES THAT SIGNIFICANTLY AFFECTED THE FUND'S
PERFORMANCE DURING THE LAST FISCAL YEAR.
YOU MAY ALSO CALL 1-800-851-9777 TO REQUEST THIS ADDITIONAL
INFORMATION ABOUT THE FUND WITHOUT CHARGE OR TO MAKE SHAREHOLDER
INQUIRIES.
OTHER INFORMATION ABOUT THESE PORTFOLIOS HAS BEEN FILED WITH AND
IS AVAILABLE FROM THE U.S. SECURITIES AND EXCHANGE COMMISSION.
INFORMATION ABOUT THE FUND (INCLUDING THE SAI) CAN BE REVIEWED AND
COPIED AT THE SECURITIES AND EXCHANGE COMMISSION'S PUBLIC
REFERENCE ROOM IN WASHINGTON, D.C. INFORMATION ON THE OPERATION OF
THE PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE
COMMISSION AT 202-942-8090. INFORMATION MAY BE OBTAINED, UPON
PAYMENT OF A DUPLICATING FEE BY WRITING THE PUBLIC REFERENCE
SECTION OF THE COMMISSION, WASHINGTON, D.C. 20549-6009.
REPORTS AND OTHER INFORMATION ABOUT THE FUND ARE ALSO AVAILABLE ON
THE COMMISSION'S INTERNET SITE AT HTTP://WWW.SEC.GOV. (WRL SERIES
FUND FILE NO. 811-4419.)
FOR MORE INFORMATION ABOUT THESE PORTFOLIOS, YOU MAY OBTAIN A COPY
OF THE SAI OR THE ANNUAL OR SEMI-ANNUAL REPORTS WITHOUT CHARGE, OR
TO MAKE OTHER INQUIRIES ABOUT THIS FUND, CALL THE NUMBER LISTED
ABOVE.
(WRL SERIES FUND FILE NO. 811-4419.)
- - --------------------------------------------------------------------------------
<PAGE>
<PAGE>
WRL SERIES FUND, INC.
WRL VKAM EMERGING GROWTH
WRL T. ROWE PRICE SMALL CAP
WRL GOLDMAN SACHS SMALL CAP
WRL PILGRIM BAXTER MID CAP GROWTH
WRL ALGER AGGRESSIVE GROWTH
WRL THIRD AVENUE VALUE
WRL VALUE LINE AGGRESSIVE GROWTH
WRL GE INTERNATIONAL EQUITY
WRL JANUS GLOBAL
WRL GREAT COMPANIES -- TECHNOLOGY(SM)
WRL JANUS GROWTH
WRL GOLDMAN SACHS GROWTH
WRL GE U.S. EQUITY
WRL GREAT COMPANIES -- AMERICA(SM)
WRL SALOMON ALL CAP
WRL C.A.S.E. GROWTH
WRL DREYFUS MID CAP
WRL NWQ VALUE EQUITY
WRL T. ROWE PRICE DIVIDEND GROWTH
WRL DEAN ASSET ALLOCATION
WRL LKCM STRATEGIC TOTAL RETURN
WRL J.P. MORGAN REAL ESTATE SECURITIES
WRL FEDERATED GROWTH & INCOME
WRL AEGON BALANCED
WRL AEGON BOND
WRL J.P. MORGAN MONEY MARKET
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 570 Carillon Parkway, St. Petersburg, FL 33716 or by calling the
Fund at (800) 851-9777.
Investment Adviser:
WRL INVESTMENT MANAGEMENT, INC.
Sub-Advisers:
VAN KAMPEN ASSET MANAGEMENT INC.
T. ROWE PRICE ASSOCIATES, INC.
GOLDMAN SACHS ASSET MANAGEMENT INC.
PILGRIM BAXTER & ASSOCIATES, LTD.
FRED ALGER MANAGEMENT, INC.
EQSF ADVISERS, INC.
VALUE LINE, INC.
GE INVESTMENT MANAGEMENT INCORPORATED
JANUS CAPITAL CORPORATION
GREAT COMPANIES, L.L.C.
SALOMON BROTHERS ASSET MANAGEMENT INC.
C.A.S.E. MANAGEMENT, INC.
THE DREYFUS CORPORATION
NWQ INVESTMENT MANAGEMENT COMPANY, INC.
DEAN INVESTMENT ASSOCIATES
LUTHER KING CAPITAL MANAGEMENT CORPORATION
J.P. MORGAN INVESTMENT MANAGEMENT INC.
FEDERATED INVESTMENT COUNSELING
AEGON USA INVESTMENT MANAGEMENT, INC.
The date of the Prospectus to which this Statement of Additional Information
relates and the date of this Statement of Additional Information is May 1,
2000.
<PAGE>
TABLE OF CONTENTS
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Additional Information
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FUND HISTORY 1
INVESTMENT OBJECTIVES AND POLICIES 2
Investment Restrictions 2
WRL VKAM Emerging Growth 2
WRL T. Rowe Price Small Cap 3
WRL Goldman Sachs Small Cap 4
WRL Pilgrim Baxter Mid Cap Growth 5
WRL Alger Aggressive Growth 6
WRL Third Avenue Value 6
WRL Value Line Aggressive Growth 7
WRL GE International Equity 8
WRL Janus Global 9
WRL Great Companies -- Technology(SM) 10
WRL Janus Growth 10
WRL Goldman Sachs Growth 10
WRL GE U.S. Equity 12
WRL Great Companies -- America(SM) 12
WRL Salomon All Cap 13
WRL C.A.S.E. Growth 13
WRL Dreyfus Mid Cap 13
WRL NWQ Value Equity 14
WRL T. Rowe Price Dividend Growth 14
WRL Dean Asset Allocation 15
WRL LKCM Strategic Total Return 16
WRL J.P. Morgan Real Estate Securities 17
WRL Federated Growth & Income 17
WRL AEGON Balanced 19
WRL AEGON Bond 19
WRL J.P. Morgan Money Market 19
INVESTMENT POLICIES 20
Lending 20
Borrowing 21
Short Sales 21
Foreign Securities 21
Foreign Bank Obligations 22
Forward Foreign Currency Contracts 22
When-Issued, Delayed Settlement and Forward Delivery Securities 23
Investment Funds (WRL GE International Equity) 23
Repurchase and Reverse Repurchase Agreements 23
Temporary Defensive Position 24
U.S. Government Securities 24
Non-Investment Grade Debt Securities 24
Convertible Securities 24
Investments in Futures, Options and Other Derivative Instruments 25
Zero Coupon, Pay-In-Kind and Step Coupon Securities 35
Warrants and Rights 35
Mortgage-Backed Securities 36
Asset-Backed Securities 36
Pass-Through Securities 36
Other Income Producing Securities 37
</TABLE>
i
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<TABLE>
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Additional Information
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Illiquid and Restricted/144A Securities 37
Money Market Reserves
(WRL T. Rowe Price Small Cap and
WRL T. Rowe Price Dividend Growth) 37
Other Investment Companies 38
Quality and Diversification Requirements
(WRL J.P. Morgan Money Market) 38
Bank and Thrift Obligations 38
Investments in the Real Estate Industry and Real Estate Investment Trusts
("REITs") 39
Variable Rate Master Demand Notes 40
Debt Securities and Fixed-Income Investing 40
High Yield/High-Risk Securities 41
Trade Claims 41
MANAGEMENT OF THE FUND 41
Directors and Officers 41
The Investment Adviser 44
The Sub-Advisers 47
Joint Trading Accounts 54
Personal Securities Transactions 55
Administrative and Transfer Agency Services 55
PORTFOLIO TRANSACTIONS AND BROKERAGE 55
Portfolio Turnover 55
Placement of Portfolio Brokerage 56
PURCHASE AND REDEMPTION OF SHARES 59
Determination of Offering Price 59
Net Asset Valuation 59
CALCULATION OF PERFORMANCE
RELATED INFORMATION 59
Total Return 59
Yield Quotations 59
Yield Quotations - WRL J.P. Morgan Money Market 60
TAXES 60
CAPITAL STOCK OF THE FUND 62
REGISTRATION STATEMENT 62
FINANCIAL STATEMENTS 62
OTHER INFORMATION 62
Independent Certified Public Accountants 62
Custodian 62
Appendix A - Description of Portfolio Securities A-1
Appendix B - Brief Explanation of
Rating Categories B-1
</TABLE>
ii
<PAGE>
/diamond/ FUND HISTORY
The Fund was incorporated under the laws of the State of Maryland on August 21,
1985 and is registered with the Securities and Exchange Commission ("SEC") as
an open-end management investment company.
The Fund offers its shares only for purchase by the separate accounts of life
companies to fund benefits under variable life insurance policies or variable
annuity contracts issued by AUSA Life Insurance Company, Inc. ("AUSA"), PFL
Life Insurance Company ("PFL"), Western Reserve Life Assurance Co. of Ohio
("WRL") Peoples Benefit Life Insurance Company ("Peoples") and Transamerica
Occidental Life Insurance Company ("Transamerica"), (the "Life Companies").
Shares may be offered to other life insurance companies in the future.
Because Fund shares are sold to separate accounts established to receive and
invest premiums received under variable life insurance policies and purchase
payments received under the variable annuity contracts, it is conceivable that,
in the future, it may become disadvantageous for variable life insurance
separate accounts and variable annuity separate accounts of the Life Companies
to invest in the Fund simultaneously. Neither the Life Companies nor the Fund
currently foresees any such disadvantages or conflicts, either to variable life
insurance policyholders or to variable annuity contract owners. Any Life
Company may notify the Fund's Board of a potential or existing conflict. The
Fund's Board will then determine if a material conflict exists and what action,
if any, should be taken in response. Such action could include the sale of Fund
shares by one or more of the separate accounts, which could have adverse
consequences. Material conflicts could result from, for example, (1) changes in
state insurance laws, (2) changes in Federal income tax laws, or (3)
differences in voting instructions between those given by variable life
insurance policyholders and those given by variable annuity contract owners.
The Fund's Board might conclude that separate funds should be established for
variable life and variable annuity separate accounts. If this happens, the
affected Life Companies will bear the attendant expenses of establishing
separate funds. As a result, variable life insurance policyholders and variable
annuity contract owners would no longer have the economies of scale typically
resulting from a larger combined fund.
The Fund offers a separate class of common stock for each portfolio. All shares
of a portfolio have equal voting rights, but only shares of a particular
portfolio are entitled to vote on matters concerning only that portfolio. Each
of the issued and outstanding shares of a portfolio is entitled to one vote and
to participate equally in dividends and distributions declared by the portfolio
and, upon liquidation or dissolution, to participate equally in the net assets
of the portfolio remaining after satisfaction of outstanding liabilities. The
shares of a portfolio, when issued, will be fully paid and nonassessable, have
no preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights. The holders
of more than 50% of the shares of the Fund voting for the election of directors
can elect all of the directors of the Fund if they so choose. In such event,
holders of the remaining shares would not be able to elect any directors.
Only the separate accounts of the Life Companies may hold shares of the Fund
and are entitled to exercise the rights directly as described above. To the
extent required by law, the Life Companies will vote the Fund's shares held in
the separate accounts, including Fund shares which are not attributable to
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 Investment Company Act of 1940, as
amended (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.
1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the WRL VKAM Emerging Growth, WRL T. Rowe Price
Small Cap, WRL Goldman Sachs Small Cap, WRL Alger Aggressive Growth, WRL Value
Line Aggressive Growth, WRL GE International Equity, WRL Janus Global, WRL Third
Avenue Value, WRL Dreyfus Mid Cap, WRL Salomon All Cap, WRL Pilgrim Baxter Mid
Cap Growth, WRL Janus Growth, WRL Goldman Sachs Growth, WRL C.A.S.E. Growth, WRL
GE U.S. Equity, WRL NWQ Value Equity, WRL T. Rowe Price Dividend Growth, WRL
Great Companies -- America(SM), WRL Great Companies -- Technology(SM), WRL Dean
Asset Allocation, WRL LKCM Strategic Total Return, WRL Federated Growth &
Income, WRL AEGON Balanced, WRL J.P. Morgan Real Estate Securities, WRL AEGON
Bond and WRL J.P. Morgan Money Market (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 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, its 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 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/ WRL VKAM 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.
2
<PAGE>
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 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/ WRL T. ROWE PRICE SMALL CAP AND
WRL T. ROWE PRICE DIVIDEND 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. Borrow money except for temporary or emergency purposes (not for
leveraging or investment) in an amount exceeding 331/3% of the value of the
portfolio's total assets (including amount borrowed) less liabilities (other
than borrowings). Any borrowings that exceed 331/3% of the value of the
portfolio's total assets by reason of a decline in net assets will be reduced
within three business days to the extent necessary to comply with the 331/3%
limitation. This policy shall not prohibit reverse repurchase agreements or
deposits of assets to margin or guarantee positions in futures, options, swaps
or forward contracts, or the segregation of assets in connection with such
contracts.
3. Purchase or sell physical commodities (but this shall not prevent the
portfolio from entering into future contracts and options thereon).
4. Invest more than 25% of the portfolio's total 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' acceptance.
5. Lend any security although the portfolio may lend portfolio securities
provided that the aggregate of such loans do not exceed 331/3% of the value of
the portfolio's total assets. The portfolio may purchase money market
securities, enter into repurchase agreements and acquire publicly distributed
or privately placed debt securities, and purchase debt.
6. Purchase or sell real estate (but this shall not prevent the portfolio
from investing in securities or other instruments backed by real estate,
including mortgage-backed securities, or securities of companies engaged in the
real estate business).
3
<PAGE>
7. Issue senior securities, except as permitted by the 1940 Act.
8. Underwrite securities issued by other persons, except to the extent
that the portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of its
portfolio securities in the ordinary course of pursuing its investment
objective.
Furthermore, the portfolios have adopted the following non-fundamental
restrictions which may be changed by the Board of Directors of the Fund without
shareholder approval:
(A) A portfolio may not purchase additional securities when money
borrowed exceeds 5% of its total assets. This restriction shall not apply to
temporary borrowings until the portfolio's net assets exceed $40,000,000.
(B) A portfolio may not purchase a futures contract or an option thereon,
if, with respect to positions in futures or options on futures which do not
represent bona fide hedging, the aggregate initial margin and premiums on such
options would exceed 5% of the portfolio's net asset value.
(C) 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 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.
(D) A portfolio may not invest in companies for the purpose of exercising
control or management.
(E) A portfolio may not purchase securities of open-end or closed-end
investment companies except (i) in compliance with the 1940 Act; or (ii)
securities of the Reserve Investment Funds.
(F) A portfolio may not purchase securities on margin, except (i) for use
of short-term credit necessary for clearance of purchases of portfolio
securities; and (ii) it may make margin deposits in connection with futures
contracts or other permissible investments.
(G) A portfolio may not mortgage, pledge, hypothecate or, in any manner,
transfer any security owned by the portfolio as security for indebtedness
except as may be necessary in connection with permissible borrowings or
investments and then such mortgaging, pledging or hypothecating may not exceed
331/3% of the portfolio's total assets at the time of borrowing or investment.
(H) A portfolio may not sell securities short, except short sales
"against the box."
/diamond/ WRL GOLDMAN SACHS GROWTH AND
WRL GOLDMAN SACHS SMALL CAP
Each 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. Borrow money except (a) the portfolio may borrow from banks (as
defined in the 1940 Act) or through reverse repurchase agreements in amounts up
to 331/3% of its total assets (including the amount borrowed), (b) the
portfolio may, to the extent permitted by applicable law, borrow up to an
additional 5% of its total assets for temporary purposes, (c) the portfolio may
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of portfolio securities, (d) the portfolio may purchase
securities on margin to the extent permitted by applicable law and (e) the
portfolio may engage in mortgage dollar rolls which are accounted for as
financings.
3. Purchase or sell physical commodities (but this shall not prevent the
portfolio from investing in currency and financial instruments and contracts
that are commodities or commodity contracts).
4. 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.
5. Make loans, except through (a) the purchase of debt obligations in
accordance with the portfolio's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other financial
institutions, and (c) loans of securities as permitted by applicable law.
6. 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).
7. Issue senior securities, except as permitted by the 1940 Act.
4
<PAGE>
8. Underwrite securities issued by other persons, except to the extent
that the portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of its
portfolio securities in the ordinary course of pursuing its investment
objective.
Furthermore, the portfolios have adopted the following non-fundamental
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or policyowner approval:
(A) A portfolio may not invest in companies for the purpose of exercising
control or management.
(B) 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 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.
(C) A portfolio may not purchase additional securities when money
borrowed exceeds 5% of its total assets. This restriction shall not apply to
temporary borrowings until the portfolio's net assets exceed $40,000,000.
(D) A portfolio may not make short sales of securities, except short
sales "against the box."
/diamond/ WRL PILGRIM BAXTER MID CAP 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. Borrow money except for temporary or emergency purposes (not for
leveraging or investment) in an amount exceeding 10% of the value of the
portfolio's total assets. This borrowing provision is included solely to
facilitate the orderly sale of portfolio securities to accommodate substantial
redemption requests if they should occur and is not for investment purposes.
All borrowings in excess of 5% of the portfolio's total assets will be repaid
before making investments.
3. Make loans, except that the portfolio, in accordance with its
investment objectives and policies, may purchase or hold debt securities, and
enter into repurchase agreements as described in the portfolio's prospectus and
this Statement of Additional Information.
4. Purchase or sell real estate, real estate limited partnership
interests, futures contracts, commodities or commodity contracts, except that
this shall not prevent the portfolio from (i) investing in readily marketable
securities of issuers which can invest in real estate or commodities,
institutions that issue mortgages, or real estate investment trusts which deal
in real estate or interests therein, pursuant to the portfolio's investment
objective and policies, and (ii) entering into futures contracts and options
thereon that are listed on a national securities or commodities exchange where,
as a result thereof, no more than 5% of the portfolio's total assets (taken at
market value at the time of entering into the futures contracts) would be
committed to margin deposits on such futures contracts and premiums paid for
unexpired options on such futures contracts; provided that, in the case of an
option that is "in-the-money" at the time of purchase, the "in-the-money"
amount, as defined under the Commodities Futures Trading Commission
regulations, may be excluded in computing the 5% limit. The portfolio (as a
matter of operating policy) will utilize only listed futures contracts and
options thereon.
5. Act as an underwriter of securities of other issuers except as it may
be deemed an underwriter in selling a portfolio security.
6. Issue senior securities, except as permitted by the 1940 Act.
7. 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.
Furthermore, the portfolio has adopted the following non-fundamental
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or policyowner approval:
(A) The portfolio may not invest in companies for the purpose of
exercising control.
(B) The portfolio may not pledge, mortgage or hypothecate assets, except
(i) to secure temporary borrowings as permitted by the portfolio's limitation
on permitted borrowings, or (ii) in connection with permitted transactions
regarding options and futures contracts.
(C) 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 1933 Act, or any successor to such Rule,
Section 4(2) commercial paper or any other securities as to which the Board of
Directors has made a determination as to liquidity, as permitted under the 1940
Act.
(D) Purchase securities of other investment companies except as permitted
by the 1940 Act and the rules and regulations thereunder.
5
<PAGE>
With respect to restriction 7 above, the portfolio may use (with the
consent of the Investment Adviser) industry classifications reflected by
Bloomberg Sub-Groups for the comunications equipment, electronic components and
accessories, and the computer and other data processing service sectors, if
applicable at the time of determination.
/diamond/ WRL ALGER AGGRESSIVE 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. 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.
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/ WRL THIRD AVENUE VALUE
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.
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
6
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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
331/3% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).
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. This restriction shall not apply to transactions involving
selling securities "short against the box."
(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/ WRL VALUE LINE AGGRESSIVE 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 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 banker's acceptances.
3. Invest in commodities or commodity contracts except that the portfolio
may invest in stock index futures contracts and options on stock index futures
contracts.
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. Make loans, except through (a) the purchase of debt obligations in
accordance with the portfolio's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other financial
institutions, provided that repurchase agreements maturing in more than seven
days when taken together with other illiquid investments do not exceed 10% of
the portfolio's assets, and (c) loans of securities as permitted by applicable
law.
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
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 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 ("short against the box"), 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 purchase 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.
(D) The portfolio may not invest more than 10% of its net assets in
illiquid securities. This does not include
7
<PAGE>
securities eligible for resale pursuant to Rule 144A under the Securities Act
of 1933 or any securities for which the Board of Directors or sub-adviser has
made a determination of liquidity, as permitted under the 1940 Act.
(E) The portfolio may not invest in companies for the purpose of
exercising control or management.
(F) The portfolio may not purchase or sell any put or call options or any
combinations thereof, except that the portfolio may write and sell covered call
option contracts on securities owned by the portfolio. The portfolio may also
purchase call options for the purpose of terminating its outstanding
obligations with respect to securities upon which covered call option contracts
have been written (IE., "closing purchase transaction"). The portfolio may also
purchase and sell put and call options on stock index futures contracts.
/diamond/ WRL GE INTERNATIONAL EQUITY
(FORMERLY WRL GE/SCOTTISH EQUITABLE
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 331/3% of the value of the
portfolio's total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that exceed 331/3% of the value of the
portfolio's total assets by reason of a decline in net assets will be reduced
within three business days to the extent necessary to comply with the 331/3%
limitation. This policy shall not prohibit reverse repurchase agreements or
deposits of assets to margin or guarantee positions in futures, options, swaps
or forward contracts, or the segregation of assets in connection with such
contracts.
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
8
<PAGE>
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 Asset
Management Incorporated ("GEAM"), created specifically to serve as a vehicle
for the collective investment of cash balances of the portfolio and other
accounts advised by GEAM, 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 SEC and Bloomberg Inc. In addition, the portfolio may select its own
industry classifications, provided such classifications are reasonable.
/diamond/ WRL JANUS GLOBAL
The portfolio may not, as a matter of fundamental policy:
1. (a) With respect to 75% of the portfolio's assets, invest in the
securities (other than Government securities as defined in the 1940 Act) of any
one issuer if immediately thereafter, more than 5% of the portfolio's total
assets would be invested in securities of that issuer; or (b) with respect to
100% of the portfolio's assets, own more than either (i) 10% in principal
amount of the outstanding debt securities of an issuer, or (ii) 10% of the
outstanding voting securities of an issuer, except that such restrictions shall
not apply to Government securities, bank money market instruments or bank
repurchase agreements.
2. Invest more than 25% of the portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services; for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction, provided that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this shall not
prevent the portfolio from purchasing or selling options, futures, swaps and
forward contracts or from investing in securities or other instruments backed
by physical commodities).
4. Invest directly in real estate or interests in real estate; however,
the portfolio may own debt or equity securities issued by companies engaged in
those businesses.
5. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
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
9
<PAGE>
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/ WRL GREAT COMPANIES -- AMERICA(SM)
WRL GREAT COMPANIES -- TECHNOLOGY(SM)
Each 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 in interest in oil, gas, or other mineral exploration or
development progams, although it may invest in the marketable securities of
companies which invest in or sponsor such programs.
3. 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.)
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. 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.
6. Issue any senior security except as permitted by the 1940 Act.
7. Lend any security or make any other loan if, as a result, more than
331/3% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).
Furthermore, each 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) Each portfolio may not make short sales of securities or maintain a
short position. This restriction shall not apply to transactions involving
selling securities "short against the box."
(B) Each portfolio may not participate on a "joint" or "joint and
several" basis in any trading account in securities.
(C) Each 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.
/diamond/ WRL JANUS GROWTH, WRL C.A.S.E. GROWTH AND WRL AEGON BOND
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
10
<PAGE>
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 policyowner approval:
(A) A portfolio may not, as a matter of non-fundamental policy: (i) enter
into any futures contracts or options on futures contracts for purposes other
than bona fide hedging transactions within the meaning of Commodity Futures
Trading Commission regulations if the aggregate initial margin deposits and
premiums required to establish positions in futures contracts and related
options that do not fall within the definition of bona fide hedging transactions
would exceed 5% of the fair market value of the portfolio's net assets, after
taking into account unrealized profits and losses on such contracts it has
entered into and (ii) enter into any futures contracts or options on futures
contracts if the aggregate amount of the portfolio's commitments under
outstanding futures contracts positions and options on futures contracts would
exceed the market value of its total assets.
(B) A portfolio may not mortgage or pledge any securities owned or held
by the portfolio in amounts that exceed, in the aggregate, 15% of the
portfolio's net assets, provided that this limitation does not apply to reverse
repurchase agreements or in the case of assets deposited to provide margin or
guarantee positions in options, futures contracts, swaps, forward contracts or
other derivative instruments or the segregation of assets in connection with
such transactions.
(C) A portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities sold
short, and provided that transactions in options, futures contracts, swaps,
forward contracts and other derivative instruments are not deemed to constitute
selling securities short.
(D) A portfolio may not purchase securities on margin, except that a
portfolio may obtain such short-term credits as are necessary for the clearance
of transactions, and provided that margin payments and other deposits made in
connection with transactions in options, futures contracts, swaps, forward
contracts, and other derivative instruments shall not be deemed to constitute
purchasing securities on margin.
(E) A portfolio may 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.
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/diamond/ WRL GE U.S. EQUITY
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 331/3% of the value of its total assets (including the amount
borrowed) less liabilities (other than borrowings) at the time the borrowing is
made. Whenever borrowings, including reverse repurchase agreements, of 5% or
more of the portfolio's total assets are outstanding, the portfolio will not
purchase securities.
Furthermore, the portfolio has adopted the following non-fundamental investment
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or 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 GEAM, created
specifically to serve as a vehicle for the collective investment of cash
balances of the portfolio and other accounts advised by GEAM 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,
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except to the extent that exercise by the portfolio 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/ WRL SALOMON ALL CAP
The portfolio may not, as a matter of fundamental policy:
1. Purchase or sell real estate, real estate mortgages, commodities or
commodity contracts; however, the portfolio may: (a) purchase interests in real
estate investment trusts or companies which invest in or own real estate if the
securities of such trusts or companies are registered under the Securities Act
of 1933 and are readily marketable or holding or selling real estate received
in connection with securities it holds; and (b) may enter into futures
contracts, including futures contracts on interest rates, stock indices and
currencies, and options thereon, and may engage in forward currency contracts
and buy, sell and write options on currencies and shall not be prohibited from
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.
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. Borrow money, except that the portfolio may borrow from banks for
investment purposes up to an aggregate of 15% of the value of its total assets
taken at the time of borrowing. The portfolio may borrow for temporary or
emergency purposes an aggregate amount not to exceed 5% of the value of its
total assets at the time of borrowing.
4. Issue senior securities, except as permitted by the 1940 Act.
5. Underwrite securities issued by other persons, except to the extent
that the portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of its
portfolio securities in the ordinary course of pursuing its investment
objective.
6. Make loans, except that the portfolio may purchase debt obligations in
which the portfolio may invest consistent with its investment objectives and
policies or enter into, and make loans of its portfolio securities, as
permitted under the 1940 Act.
Furthermore, the portfolio has adopted the following non-fundamental
restrictions that may be changed by the Board of Directors of the Fund without
shareholder or policyowner approval:
(A) 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.
(B) The portfolio may not invest in companies for the purpose of
exercising control or management.
(C) The portfolio may not sell securities short. This restriction shall
not apply to transactions involving selling securities "short against the box."
/diamond/ WRL DREYFUS MID CAP
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 such issuer.
2. Purchase any securities which would cause more than 25% of the value
of the portfolio's total assets at the time of such purchase to be invested in
the securities of one or more issuers conducting their principal activities in
the same industry. (For purposes of this limitation, U.S. Government
securities, and state or municipal governments and their political subdivisions
are not considered members of any industry. In addition, this limitation does
not apply to investments in domestic banks, including U.S. branches of foreign
banks and foreign branches of U.S. banks.)
3. Borrow money or issue senior securities as defined in the 1940 Act
except that (a) the portfolio may
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<PAGE>
borrow money in an amount not exceeding one-third of the portfolio's total
assets at the time of such borrowings, and (b) the portfolio may issue multiple
classes of shares. The purchase or sale of futures contracts and related
options shall not be considered to involve the borrowing of money or issuance
of senior securities.
4. Make loans or lend securities, if as a result thereof more than
one-third of the portfolio's total assets would be subject to all such loans.
For purposes of this limitation debt instruments and repurchase agreements
shall not be treated as loans.
5. Purchase or sell real estate 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 real estate,
including mortgage loans, or securities of companies that engage in real estate
business or invest or deal in real estate interests therein).
6. Underwrite securities issued by any other person, except to the extent
that the purchase of securities and later disposition of such securities in
accordance with the portfolio's investment program may be deemed an
underwriting.
7. Purchase or sell commodities except that the portfolio may enter into
futures contracts and related options, forward currency contracts and other
similar instruments.
Furthermore, the portfolio has adopted the following non-fundamental
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or policyowner approval:
(A) The portfolio shall 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 futures contracts and options are
not deemed to constitute selling short.
(B) The portfolio shall 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 in connection with
futures contracts and options on futures contracts shall not constitute
purchasing securities on margin.
(C) The portfolio will invest no more than 15% of the value of its net
assets in illiquid securities, including repurchase agreements with remaining
maturities in excess of seven days, time deposits with maturities in excess of
seven days and other securities which are not readily marketable. For purposes
of this limitations, illiquid securities shall not include Section 4(2) paper
and securities which may be resold under Rule 144A under the Securities Act of
1933, provided the Board of Directors, or its delegate, determines that such
securities are liquid based upon the trading market for the specific security.
(D) The portfolio may not invest in securities of other investment
companies, except as they may be acquired as part of a merger, consolidation or
acquisition of assets and except to the extent otherwise permitted by the 1940
Act.
(E) The portfolio shall not purchase any security while borrowings
representing more than 5% of the portfolio's total assets are outstanding. This
restriction shall not apply to temporary borrowings until the portfolio's net
assets exceed $40,000,000.
/diamond/ WRL NWQ VALUE EQUITY
The portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the portfolio in the securities of such issuer exceeds
5% of the value of the portfolio's total assets, or (b) the portfolio owns more
than 10% of the outstanding voting securities of such issuer.
2. Invest more than 25% of the portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services; for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction. In addition, there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Make loans except (i) by purchasing debt securities in accordance with
its investment objectives and policies or by entering into repurchase
agreements or (ii) by lending the portfolio securities to banks, brokers,
dealers and other financial institutions so long as such loans are not
inconsistent with the 1940 Act or the rules and regulations or interpretations
of the SEC thereunder.
4. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments.
5. Purchase or sell real estate or real estate limited partnerships (but
this shall not prevent the portfolio from investing in securities or other
instruments backed by real estate, including mortgage-backed securities, or
securities of companies engaged in the real estate business).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
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
14
<PAGE>
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/ WRL DEAN ASSET ALLOCATION
The portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the portfolio in the securities of such issuer exceeds
5% of the value of the portfolio's total assets, or (b) the portfolio owns more
than 10% of the outstanding voting securities of such issuer.
2. Invest more than 25% of the portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services; for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction. In addition, there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments.
4. Purchase or sell real estate (but this shall not prevent the portfolio
from investing in securities or other instruments backed by real estate,
including mortgage-backed securities, or securities of companies engaged in the
real estate business).
5. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper or debt securities).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
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.
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<PAGE>
(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. 20.)
/diamond/ WRL LKCM STRATEGIC TOTAL RETURN
The portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the portfolio in the securities of such issuer exceeds
5% of the value of the portfolio's total assets, or (b) the portfolio owns more
than 10% of the outstanding voting securities of such issuer.
2. Invest more than 25% of the portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services, for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction. In addition, there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
portfolio from investing in securities or other instruments backed by physical
commodities).
4. Purchase or sell real estate (but this shall not prevent the portfolio
from investing in securities or other instruments backed by real estate,
including mortgage-backed securities, or securities of companies engaged in the
real estate business).
5. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper or debt securities).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
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.
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<PAGE>
/diamond/ WRL J.P. MORGAN REAL ESTATE SECURITIES
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 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 331/3% of the value of the
portfolio's total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that exceed 331/3% of the value of the
portfolio's total assets by reason of the decline in net assets will be reduced
within three business days to the extent necessary to comply with the 331/3%
limitation. This policy shall not prohibit reverse repurchase agreements or
deposits of assets to margin or guarantee positions in futures, options, swaps
or forward contracts, or the segregation of assets in connection with such
contracts.
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 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.
(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/ WRL FEDERATED GROWTH & INCOME
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
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<PAGE>
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 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.
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/diamond/ WRL AEGON BALANCED
The portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the portfolio in the securities of such issuer exceeds
5% of the value of the portfolio's total assets, or (b) the portfolio owns more
than 10% of the outstanding voting securities of such issuer.
2. Invest more than 25% of the portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services, for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction. In addition, there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
portfolio from purchasing or selling options, futures, swaps and forward
contracts or from investing in securities or other instruments backed by
physical commodities).
4. Purchase or sell real estate (but this shall not prevent the portfolio
from investing in securities or other instruments backed by real estate,
including mortgage-backed securities, or securities of companies engaged in the
real estate business).
5. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchase of commercial paper or debt securities).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
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. 20.)
/diamond/ WRL J.P. MORGAN MONEY MARKET
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.
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4. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real estate (including real estate limited partnerships), commodities,
or commodity contracts or interest in oil, gas or mineral exploration or
development programs or leases. However, the portfolio may purchase debt
securities or commercial paper issued by companies which invest in real estate
or interest therein, including real estate investment trusts.
5. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of portfolio securities of the portfolio.
6. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).
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.
/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.
State laws and regulations may impose additional limitations on borrowings.
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
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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 WRL GE International Equity, WRL GE U.S. Equity, WRL VKAM Emerging Growth,
WRL LKCM Strategic Total Return, WRL T. Rowe Price Dividend Growth, WRL T. Rowe
Price Small Cap, WRL Salomon All Cap, WRL Goldman Sachs Growth, WRL Goldman
Sachs Small Cap, WRL Dreyfus Mid Cap and WRL Pilgrim Baxter Mid Cap Growth 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.
/diamond/ BORROWING
Subject to its investment restrictions, 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 WRL GE International
Equity, WRL GE U.S. Equity, WRL T. Rowe Price Small Cap, WRL T. Rowe Price
Dividend Growth, WRL Dreyfus Mid Cap, WRL J. P. Morgan Real Estate Securities,
and WRL Goldman Sachs Small Cap, WRL Goldman Sachs Growth; 15% for WRL Salomon
All Cap; 10% of total assets for the WRL NWQ Value Equity and WRL Pilgrim Baxter
Mid Cap Growth; 5% of total assets for the WRL Third Avenue Value, WRL Great
Companies -- America(SM) and WRL Great Companies -- Technology(SM); and 25% of
total assets for all other portfolios.
To secure borrowings, a portfolio may not mortgage or pledge its securities in
amounts that exceed 15% of its net assets (10% for the WRL NWQ Value Equity and
5% for the WRL Third Avenue Value).
The portfolios with a common Sub-Adviser may also borrow (or lend) money to
other portfolios or funds that permit such transactions and are also advised by
that Sub-Adviser, provided each portfolio or fund seeks and obtains permission
from the SEC. There is no assurance that such permission would be granted.
The WRL Alger Aggressive Growth and WRL Value
Line Aggressive Growth 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.
/diamond/ SHORT SALES
Each portfolio other than WRL Goldman Sachs Small Cap, may sell securities
"short against the box." A short sale is the sale of a security that the
portfolio does not own. A short sale is "against the box" if at all times when
the short position is open, the portfolio owns an equal amount of the
securities sold short or securities convertible into, or exchangeable without
further consideration for, securities of the same issue as the securities sold
short.
/diamond/ FOREIGN SECURITIES
Subject to a portfolio's investment restricitions and policies, 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:
o CURRENCY TRADING COSTS. A portfolio incurs costs in converting foreign
currencies into U.S. dollars, and vice versa.
o 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.
o LESS INFORMATION AVAILABLE. There is generally less public information
available about foreign companies.
o MORE DIFFICULT BUSINESS NEGOTIATIONS. A portfolio may find it
difficult to enforce obligations in foreign countries or to negotiate
favorable brokerage commission rates.
o REDUCED LIQUIDITY/INCREASED VOLATILITY. Some foreign securities are
less liquid and their prices more volatile, than securities of
comparable U.S. companies.
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o SETTLEMENT DELAYS. Settling foreign securities may take longer than
settlements in the U.S.
o HIGHER CUSTODY CHARGES. Custodianship of shares may cost more for
foreign securities than it does for U.S. securities.
o 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.
o POLITICAL INSTABILITY. In some countries, political instability, war
or diplomatic developments could affect investments.
These risks may be greater in emerging countries or in countries with limited
or emerging markets, In particular, developing countries have relatively
unstable governments, economies based on only a few industries, and securities
markets that trade only a small number of securities. As a result, securities
of issuers located in developing countries may have limited marketability and
may be subject to abrupt or erratic price fluctuations.
At times, a portfolio's foreign securities may be listed on exchanges or traded
in markets which are open on days (such as Saturday) when the portfolio does
not compute a price or accept orders for purchase, sale or exchange of shares.
As a result, the net asset value of the portfolio may be significantly affected
by trading on days when policyholders cannot make transactions.
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.
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 ADS.
FOREIGN EXCHANGE TRANSACTIONS. To the extent a portfolio invests directly in
foreign securities, a portfolio will engage in foreign exchange transactions.
The foreign currency exchange market is subject to little government
regulation, and such transactions generally occur directly between parties
rather than on an exchange or in an organized market. This means that a
portfolio is subject to the full risk of default by a counterparty in such a
transaction. Because such transactions often take place between different time
zones, a portfolio may be required to complete a currency exchange transaction
at a time outside of normal business hours in the counterparty's location,
making prompt settlement of such transaction impossible. This exposes a
portfolio to an increased risk that the counterparty will be unable to settle
the transaction. Although the counterparty in such transactions is often a bank
or other financial institution, currency transactions are generally not covered
by insurance otherwise applicable to such institutions.
/diamond/ FOREIGN BANK OBLIGATIONS
A portfolio may invest in foreign bank obligations and obligations of foreign
branches of domestic banks. These investments present 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/ 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.
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/diamond/ WHEN-ISSUED, DELAYED SETTLEMENT AND FORWARD DELIVERY SECURITIES
Securities may be purchased and sold on a "when- issued," "delayed settlement,"
or "forward (delayed) delivery" basis.
"When-issued" or "forward delivery" refers to securities whose terms are
available, and for which a market exists, but which are not available for
immediate delivery. When-issued or forward delivery transactions may be
expected to occur a month or more before delivery is due.
A portfolio may engage in when-issued transactions to obtain what is considered
to be an advantageous price and yield at the time of the trasaction. 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 or purchase
commitments until payment is made. Such of the 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 a 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/ INVESTMENT FUNDS (WRL GE INTERNATIONAL EQUITY)
The WRL GE International Equity 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.
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. Reverse repurchase
agreements may be used to provide cash to satisfy unusually heavy redemption
requests or for temporary or emergency purposes without necessity of selling
portfolio securities or to earn additional income on portfolio securities such
as U.S. Treasury bills and notes. While a reverse repurchase agreement is
outstanding, the portfolio will segregate with its custodian cash and
appropriate 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. A portfolio will enter into reverse repurchase
agreements only with
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parties that the portfolio's Sub-Adviser deems creditworthy, and that have been
reviewed by the Board of Directors of the Fund. The WRL Goldman Sachs Small Cap
and WRL Goldman Sachs Growth may, together with other registered investment
companies managed by GSAM or its affiliates, transfer uninvested cash balances
into a single joint account, the daily aggregate balance of which will be
invested in one or more repurchase agreements.
/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/ TEMPORARY DEFENSIVE POSITION
For temporary defensive purposes, 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 decrease. Furthermore, when a
portfolio assumes a temporary defensive position it may not be able to achieve
its investment objective.
/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
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 B 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.
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
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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, converts 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
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 would be made 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.
Futures may also be used for managing a portfolio's exposure to change in
securities prices and foreign currencies; as an efficient means of adjusting
its overall exposure to certain markets, or in an effort to enhance income.
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
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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 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
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expiration of the contract. Those factors may affect securities prices
differently from futures prices. Imperfect correlations between a portfolio's
investments and its futures positions may also result from differing levels of
demand in the futures markets and the securities markets, from structural
differences in how futures and securities are traded, and from imposition of
daily price fluctuation limits for futures contracts. A portfolio may buy or
sell futures contracts with a greater or lesser value than the securities it
wishes to hedge or is considering purchasing in order to attempt to compensate
for differences in historical volatility between the futures contract and the
securities, although this may not be successful in all cases. If price changes
in a portfolio's futures positions are poorly correlated with its other
investments, its futures positions may fail to produce desired gains or result
in losses that are not offset by the gains in the portfolio's other
investments.
Because futures contracts are generally settled within a day from the date they
are closed out, compared with longer settlement periods for some types of
securities, the futures markets can provide superior liquidity to the
securities markets. Nevertheless, there is no assurance a liquid secondary
market will exist for any particular futures contract at any particular time.
In addition, futures exchanges may establish daily price fluctuation limits for
futures contracts and may halt trading if a contract's price moves upward or
downward more than the limit in a given day. On volatile trading days when the
price fluctuation limit is reached, it may be impossible for a portfolio to
enter into new positions or close out existing positions. If the secondary
market for a futures contract is not liquid because of price fluctuation limits
or otherwise, a portfolio may not be able to promptly liquidate unfavorable
positions and potentially be required to continue to hold a futures position
until the delivery date, regardless of changes in its value. As a result, the
portfolio's access to other assets held to cover its futures positions also
could be impaired.
Although futures contracts by their terms call for the delivery or acquisition
of the underlying commodities or a cash payment based on the value of the
underlying commodities, in most cases the contractual obligation is offset
before the delivery date of the contract by buying, in the case of a
contractual obligation to sell, or selling, in the case of a contractual
obligation to buy, an identical futures contract on a commodities exchange.
Such a transaction cancels the obligation to make or take delivery of the
commodities.
Each portfolio intends to comply with guidelines of eligibility for exclusion
from the definition of the term "commodity pool operator" with the CFTC and the
National Futures Association, which regulate trading in the futures markets.
Such guidelines presently require that to the extent that a portfolio enters
into futures contracts or options on a futures position that are not for bona
fide hedging purposes (as defined by the CFTC), the aggregate initial margin
and premiums on these positions (excluding the amount by which options are
"in-the-money") may not exceed 5% of the portfolio's net assets.
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 28. 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 increased by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is similar in some respect
to the purchase of protective put options on portfolio securities. For example,
a portfolio
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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 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
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result in poorer overall performance for a portfolio than if it had not entered
into such contracts. The use of foreign currency forward contracts will not
eliminate fluctuations in the underlying U.S. dollar equivalent value of the
proceeds of or rates of return on a portfolio's foreign currency denominated
portfolio securities.
The matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency denominated asset that
is the subject of the hedging transaction generally will not be precise. In
addition, a portfolio may not always be able to enter into forward contracts at
attractive prices and accordingly may be limited in its ability to use these
contracts in seeking to hedge the portfolio's assets.
Also, with regard to a portfolio's use of cross-hedging transactions, there can
be no assurance that historical correlations between the movement of certain
foreign currencies relative to the U.S. dollar will continue. Thus, at any time
poor correlation may exist between movements in the exchange rates of the
foreign currencies underlying a portfolio's cross-hedges and the movements in
the exchange rates of the foreign currencies in which the portfolio's assets
that are subject of the cross-hedging transactions are denominated.
OPTIONS ON FOREIGN CURRENCIES. A portfolio may buy put and call options and may
write covered put and call options on foreign currencies for hedging purposes
in a manner similar to that in which futures contracts or forward contracts on
foreign currencies may be utilized. For example, a decline in the U.S. dollar
value of a foreign currency in which portfolio securities are denominated will
reduce the U.S. dollar value of such securities, even if their value in the
foreign currency remains constant. In order to protect against such diminutions
in the value of portfolio securities, a portfolio may buy put options on the
foreign currency. If the value of the currency declines, the portfolio will
have the right to sell such currency for a fixed amount in U.S. dollars and
will thereby offset, in whole or in part, the adverse effect on its portfolio
which otherwise would have resulted.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a portfolio may buy call options thereon. The purchase
of such options could offset, at least partially, the effects of the adverse
movements in exchange rates. The purchase of an option on a foreign currency
may constitute an effective hedge against fluctuations in exchange rates,
although, in the event of exchange rate movements adverse to a portfolio's
option position, the portfolio could sustain losses on transactions in foreign
currency options which would require that the portfolio lose a portion or all
of the benefits of advantageous changes in those rates. In addition, in the
case of other types of options, the benefit to a portfolio from purchases of
foreign currency options will be reduced by the amount of the premium and
related transaction costs.
A portfolio may write options on foreign currencies for the same types of
hedging purposes. For example, in attempting to hedge against a potential
decline in the U.S. dollar value of foreign currency denominated securities due
to adverse fluctuations in exchange rates, a portfolio could, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurs, the option will most likely not be exercised and the
diminution in value of portfolio securities will be offset by the amount of the
premium received.
Similarly, instead of purchasing a call option to attempt to hedge against a
potential increase in the U.S. dollar cost of securities to be acquired, a
portfolio could write a put option on the relevant currency which, if rates
move in the manner projected, will expire unexercised and allow the portfolio
to hedge the increased cost up to the amount of premium. As in the case of
other types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium received, and
only if exchange rates move in the expected direction. If that does not occur,
the option may be exercised and the portfolio would be required to buy or sell
the underlying currency at a loss which may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, a portfolio also
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
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the right to acquire and which is denominated in the currency underlying the
option. In such circumstances, the portfolio collateralizes the option by
maintaining segregated assets in an amount not less than the value of the
underlying foreign currency in U.S. dollars marked-to-market daily.
A portfolio may buy or write options in privately negotiated transactions on the
types of securities and indices based on the types of securities in which the
portfolio is permitted to invest directly. A portfolio will effect such
transactions only with investment dealers and other financial institutions (such
as commercial banks or savings and loan institutions) deemed creditworthy, and
only pursuant to procedures adopted by the portfolio's Sub- Adviser for
monitoring the creditworthiness of those entities. To the extent that an option
bought or written by a portfolio in a negotiated transaction is illiquid, the
value of an option bought or the amount of the portfolio's obligations under an
option written by the portfolio, as the case may be, will be subject to the
portfolio's limitation on illiquid investments. In the case of illiquid options,
it may not be possible for the portfolio to effect an offsetting transaction at
the time when the portfolio's Sub-Adviser believes it would be advantageous for
the portfolio to do so.
OPTIONS ON SECURITIES. In an effort to reduce fluctuations in net asset value,
a portfolio may write covered put and call options and may buy put and call
options and warrants on securities that are traded on United States and foreign
securities exchanges and over-the-counter ("OTC"). A portfolio also may write
call options that are not covered for cross-hedging purposes. A portfolio may
write and buy options on the same types of securities that the portfolio could
buy directly and may buy options on financial indices as described above with
respect to futures contracts. There are no specific limitations on a
portfolio's writing and buying options on securities.
A put option gives the holder the right, upon payment of a premium, to deliver
a specified amount of a security to the writer of the option on or before a
fixed date at a predetermined price. A call option gives the holder the right,
upon payment of a premium, to call upon the writer to deliver a specified
amount of a security on or before a fixed date at a predetermined price.
A put option written by a portfolio is "covered" if the portfolio (i) maintains
cash not available for investment or other liquid assets with a value equal to
the exercise price in a segregated account with its custodian or (ii) holds a
put on the same security and in the same principal amount as the put written
and the exercise price of the put held is equal to or greater than the exercise
price of the put written. The premium paid by the buyer of an option will
reflect, among other things, the relationship of the exercise price to the
market price and the volatility of the underlying security, the remaining term
of the option, supply and demand and interest rates. A call option written by a
portfolio is "covered" if the portfolio owns the underlying security covered by
the call or has an absolute and immediate right to acquire that security
without additional cash consideration (or has segregated additional cash
consideration with its custodian) upon conversion or exchange of other
securities 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
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put option is exercised, the writer must fulfill the obligation to buy the
underlying security.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is
that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the holder
of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously bought. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit a portfolio to write another call option on the underlying security with
either a different exercise price or expiration date or both or, in the case of
a written put option, will permit a portfolio to write another put option to
the extent that the exercise price thereof is secured by deposited high-grade
liquid assets. Also, effecting a closing transaction will permit the cash or
proceeds from the concurrent sale of any securities subject to the option to be
used for other portfolio investments. If a portfolio desires to sell a
particular security on which the portfolio has written a call option, the
portfolio will effect a closing transaction prior to or concurrent with the
sale of the security.
A portfolio may realize a profit from a closing transaction if the price of the
purchase transaction is less than the premium received from writing the option
or the price received from a sale transaction is more than the premium paid to
buy the option; a portfolio may realize a loss from a closing transaction if
the price of the purchase transaction is less than the premium paid to buy the
option. Because increases in the market of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the repurchase of a call option is likely to be offset in whole or in part
by appreciation of the underlying security owned by the portfolio.
An option position may be closed out only where there exists a secondary market
for an option of the same series. If a secondary market does not exist, it
might not be possible to effect closing transactions in particular options with
the result that a portfolio would have to exercise the options in order to
realize any profit. If a portfolio is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or the portfolio delivers the underlying
security upon exercise. Reasons for the absence of a liquid secondary market
may include the following: (i) there may be insufficient trading interest in
certain options, (ii) restrictions may be imposed by a national securities
exchange on which the option is traded ("Exchange") on opening or closing
transactions or both, (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options or
underlying securities, (iv) unusual or unforeseen circumstances may interrupt
normal operations on an Exchange, (v) the facilities of an Exchange or the
Options Clearing Corporation ("OCC") may not at all times be adequate to handle
current trading volume, or (vi) one or more Exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
would cease to exist, although outstanding options on that Exchange that had
been issued by the OCC as a result of trades on that Exchange would continue to
be exercisable in accordance with their terms.
A portfolio may write options in connection with buy-and-write transactions;
that is, a portfolio may buy a security and then write a call option against
that security. The exercise price of a call option may be below ("in-the-
money"), equal to ("at-the-money") or above ("out-of-the-money") the current
value of the underlying security at the time the option is written.
Buy-and-write transactions using in-the-money call options may be used when it
is expected that the price of the underlying security will remain flat or
decline moderately during the option period. Buy-and-write transactions using
at-the-money call options may be used when it is expected that the price of the
underlying security will remain fixed or advance moderately during the option
period. Buy-and-write transactions using out-of-the-money call options may be
used when it is expected that the premiums received from writing the call
option plus the appreciation in the market price of the underlying security up
to the exercise price will be greater than the appreciation in the price of the
underlying security alone. If the call options are exercised in such
transactions, a portfolio's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
portfolio's purchase price of the security and the exercise price. If the
options are not exercised and the price of the underlying security declines,
the amount of such decline will be offset by the amount of premium received.
The writing of covered put options is similar in terms of risk and return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and a portfolio's gain will be limited to the
premium received. If the market price of the underlying security declines or
otherwise is below the exercise price, the portfolio may elect to close the
position or take delivery of the security at the exercise price and a
portfolio's return will be the premium received from the put options minus the
amount by which the market price of the security is below the exercise price.
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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 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
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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.
SUPRANATIONAL AGENCIES. A portfolio may invest up to 10% of its assets in debt
obligations of supranational agencies such as: the International Bank for
Reconstruction and Development (commonly referred to as the World Bank), which
was chartered to finance development projects in developing member countries;
the European Community, which is a twelve-nation organization engaged in
cooperative economic activities; the European Coal and Steel Community, which
is an economic union of various European nations' steel and coal industries;
and the Asian Development Bank, which is an international development bank
established to lend funds, promote investment and provide technical assistance
to member nations in the Asian and Pacific regions. Debt obligations of
supranational agencies are not considered Government Securities and are not
supported, directly or indirectly, by the U.S. Government.
INDEX OPTIONS. In seeking to hedge all or a portion of its investments, a
portfolio may purchase and write put and call options on securities indices
listed on U.S. or foreign securities exchanges or traded in the
over-the-counter market, which indices include securities held in the
portfolios. The portfolios with such option writing authority may write only
covered options. A portfolio may also use securities index options as a means
of participating in a securities market without making direct purchases of
securities.
A securities index measures the movement of a certain group of securities by
assigning relative values to the securities included in the index. Options on
securities indexes are generally similar to options on specific securities.
Unlike options on securities, however, options on securities indices do not
involve the delivery of an underlying security; the option in the case of an
option on a securities index represents the holder's right to obtain from the
writer in cash a fixed multiple of the amount by which the exercise price
exceeds (in the case of a call) or is less than (in the case of a put) the
closing value of the underlying securities index on the exercise date. A
portfolio may purchase and write put and call options on securities indexes or
securities index futures contracts that are traded on a U.S. exchange or board
of trade or a foreign exchange, to the extent permitted under rules and
interpretations of the Commodity Futures Trading Commission ("CFTC"), as a
hedge against changes in market conditions and interest rates, and for duration
management, and may enter into closing transactions with respect to those
options to terminate existing positions. A securities index fluctuates with
changes in the market values of the securities included in the index.
Securities index options may be based on a broad or narrow market index or on
an industry or market segment.
The delivery requirements of options on securities indices differ from options
on securities. Unlike a securities option, which contemplates the right to take
or make delivery of securities at a specified price, an option on a securities
index gives the holder the right to receive a cash "exercise settlement amount"
equal to (i) the amount, if any, by which the fixed exercise price of the
option exceeds (in the case of a put) or is less than (in the case of a call)
the closing value of the underlying index on the date of exercise, multiplied
by (ii) a fixed "index multiplier." Receipt of this cash amount will depend
upon the closing level of the securities index upon which the option is based
being greater than, in the case of a call, or less than, in the case of a put,
the exercise price of the option. The amount of cash received will be equal to
the difference between the closing price of the index and the exercise price of
the option expressed in dollars times a specified multiple. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount. The writer may offset its position in securities index options
prior to expiration by entering into a closing transaction on an exchange or it
may allow the option to expire unexercised.
The effectiveness of purchasing or writing securities index options as a
hedging technique will depend upon the extent to which price movements in the
portion of a securities portfolio being hedged correlate with price movements
of the securities index selected. Because the value of an index option depends
upon movements in the level of the index rather than the price of a particular
security, whether a portfolio realizes a gain or loss from the purchase of
writing of options on an index depends upon movements in the level of prices in
the market generally or, in the case of certain indices, in an industry or
market segment, rather than movements in the price of a particular security. As
a result, successful use by a portfolio of options on securities indices is
subject to the sub-adviser's ability to predict correctly movements in the
direction of the market generally or of a particular industry. This ability
contemplates different skills and techniques from those used in predicting
changes in the price of individual securities.
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Securities index options are subject to position and exercise limits and other
regulations imposed by the exchange on which they are traded. The ability of a
portfolio to engage in closing purchase transactions with respect to securities
index options depends on the existence of a liquid secondary market. Although a
portfolio will generally purchase or write securities index options only if a
liquid secondary market for the options purchased or sold appears to exist, no
such secondary market may exist, or the market may cease to exist at some
future date, for some options. No assurance can be given that a closing
purchase transaction can be effected when the sub-adviser desires that a
portfolio engage in such a transaction.
WEBS AND OTHER INDEX-RELATED SECURITIES. A portfolio may invest in shares in an
investment company whose shares are known as "World Equity Benchmark Shares" or
"WEBS." WEBS have been listed for trading on the American Stock Exchange, Inc.
The portfolios also may invest in the CountryBaskets Index Fund, Inc., or
another fund the shares of which are the substantial equivalent of WEBS. A
portfolio may invest in S&P Depositary Receipts, or "SPDRs." SPDRs are
securities that represent ownership in a long-term unit investment trust that
holds a portfolio of common stocks designed to track the performance of the S&P
500 Index. A portfolio investing in a SPDR would be entitled to the dividends
that accrue to the S&P 500 stocks in the underlying portfolio, less trust
expenses.
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 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
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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 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,
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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
Subject to a portfolio's investment restrictions and policies, 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 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 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 response to changes in interest rates.
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
Subject to a portfolio's investment restrictions and policies, asset-backed
securities represent interests in pools of consumer loans (generally unrelated
to mortgage loans) and most often are structured as pass-through securities.
Interest and principal payments ultimately depend on payment of the underlying
loans by individuals, although the securities may be supported by letters of
credit or other credit enhancements. The underlying assets (E.G., loans) are
subject to prepayments which shorten the securities' weighted average life and
may lower their returns. If the credit support or enhancement is exhausted,
losses or delays in payment may result if the required payments of principal
and interest are not made. The value of these securities also may change
because of changes in the market's perception of the creditworthiness of the
servicing agent for the pool, the originator of the pool, or the financial
institution providing the credit support or enhancement. A portfolio will
invest its assets in asset-backed securities subject to any limitations set
forth in its investment policies or restrictions.
/diamond/ PASS-THROUGH SECURITIES
Subject to a portfolio's investment restrictions and policies, a portfolio may
invest its net assets in various types of pass-through securities, such as
mortgage-backed securities, asset-backed securities and participation
interests. A pass-through security is a share or certificate of interest in a
pool of debt obligations that have been repackaged by an intermediary, such as
a bank or broker-dealer. The purchaser receives an undivided interest in the
underlying pool of securities. The issuers of the underlying securities make
interest and principal payments to the intermediary which are passed through to
purchasers, such as the portfolio. The most common type of pass-through
securities are mortgage-backed securities. GNMA Certificates are
mortgage-backed securities that evidence an undivided interest in a pool of
mortgage loans. GNMA Certificates differ from traditional bonds in that
principal is paid back monthly by the borrowers over the term of the loan
rather than returned in a lump sum at maturity. The portfolio will generally
purchase "modified pass-through" GNMA Certificates, which entitle the holder to
receive a share of all interest and principal payments paid and owned on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment. GNMA Certificates are backed
as to the timely payment of principal and interest by the full faith and credit
of the U.S. Government.
The Federal Home Loan Mortgage Corporation ("FHLMC") issues two types of
mortgage pass-through securities: mortgage participation certificates ("PCs")
and guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates
in that each PC represents a pro rata share of all interest and principal
payments made and owned on the underlying pool. FHLMC guarantees timely
payments of interest on PCs and the full return of principal. GMCs also
represent a pro rata interest in a pool of mortgages. However, these
instruments pay interest semi-annually and return principal once a
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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.
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 regarding income producing securities in
which a portfolio may invest.)
/diamond/ ILLIQUID AND RESTRICTED/144A SECURITIES
A portfolio may invest up to 15% (the WRL J.P. Morgan Money Market may only
invest up to 10%) of its net assets in illiquid securities (I.E., securities
that are not readily marketable).
In recent years, a large institutional market has developed for certain
securities that are not registered under the Securities Act of 1933 ("1933
Act"). Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend on an
efficient institutional market in which such unregistered securities can
readily be resold or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not dispositive of the
liquidity of such investments.
Rule 144A under the 1933 Act established a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. Institutional markets for restricted securities that
might develop as a result of Rule 144A could provide both readily ascertainable
values for restricted securities and the ability to liquidate an investment in
order to satisfy share redemption orders. An insufficient number of qualified
institutional buyers interested in purchasing a Rule 144A-eligible security
held by a portfolio could, however, adversely affect the marketability of such
portfolio security and the portfolio might be unable to dispose of such
security promptly or at reasonable prices.
The Fund's Board of Directors has authorized each portfolio's Sub-Adviser to
make liquidity determinations with respect to Rule 144A securities in
accordance with the guidelines established by the Board of Directors. Under the
guidelines, the portfolio's Sub-Adviser will consider the following factors in
determining whether a Rule 144A security is liquid: 1) the frequency of trades
and quoted prices for the security; 2) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers; 3)
the willingness of dealers to undertake to make a market in the security; and
4) the nature of the marketplace trades, including the time needed to dispose
of the security, the method of soliciting offers and the mechanics of the
transfer. The sale of illiquid securities often requires more time and results
in higher brokerage charges or dealer discounts and other selling expenses than
does the sale of 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/ MONEY MARKET RESERVES
(WRL T. ROWE PRICE SMALL CAP AND
WRL T. ROWE PRICE DIVIDEND GROWTH)
It is expected that WRL T. Rowe Price Dividend Growth and WRL T. Rowe Price
Small Cap portfolios will invest their cash reserves primarily in a money
market fund established for the exclusive use of the T. Rowe Price family of
mutual funds and other clients of T. Rowe Price and Price-Fleming. The Reserve
Investment Fund ("RIF") is a series of Reserve Investment Funds, Inc.
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Additional series may be created in the future. This fund was created and
operates under an Exemptive Order issued by the Securities and Exchange
Commission (Investment Company Act Release No. IC-22770, July 29, 1997).
The fund must comply with the requirements of Rule 2a-7 under the 1940 Act
governing money market funds. The RIF invests at least 95% of its total assets
in prime money market instruments receiving the highest credit rating.
The RIF provides a very effecient means of managing the cash reserves of the
portfolios. While the RIF does not pay an advisory fee to the Investment
Manager, it will incur other expenses. However, the RIF is expected by T. Rowe
Price to operate at a very low expense ratio. The portfolios will only invest
in RIF to the extent it is consistent with their objectives and programs.
RIF is not insured or guaranteed by the U.S. government, and there is no
assurance it will maintain a stable net asset value of $1.00 per share.
/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 WRL Janus Growth, or WRL Janus 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 WRL GE International Equity and WRL GE 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 WRL GE International Equity and WRL GE 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.
WRL Goldman Sachs Growth and WRL Goldman Sachs Small Cap may also purchase
Standard & Poors Depositary Receipts ("SPDRs"). SPDRs are American Stock
Exchange-traded securities that represent ownerhsip in the SPDR Trust, a trust
which has been established to accumulate and hold a portfolio of common stocks
that is intended to track the price performance and dividend yield of the S&P
500.
/diamond/ QUALITY AND DIVERSIFICATION REQUIREMENTS
(WRL J.P. MORGAN MONEY MARKET)
For the purpose of maintaining a stable net asset value per share, the WRL J.P.
Morgan Money Market 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 B. The portfolio may also purchase unrated securities
that are of comparable quality to the rated securities described above as
determined by the Board of Directors. Additionally, if the issuer of a
particular security has issued other securities of comparable priority and
security and which have been rated in accordance with (ii) above, that security
will be deemed to have the same rating as such other rated securities.
In addition, the Board of Directors of the Fund has adopted procedures which
(i) require the Fund's Directors to approve or ratify purchases by the
portfolio of securities (other than U.S. Government securities) that are rated
by only one NRSRO or that are unrated; (ii) require the portfolio to maintain a
dollar-weighted average portfolio maturity of not more than 90 days and to
invest only in securities with a remaining maturity of not more than 13 months;
and (iii) require the portfolio, in the event of certain downgrading of or
defaults on portfolio holdings, to dispose of the holdings, subject in certain
circumstances to a finding by the Fund's Directors that disposing of the
holding would not be in the portfolio's best interest.
/diamond/ BANK AND THRIFT OBLIGATIONS
Bank and thrift obligations in which a portfolio may invest are limited to
dollar-denominated certificates of deposit,
38
<PAGE>
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.
/diamond/ INVESTMENTS IN THE REAL ESTATE INDUSTRY AND REAL ESTATE INVESTMENT
TRUSTS ("REITS")
REITs are pooled investment vehicles which invest primarily in income producing
real estate, or real estate related loans or interests. REITs are generally
classified as equity REITs, mortgage REITs, or hybrid REITs.
Equity REITs invest the majority of their assets directly in real property and
derive income primarily from the collection of rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs invest the majority of their assets in real estate mortgages and
derive income from the collection of interest payments. Hybrid REITs invest
their assets in both real property and mortgages. REITs are not taxed on income
distributed to 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.
39
<PAGE>
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, 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.")
/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
adjustment 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.
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/ DEBT SECURITIES AND FIXED-INCOME INVESTING
Debt securities include securities such as corporate bonds and debentures;
commercial paper; trust preferreds, 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 payment
prospects and principal security for such bonds appear adequate for the present,
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and, in fact, have speculative characteristics. (See Appendix B
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.
40
<PAGE>
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/ 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 B for a description of debt securities rating.)
/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
investment.
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/ 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 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 AND OFFICERS
The Fund is governed by a Board of Directors. Subject to the supervision of the
Board of Directors, the assets of each portfolio are managed by an investment
adviser and sub-advisers, and by portfolio managers. The Board of Directors is
responsible for managing the business and affairs of the Fund and oversees the
operation of the Fund by its officers. It also reviews the management of the
portfolios' assets by the investment adviser and sub-adviser. Information about
the Directors and officers of the Fund is as follows:
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
- - --------------------- -------------------------- -----------------------------------------------
<S> <C> <C>
PETER R. BROWN DIRECTOR Retired (January, 2000 - present); Chairman of the Board,
(DOB 5/10/28), Peter Brown Construction Company (construction contrac-
11180 6th Street East tors and engineers), Largo, Florida (1963 - 2000); Trustee
Treasure Island, Florida 33706 of IDEX Mutual Funds, Rear Admiral (Ret.) U.S. Navy
Reserve, Civil Engineer Corps.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
- - --------------------- -------------------------- -----------------------------------------------
<S> <C> <C>
CHARLES C. HARRIS DIRECTOR Trustee of IDEX Mutual Funds, (March, 1994 - present)
(DOB 7/15/30), former Trustee of IDEX Fund, IDEX II Series Fund and
35 Winston Drive IDEX Fund 3.
Clearwater, Florida 34616
RUSSELL A. KIMBALL, JR. DIRECTOR General Manager, Sheraton Sand Key Resort (resort
(DOB 8/17/44), hotel), Clearwater, Florida (1975 - present)
1160 Gulf Boulevard
Clearwater Beach, Florida 34630
JOHN R. KENNEY(1,2) CHAIRMAN OF THE BOARD Chairman of the Board, Director and Co-CEO of Great
(DOB 2/8/38) OF DIRECTORS AND Companies, L.L.C.; Chairman of the Board of Directors
PRESIDENT (1982 - present), Chief Executive Officer (1982 - present),
President (1978 - 1987 and December, 1992 - 1999),
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), St. Petersburg, Florida; Chairman of the Board of
Directors (September, 1996 - present), WRL Investment
Services, Inc., St. Petersburg, Florida; Chairman of the
Board of Directors (February, 1997 - present), AEGON
Asset Management Services, Inc., St.Petersburg, Florida;
Director (December, 1990 - present); IDEX Management,
Inc., (investment adviser), St. Petersburg, Florida; Trustee
and Chairman (September, 1996 - present) of IDEX
Mutual Funds (investment companies) St. Petersburg,
Florida.
PAT BAIRD DIRECTOR AND EXECUTIVE President and Trustee (November, 1999 - present), IDEX
(DOB 1/19/54) VICE PRESIDENT Mutual Funds; Executive Vice President, Chief Operating
433 Edgewood Road, NE, Officer (February, 1996 - present) Executive Vice
Cedar Rapids, Iowa 52499 President and CFO (February, 1995 - February, 1996),
Vice President, Chief Financial Officer (May, 1992 -
February, 1995), AEGON USA.
ALLAN HAMILTON(1,2) TREASURER, PRINCIPAL Vice President and Controller (1987 - present), Treasurer
(DOB 11/26/56) FINANCIAL OFFICER (February, 1997 - present).
JOHN K. CARTER(1,2) VICE PRESIDENT, Vice President, Secretary and Counsel (December, 1999 -
(DOB 04/24/61) SECRETARY AND COUNSEL present), IDEX Mutual Funds; Vice President, Counsel and
Assistant Secretary (April, 2000 - present) of Idex Investor
Services, Inc., AEGON Asset Management Services, Inc.
and WRL Investment Services, Inc.; Vice President,
Counsel, Compliance Officer and Assistant Secretary
(April, 2000 - present) of Idex Management, Inc. and WRL
Investment Management, Inc.; Vice President and Counsel
(March, 1997 - May 1999), Salomon Smith Barney;
Assistant Vice President, Associate Corporate Counsel
and Trust Officer (September, 1993 - March 1997),
Franklin Templeton Mutual Funds.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
- - --------------------- -------------------------- -----------------------------------------------
<S> <C> <C>
THOMAS E. PIERPAN(1,2) ASSISTANT SECRETARY Vice President, Secretary and Counsel (December, 1997 -
(DOB 10/18/43) AND VICE PRESIDENT December, 1999); Assistant Secretary (March, 1995 -
December, 1997) of WRL Series Funds, Inc.; Vice
President and Assistant Secretary 1999 - present), Vice
President, Counsel and Secretary (December, 1997 -
1999) of IDEX Mutual Funds (mutual fund); Assistant Vice
President, Counsel and Assistant Secretary (November,
1997 - present) of Intersecurities, Inc. (broker-dealer);
Senior Vice President, General Counsel and Assistant
Secretary (April, 2000 - present) of AEGON Equity Group;
Senior Vice President and General Counsel (1999 -
present), Vice President (November, 1993 - present),
Associate General Counsel (February, 1995 - 1997),
Assistant Secretary, (February, 1995 - present) of Western
Reserve Life Assurance of Ohio.
ALAN M. YAEGER(1,2) EXECUTIVE VICE Executive Vice President (June, 1993 - present), Chief
(DOB 10/21/46) PRESIDENT Financial Officer (December, 1995 - present), Actuary
(1972 - present), Western Reserve Life Assurance
Company of Ohio; Director (September, 1996 - present),
WRL Investment Management, Inc. (investment adviser)
St. Petersburg, Florida; Director (September, 1996 -
present), WRL Investment Services, Inc., St. Petersburg,
Florida.
</TABLE>
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Bos 5068, Clearwater, Florida 33758-5068.
(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 $10,000 to each Director
who is not affiliated with the Investment Adviser or the Sub-Advisers
("disinterested Director"). Each disinterested Director also receives $1,500,
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, 1999. The compensation table provides compensation
amounts paid to disinterested Directors of the Fund for the fiscal year ended
December 31, 1999. (Information is not included for WRL Great Companies --
America(SM), WRL Great Companies -- Technology(SM) and WRL Value Line Aggressive
Growth as they had not commenced operations as of December 31, 1999).
DIRECTOR'S FEES PAID - YEAR ENDED DECEMBER 31, 1999
PORTFOLIO AMOUNT PAID
- - --------- -----------
WRL VKAM Emerging Growth $ 8,000
WRL T. Rowe Price Small Cap -0-
WRL Goldman Sachs Small Cap -0-
WRL Alger Aggressive Growth 6,000
WRL GE International Equity(1) -0-
WRL Janus Global 8,000
WRL Third Avenue Value -0-
WRL Dreyfus Mid Cap -0-
WRL Salomon All Cap -0-
WRL Pilgrim Baxter Mid Cap Growth -0-
WRL Janus Growth 11,000
WRL Goldman Sachs Growth -0-
WRL C.A.S.E. Growth 1,000
WRL GE U.S. Equity 1,000
WRL NWQ Value Equity 1,000
WRL T. Rowe Price Dividend Growth -0-
WRL Dean Asset Allocation 2,000
WRL LKCM Strategic Total Return 3,000
WRL Federated Growth & Income 1,000
WRL AEGON Balanced 1,000
WRL J.P. Morgan Real Estate Securities -0-
WRL AEGON Bond 1,000
WRL J.P. Morgan Money Market -0-
- - --------------
(1) Prior to May 1, 2000, this portfolio was named WRL GE/Scottish Equitable
International Equity.
43
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS TOTAL COMPENSATION
AGGREGATE ACCRUED AS ESTIMATED PAID TO DIRECTORS FROM
COMPENSATION FROM PART OF ANNUAL BENEFITS WRL SERIES FUND, INC. AND
NAME OF PERSON, POSITION WRL SERIES FUND, INC. FUND EXPENSES* UPON RETIREMENT IDEX MUTUAL FUNDS
- - ------------------------ --------------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Peter R. Brown, Director $15,500 0 N/A $43,750
Charles C. Harris, Director 15,500 0 N/A 43,750
Russell A. Kimball, Jr., Director 15,500 0 N/A 15,500
</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 Mutual Funds to a disinterested Director or
Trustee on a current basis for services rendered as director. Deferred
compensation amounts will accumulate based on the value of Class A shares of a
portfolio of IDEX Mutual Funds (without imposition of sales charge), as elected
by the Director. As of April 1, 1999, 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") located at 570 Carillon
Parkway, St. Petersburg, FL 33716, 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
N.V., 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 (that commenced operations prior to
that date) on December 16, 1996. The Investment Advisory Agreement provides
that it will continue in effect 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 p. 47.
ADVISORY FEE. The method of computing the investment advisory fee is fully
described in the Fund's prospectus. For the years ended December 31, 1999, 1998
and 1997, the Investment Adviser was paid fees for its services to each
portfolio in the following amounts (information is not included for WRL Value
Line Aggressive Growth, WRL Great Companies -- America(SM) and WRL Great
Companies -- Technology(SM) as these portfolios had not commenced operations as
of December 31, 1999):
44
<PAGE>
ADVISORY FEES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
PORTFOLIO 1999 1998 1997
- - --------- ----------- ----------- -----------
<S> <C> <C> <C>
WRL Alger Aggressive Growth $ 5,873,932 $ 3,361,604 $ 2,249,801
WRL VKAM Emerging Growth 8,946,705 5,408,098 4,075,498
WRL GE International Equity(2) 329,326 275,279 111,702
WRL Janus Global 10,293,952 7,537,671 5,591,818
WRL Janus Growth 25,489,599 18,111,607 13,716,824
WRL Third Avenue Value(3) 145,682 111,928 N/A
WRL C.A.S.E. Growth 669,877 515,902 334,892
WRL GE U.S. Equity (2) 1,177,975 555,341 140,280
WRL NWQ Value Equity(4) 1,214,963 1,458,166 900,818
WRL Dean Asset Allocation 2,623,575 2,710,626 2,079,540
WRL LKCM Strategic Total Return 4,766,336 4,485,018 3,703,670
WRL J.P. Morgan Real Estate Securities(3) 24,531 9,338 N/A
WRL Federated Growth & Income 615,256 578,162 338,267
WRL AEGON Balanced 842,458 680,543 491,901
WRL AEGON Bond(1) 731,366 663,484 479,685
WRL J.P. Morgan Money Market 1,078,993 644,611 514,968
WRL Goldman Sachs Small Cap(4) 11,839 N/A N/A
WRL Goldman Sachs Growth(4) 26,410 N/A N/A
WRL Dreyfus Mid Cap(4) 7,501 N/A N/A
WRL Salomon All Cap(4) 25,424 N/A N/A
WRL T. Rowe Price Dividend Growth(4) 30,980 N/A N/A
WRL T. Rowe Price Small Cap(4) 32,294 N/A N/A
WRL Pilgrim Baxter Mid Cap Growth(4) 76,560 N/A N/A
----------- ----------- -----------
TOTAL $65,035,534 $47,107,378 $34,729,664
=========== =========== ===========
</TABLE>
- - ------------------------------
(1) 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 WRL AEGON Bond (formerly
Bond portfolio) and receives monthly compensation from the Investment
Adviser at the rate of 0.20% of average daily net assets of the portfolio.
(2) Portfolio was previously named WRL GE/Scottish Equitable International
Equity.
(3) Portfolio commenced operations May 1, 1998.
(4) Portfolio commenced operations May 1, 1999.
PAYMENT OF EXPENSES. Under the terms of the Investment Advisory Agreement, the
Investment Adviser is responsible for providing investment advisory services
and furnishing office space for officers and employees of the Investment
Adviser connected with investment management of the portfolios.
Each portfolio pays: all expenses incurred in connection with the formation and
organization of a portfolio, including the preparation (and filing, when
necessary) of the portfolio's contracts, plans, and documents, conducting
meetings of organizers, directors and shareholders; preparing and filing the
post-effective amendment to the Fund's registration statement effecting
registration of a portfolio and its shares under the 1940 Act and the 1933 Act
and all other matters relating to the information and organization of a
portfolio and the preparation for offering its shares; expenses in connection
with ongoing registration or qualification requirements under Federal and state
securities laws; investment advisory fees; pricing costs (including the daily
calculations of net asset value); brokerage commissions and all other expenses
in connection with execution of portfolio transactions, including interest; all
Federal, state and local taxes (including stamp, excise, income and franchise
taxes) and the preparation and filing of all returns and reports in connection
therewith; any compensation, fees, or reimbursements which the Fund pays to its
Directors who are not "interested persons," as that phrase is defined in the
1940 Act, of the Fund or WRL Management; compensation of the Fund's custodian,
administrative and transfer agent, registrar and dividend disbursing agent;
legal, accounting and printing expenses; other administrative, clerical,
recordkeeping and bookkeeping expenses; auditing fees; certain insurance
premiums; services for shareholders (including allocable telephone and
personnel expenses); costs of certificates and the expenses of delivering such
certificates to the purchaser of shares relating thereto; expenses of local
representation in Maryland; fees and/or expenses payable pursuant to any plan
of distribution adopted with respect to the Fund in accordance with Rule 12b-1
under the 1940 Act; expenses of shareholders' meetings and of preparing,
printing, and distributing notices, proxy statements and reports to
shareholders; expenses of preparing and filing reports with Federal and state
regulatory authorities; all costs and expenses, including fees and
disbursements, of counsel and auditors, filing and renewal fees and printing
costs in connection with the filing of any required amendments, supplements or
renewals of registration statement, qualifications or prospectuses under the
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.
45
<PAGE>
The Investment Adviser has voluntarily undertaken, until at least April 30,
2001, to pay expenses on behalf of the portfolios to the extent normal
operating expenses (including investment advisory fees but excluding interest,
taxes, brokerage fees, commissions and extraordinary charges) exceed, as a
percentage of each portfolio's average daily net assets, 1.00% (0.70% for the
WRL AEGON Bond and WRL J.P. Morgan Money Market, 1.20% for the WRL GE
International Equity). The following expenses were paid by the investment
adviser for the fiscal years ended December 31, 1999, 1998, and 1997 (WRL
served as investment adviser for 1996) (there are no expenses included for WRl
Value Line Aggressive Growth, WRL Great Companies -- America(SM) or WRL Great
Companies -- Technology(SM) because these portfolios had not yet commenced
operations as of December 31, 1999):
PORTFOLIO EXPENSES PAID BY INVESTMENT ADVISER
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
PORTFOLIO 1999 1998 1997
- - --------- ------- ------- -------
<S> <C> <C> <C>
WRL Alger Aggressive Growth -0- -0- -0-
WRL VKAM Emerging Growth -0- -0- -0-
WRL GE International Equity 112,088 127,763 179,163
WRL Janus Global -0- -0- -0-
WRL Janus Growth -0- -0- -0-
WRL Third Avenue Value 10,734 14,229 N/A
WRL C.A.S.E. Growth -0- -0- 49,784
WRL GE U.S. Equity -0- -0- 29,464
WRL NWQ Value Equity -0- -0- -0-
WRL Dean Asset Allocation -0- -0- -0-
WRL LKCM Strategic Total Return -0- -0- -0-
WRL J.P. Morgan Real Estate Securities(2) 51,924 28,275 N/A
WRL Federated Growth & Income -0- -0- -0-
WRL AEGON Balanced -0- -0- -0-
WRL AEGON Bond(1) -0- -0- -0-
WRL J.P. Morgan Money Market -0- -0- -0-
WRL Goldman Sachs Small Cap(3) 60,555 N/A N/A
WRL Goldman Sachs Growth(3) 49,677 N/A N/A
WRL Dreyfus Mid Cap(3) 34,541 N/A N/A
WRL Salomon All Cap(3) 53,174 N/A N/A
WRL T. Rowe Price Dividend Growth(3) 46,989 N/A N/A
WRL T. Rowe Price Small Cap(3) 63,542 N/A N/A
WRL Pilgrim Baxter Mid Cap Growth(3) 34,986 N/A N/A
</TABLE>
- - ------------------------------
(1) Prior to January 1, 1998, Janus Capital Corporation served as the
Sub-Adviser for the WRL AEGON Bond.
(2) Portfolio commenced operations on May 1, 1998.
(3) Portfolio commenced operations May 1, 1999.
Effective May 1, 2000, the Investment Adviser has entered into an agreement
with the Fund on behalf of, and pursuant to which, the Investment Adviser will
be reimbursed for operating expenses paid on behalf of a portfolio during the
previous 36 months, but only if, after such reimbursement, the portfolio's
expense ratio does not exceed the expense cap. The agreement has an initial
term through April 30, 2001, and will automatically renew for one-year terms
unless terminated by a 30 day written notice to the Fund.
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. The following Administrative Services fees were paid by the
portfolios for the fiscal year ended December 31, 1999 (there are no fees
included for WRL Value Line Aggressive Growth, WRL Great Companies --
America(SM) or WRL Great Companies --
46
<PAGE>
Technology(SM) because these portfolios had not commenced operations as of
December 31, 1999):
ADMINISTRATIVE SERVICES FEES
PORTFOLIO 1999 1998 1997
- - --------- -------- ------- --------
WRL Alger Aggressive Growth $178,687 $73,408 $122,776
WRL VKAM Emerging Growth 214,882 95,721 166,269
WRL GE International Equity 8,983 3,731 3,901
WRL Janus Global 223,428 99,277 165,294
WRL Janus Growth 306,127 143,999 260,374
WRL Third Avenue Value 2,871 1,139 N/A
WRL C.A.S.E. Growth 30,645 14,345 15,798
WRL GE U.S. Equity 27,038 6,364 3,218
WRL NWQ Value Equity 35,693 18,893 23,307
WRL Dean Asset Allocation 50,791 25,722 41,445
WRL LKCM Strategic Total
Return 89,085 47,197 87,766
WRL J.P. Morgan Real Estate
Securities 384 -0- N/A
WRL Federated Growth &
Income 27,663 12,140 16,773
WRL AEGON Balanced 23,945 10,827 18,333
WRL AEGON Bond 32,651 16,871 31,011
WRL J.P. Morgan Money
Market 13,674 6,378 12,092
WRL Goldman Sachs Small
Cap 175 N/A N/A
WRL Goldman Sachs Growth 279 N/A N/A
WRL Dreyfus Mid Cap 73 N/A N/A
WRL Salomon All Cap 283 N/A N/A
WRL T. Rowe Price Dividend
Growth 217 N/A N/A
WRL T. Rowe Price Small Cap 402 N/A N/A
WRL Pilgrim Baxter Mid Cap
Growth 527 N/A N/A
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 AFSG Securities Corporation (AFSG) located at 4333
Edgewood Road NE, Cedar Rapids, Iowa 52494. The Distribution Plan and related
Agreement were approved by the Fund's Board of Directors, including a majority
of Directors who are not "interested persons" of the Fund (as defined in the
1940 Act) on October 3, 1996 as amended by the Board March 29, 1999, and the
Distribution Plan was approved by the shareholders of each portfolio of the
Fund on December 16, 1996 (by all portfolios that had commenced operations on
that date). AFSG is an affiliate of the Investment Adviser.
Under the Distribution Plan and Distribution Agreement, the Fund, on behalf of
the portfolios, will reimburse AFSG after each calendar month for certain Fund
distribution expenses incurred or paid by AFSG, 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 AFSG 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.
AFSG submits to the Directors of the Fund for approval annual distribution
budgets and quarterly reports of distribution expenses with respect to each
portfolio. AFSG 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 AFSG deems fair and are approved by the Fund's Board
of Directors. AFSG has determined that it will not seek payment by the Fund of
distribution expenses incurred with respect to any portfolio before April 30,
2001. (ISI waived payment by the Fund for the fiscal year ended December 31,
1999.) Prior to AFSG 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
Each Sub-Adviser serves, pursuant to each Sub-Advisory Agreement dated January
1, 1997 (January 1, 1998 with respect to the WRL Third Avenue Value and WRL
AEGON Bond; May 1, 1998 with respect to WRL J.P. Morgan Real Estate Securities,
May 1, 1999 with respect to the WRL T. Rowe Price Small Cap, WRL T. Rowe Price
Dividend Growth, WRL Pilgrim Baxter Mid Cap Growth, WRL Salomon All Cap, WRL
Goldman Sachs Growth, WRL Goldman Sachs Small Cap and WRL Dreyfus Mid Cap) and
May1, 2000 with respect to WRL Value Line Agressive Growth, WRL Great Companies
- - -- America(SM) or WRL Great Companies -- Technology(SM)) 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 (for portfolios that had commenced
operations prior to that date)
47
<PAGE>
(December 9, 1997 with respect to the WRL AEGON Bond). The Sub-Advisory
Agreements provide that they will continue in effect 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. WRL Goldman Sachs Growth, WRL Goldman Sachs Small Cap, WRL
T. Rowe Price Small Cap, WRL T. Rowe Price Dividend Growth, WRL Salomon All
Cap, the WRL Pilgrim Baxter Mid Cap Growth and WRL Dreyfus Mid Cap will
continue in effect for an initial term ending April 30, 2001, and WRL Value
Line Aggressive Growth, WRL Great Companies -- America(SM) and WRL Great
Companies -- Technology(SM) will continue for an initial term ending April 30,
2002, and from year to year thereafter, if approved annually. 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. The
agreements may also be terminated under the term of an Exemptive Order granted
by the SEC under section 6(c) of the 1940 Act from section 15(a) and rule 18f-2
under the 1940 Act (Release #23379).
Pursuant to the Sub-Advisory Agreements, each Sub-Adviser provides investment
advisory assistance and portfolio management advice to the Investment Adviser
for their respective portfolio(s). Subject to review by the Investment Adviser
and the Board of Directors of the Fund, the Sub-Advisers are responsible for
the actual management of their respective portfolio(s) and for making decisions
to buy, sell or hold a particular security. Each Sub-Adviser bears all of its
expenses in connection with the performance of its services under their Sub-
Advisory Agreement such as compensating and furnishing office space for their
officers and employees connected with investment and economic research, trading
and investment management of the respective portfolio(s).
Each Sub-Adviser is a registered investment adviser under the Investment
Advisers Act of 1940, as amended. The Sub-Advisers for the portfolios of the
Fund are:
/five diamonds/
FRED ALGER MANAGEMENT, INC.
Fred Alger Management, Inc. ("Alger") serves as Sub-Adviser to the WRL Alger
Aggressive Growth.
Alger, located at One World Trade Center, Suite 9333, New York, New York 10048,
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 is generally engaged in the business of
rendering investment advisory services to institutions and, to a lesser extent,
individuals. Alger has been engaged in the business of rendering investment
advisory services since 1964 and, as of March 31, 2000, had approximately $21.8
billion under management.
/diamond/ PORTFOLIO MANAGER:
DAVID D. ALGER AND DAVID HYUN are primarily responsible for the day-to-day
management of WRL Alger Aggressive Growth. Mr. Alger has been employed by Alger
Management as Executive Vice President and Director of Research Since 1971 and
as President since 1995. Mr. Hyun has been employed by Alger Management as a
senior research analyst since 1991, as a portfolio manager since 1997, and
Senior Vice President since 1998. Mr. Alger has served as portfolio Manager of
WRL Alger Aggressive Growth since its inception. Mr. Hyun has served as
co-portfolio manager of WRL Alger Aggressive Growth sinceFebruary 1998. Mr.
Alger and Mr. Hyun also serve as portfolio managers for other mutual funds and
investment accounts managed by Alger Management.
/five diamonds/
VAN KAMPEN ASSET
MANAGEMENT INC. (`VKAM")
Van Kampen Asset Management Inc. ("VKAM") serves as Sub-Adviser to WRL VKAM
Emerging Growth.
VKAM, located at 1 Parkview Plaza, P.O. Box 5555 Oakbrook Terrace, Illinois
60181, is a wholly owned subsidiary of Van Kampen Investments Inc., which, in
turn, is an indirect wholly owned subsidiary of Morgan Stanley Dean Witter &
Co., a financial services company.
/diamond/ PORTFOLIO MANAGER:
GARY M. LEWIS leads an investment team and is primarily responsible for the
day-to-day management of WRL VKAM Emerging Growth. Mr. Lewis has been Senior
Vice President of Van Kampen since October 1995. Previously, he served as Vice
President and portfolio manager of Van Kampen from 1989 to October 1995.
/five diamonds/
JANUS CAPITAL CORPORATION
Janus Capital Corporation ("Janus") serves as the Sub-Adviser to WRL Janus
Growth and WRL Janus Global.
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 $261 billion as of
February 1, 2000. Kansas City Southern Industries, Inc. ("KCSI") owns 82% of
Janus indirectly through Stilwell Financial, Inc. KCSI, whose address is 114
West 11th Street, Kansas City, Missouri 64105-1804, is a publicly-traded
holding company with a subsidiary, the
48
<PAGE>
Kansas City Southern Railway Company, is primarily engaged in the
transportation industry. Other KCSI subsidiaries are engaged in financial
services and real estate.
/diamond/ PORTFOLIO MANAGERS:
EDWARD KEELY has served as manager of the WRL Janus Growth portfolio since
January 2000. He previously served as co-portfolio manager of this portfolio
since January 1999. Prior to joining Janus in 1998, Mr. Keely was a senior vice
president of investments at Founders.
HELEN YOUNG HAYES, CFA AND LAURENCE CHANG, CFA have served as co-portfolio
managers of the WRL Janus Global portfolio since January 2000. Ms. Hayes
previously served as manager of this portfolio since its inception. She has
been employed by Janus since 1987.
Mr. Chang has been employed by Janus since 1993. Before joining Janus, Mr.
Chang was a project director at the National Security Archive.
/five diamonds/
EQSF ADVISERS, INC.
EQSF Advisers, Inc. ("EQSF") serves as Sub-Adviser to WRL Third Avenue Value.
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.
/diamond/ PORTFOLIO MANAGER:
MARTIN J. WHITMAN has served as portfolio manager of WRL Third Avenue Value
since inception. Mr. Whitman is Chairman and Chief Executive 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 42 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, Nabors Industries, Inc. an international oil drilling contractor and
Tejon Ranch Company, an agricultural and land development company.
/five diamonds/
C.A.S.E. MANAGEMENT, INC.
C.A.S.E. Management, Inc. ("C.A.S.E.") serves as sub-adviser to WRL C.A.S.E.
Growth.
C.A.S.E., 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. 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.
/five diamonds/
NWQ INVESTMENT MANAGEMENT COMPANY, INC.
NWQ Investment Management Company, Inc. ("NWQ") serves as sub-adviser to WRL
NWQ Value Equity.
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 $5.63 billion in assets under management as
of December 31, 1999.
/diamond/ PORTFOLIO MANAGER:
An investment policy committee is responsible for the day-to-day management of
WRL NWQ Vaue Equity investments. David A. Polak, CFA, Edward C. Friedel, CFA,
James H. Galbreath, CFA, Phyllis G. Thomas, CFA, Jon D. Bosse, CFA, and Justin
T. Clifford constitute the committee.
EDWARD C. FRIEDEL, CFA serves as senior portfolio manager for WRL NWQ Value
Equity. Mr. Friedel has been a managing director and investment
strategist/portfolio manager of NWQ Investment since 1983. Mr. Friedel is a
graduate of the University of California at Berkeley (BS) and Stanford
University (MBA).
/five diamonds/
DEAN INVESTMENT ASSOCIATES
Dean Investment Associates ("Dean") serves as sub-adviser to WRL Dean Asset
Allocation.
Dean, located at 2480 Kettering Tower, Dayton, Ohio 45423-2480, is wholly-owned
by C.H. Dean and Associates, Inc. Founded in 1972, Dean manages portfolios for
individuals and institutional clients worldwide. Dean
49
<PAGE>
provides a full range of investment advisory services and currently has $2.5
billion of assets under management.
/diamond/ PORTFOLIO MANAGERS:
The WRL Dean Asset Allocation is managed by a team of 10 senior investment
professionals (Central Investment Committee), with over 137 years of total
investment experience.
JOHN C. RIAZZI, CFA, has served as the senior portfolio Manager of WRL Dean
Asset Allocation 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 five years.
He received a B.A. in Economics from Kenyon College in 1985 and was awarded the
Chartered Financial Analyst designation in 1993.
/five diamonds/
LUTHER KING CAPITAL
MANAGEMENT CORPORATION
Luther King Capital Management Corporation ("LKCM") serves as sub-adviser to
WRL LKCM Strategic Total Return.
LKCM 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 18 years; as of December 31, 1999, the
total assets managed by Luther King was approximately $6.5 billion.
/diamond/ PORTFOLIO MANAGERS:
LUTHER KING, JR., CFA, AND SCOT HOLLMANN, CFA, have served as portfolio
Managers of the WRL LKCM Strategic Total Return 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.
/five diamonds/
FEDERATED INVESTMENT COUNSELING
Federated Investment Counseling ("Federated") serves as the sub-adviser to WRL
Federated Growth & Income.
Federated, located at Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779, is a wholly-owned subsidiary of Federated Investors, Inc. All of
the voting securities of Federated Investors, Inc. are owned by a trust, the
trustees of which are John F. Donahue, his wife, Rhodora Donahue, and his son,
J. Christopher Donahue.
/diamond/ PORTFOLIO MANAGERS:
STEVEN J. LEHMAN and LINDA A. DUESSEL serve as Co-portfolio Managers of the WRL
Federated Growth & Income. Ms. Duessel has been a portfolio Manager of the WRL
Federated Growth & Income since July, 1996. 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.
Ms. Duessel, Senior Vice President, 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 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.
Federated's disciplined investment selection process is rooted in sound
methodologies backed by fundamental and technical research. At Federated,
success in investment management does not depend solely on the skill of a
single portfolio manager. It is a fusion of individual talents and
state-of-the-art industry tools and resources. Federated's investment process
involves teams of portfolio managers and analysts, and investment decisions are
executed by traders who are dedicated to specific market sectors and who handle
trillions of dollars in annual trading volume.
/five diamonds/
AEGON USA INVESTMENT MANAGEMENT, INC.
AEGON USA Investment Management, Inc. ("AIMI") serves as sub-adviser to the WRL
AEGON Bond and the WRL AEGON Balanced.
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
Mutual Funds. AIMI also manages the general account investment portfolios of
the life insurance subsidiaries of AEGON USA and had in excess of $46 billion
under management as of December 31, 1999.
/diamond/ PORTFOLIO MANAGERS:
CLIFFORD A. SHEETS, CFA AND DAVID R. HALFPAP, CFA have served as co-portfolio
managers of this portfolio since January 2000. Mr. Sheets previously served as
co-portfolio manager of this portfolio since 1998. Mr. Sheets joined AIMI in
1990.
Mr. Halfpap has been employed by AIMI since 1975 and is currently a senior vice
president.
50
<PAGE>
MICHAEL VAN METER has served as the senior portfolio Manager of the WRL AEGON
Balanced 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.
/five diamonds/
J.P. MORGAN INVESTMENT MANAGEMENT INC.
J.P. Morgan Investment Management, Inc. ("J.P. Morgan") serves as sub-adviser
to WRL J.P. Morgan Money Market and WRL J.P. Morgan Real Estate Securities.
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.
/diamond/ PORTFOLIO MANAGERS:
JOHN T. DONOHUE AND MARK SETTLES have served as co-portfolio managers of the
WRL J.P. Morgan Money Market Portfolio since January 2000. Mr. Donohue has been
employed by J.P. Morgan since 1997 and is a portfolio manager in the Fixed
Income Group. He previously served as senior money market trader. Mr. Donohue
was a portfolio manager at Goldman Sachs for 10 years prior to his employment
at J.P. Morgan.
MR. SETTLES is a product portfolio manager in the Short Term Fixed Income Group
at J.P. Morgan. Previously, he spent five years trading dollar and
euro-denominated fixed income products in J.P. Morgan's New York and London
trading desks.
DANIEL P. O'CONNOR has served as the portfolio manager of the WRL J.P. Morgan
Real Estate Securities portfolio since its inception. 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 of Real Estate Securities at INVESCO, an
investment management firm. In that position, Mr. O'Connor was responsible for
developing the firm's REIT investment management process. 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.
/five diamonds/
GE ASSET MANAGEMENT INCORPORATED
GE Asset Management Incorporated ("GEAM") serves as a sub-adviser to WRL GE
International Equity and WRL GE U.S. Equity. Prior to May 1, 2000, GEAM served
as co-sub-adviser to WRL GE/Scottish Equitable International Equity.
GEAM is located at 3003 Summer Street, P.O. Box 7900, Stamford, Connecticut
06904. GEAM is a wholly-owned subsidiary of General Electric Company and a
registered investment adviser. As of December 31, 1999, GEAM oversaw $115.8
billion and managed individual and institutional assets of $91.7 billion, of
which more than $18.2 billion was invested in mutual funds.
/diamond/ PORTFOLIO MANAGERS:
RALPH R. LAYMAN is a Director and Executive Vice President of GEAM. Mr. Layman
manages the overall International Equity Investments for GEAM. He leads a team
of portfolio managers for WRL GE International. Mr. Layman joined GEAM in 1991
as Executive Vice President for International Investments.
EUGENE K. BOLTON is Director and Executive Vice President of GEAM. He manages
U.S. Equity investments for GEAM. He leads a team of portfolio managers for the
overall the WRL GE U.S. Equity and has served in that capacity since its
inception. Mr. Bolton joined GEAM in 1984 as Chief Financial Officer and has
been portfolio manager since 1986. Mr. Bolton is currently a director and
executive vice president of GE Investments.
/five diamonds/
GOLDMAN SACHS ASSET MANAGEMENT
As of September 1, 1999, the Investment Management Division ("IMD") was
established as a new operating division of Goldman, Sachs & Co. and this newly
created entity includes Goldman Sachs Asset Management ("GSAM"). Goldman Sachs
& Co. registered as an investment adviser in 1981. GSAM serves as the sub-
adviser to the WRL Goldman Sachs Growth and WRL Goldman Sachs Small Cap. GSAM
is located at 32 Old Slip, New York, New York 10005. The Goldman Sachs Group,
L.P., which controlled GSAM, merged into the Goldman Sachs Group, Inc. as a
result of an initial public offering.
/diamond/ PORTFOLIO MANAGER:
HERBERT E. EHLERS has served as head of a thirteen person investment team that
has managed the WRL Goldman Sachs Growth since inception. Prior to joining GSAM
in 1997, he was chief investment officer at Liberty Investment Management, Inc.
from 1994-1997.
ROBERT C. JONES, Managing Director, has served as head of an investment team
that has managed the WRL Goldman Sachs Small Cap since inception. Mr. Jones
joined GSAM as a portfolio manager in 1989.
/five diamonds/
51
<PAGE>
SALOMON BROTHERS ASSET
MANAGEMENT INC
Salomon Brothers Asset Management Inc ("SBAM") serves as the sub-adviser to the
WRL Salomon All Cap.
SBAM, located at 7 World Trade Center, New York, NY 10048, is a wholly-owned
subsidiary of Salomon Brothers Holding Company, Inc., which is wholly-owned by
Salomon Smith Barney Holdings Inc., which is, in turn, wholly-owned by
Citigroup.
/diamond/ PORTFOLIO MANAGERS:
ROSS S. MARGOLIES, has managed this portfolio since inception. Mr. Margolies
joined Salomon in 1992.
ROBERT M. DONAHUE, Jr. assists in the day-to-day management of the portfolio.
Prior to joining SBAM in 1997, Mr. Donahue worked as an equity analyst at
Gabelli & Company.
/five diamonds/
THE DREYFUS CORPORATION
The Dreyfus Corporation ("Dreyfus") serves as the sub-adviser to WRL Dreyfus
Mid Cap.
Dreyfus, located at 200 Park Avenue, New York, NY 10166, is a wholly-owned
subsidiary of Mellon Bank, which is a wholly-owned subsidiary of Mellon Bank
Corporation. Dreyfus manages assets in excess of $128 billion, as of December
31, 1999.
/diamond/ PORTFOLIO MANAGER:
JOHN O'TOOLE has served as portfolio manager since its inception and has been
employed by Dreyfus as a portfolio manager since 1994. Mr. O'Toole is a senior
vice president and portfolio manager for Mellon Equity Assocates, LLP, a
wholly-owned subsidiary of Mellon Bank, N.A. He has been with Mellon Bank, N.A.
since 1979.
/five diamonds/
T. ROWE PRICE ASSOCIATES, INC.
T. Rowe Price Associates, Inc. ("T. Rowe Price") serves as sub-Adviser to WRL
T. Rowe Price Small Cap and the WRL T. Rowe Price Dividend Growth.
T. Rowe Price is located at 100 E. Pratt Street, Baltimore, MD 21202.
/diamond/ PORTFOLIO MANAGERS:
TOM HUBER has managed the WRL T. Rowe Price Dividend Growth portfolio since
March, 2000 and heads an Investment Team for this portfolio. He joined T. Rowe
Price in 1994.
RICHARD T. WHITNEY, CFA, has managed the WRL T. Rowe Price Small Cap portfolio
since inception and heads the Investment Team for this portfolio. He joined T.
Rowe Price in 1985.
/five diamonds/
PILGRIM BAXTER AND ASSOCIATES, LTD.
Pilgrim Baxter and Associates, Ltd. ("Pilgrim Baxter") serves as sub-adviser to
the WRL Pilgrim Baxter Mid Cap Growth.
Pilgrim Baxter, located at 825 Duportail Road, Wayne PA 19087, is a
professional investment management firm which, along with its predecessors, has
been in business since 1982. Pilgrim Baxter is a wholly-owned subsidiary of
United Asset Management.
/diamond/ PORTFOLIO MANAGER:
JEFF A. WRONA, CFA, has managed this portfolio since inception. Prior to
joining Pilgrim Baxter, he was a senior portfolio manager at Munder Capital
Management.
/five diamonds/
GREAT COMPANIES, INC.
Great Companies, L.L.C. ("Great Companies") serves as the sub-adviser to WRL
Great Companies -- America(SM) and WRL Great Companies -- Technology(SM).
Great Companies, located at 8550 Ulmerton Road, Largo, FL 33771, is a
professional investment management firm.
James H. Huguet, John R. Kenney (Chairman of the Board and President of the
Fund), and AEGON USA are each a controlling minority shareholder of Great
Companies. Great Companies may be deemed to be an affiliate of the Investment
Adviser.
/diamond/ PORTFOLIO MANAGER:
James H. Huguet and Gerald W. Bollman, CFA have served as co-managers of the
portfolios since inception.
/five diamonds/
VALUE LINE, INC.
Value Line, Inc. ("Value Line") serves as the sub-adviser to WRL Value Line
Aggressive Growth.
Value Line, located at 220 East 42nd Street, New York, New York 10017-5891 also
acts as investment adviser to other mutual funds and furnishes investment
counseling services to private and institutional clients resulting in combined
assets under management of over $5 billion. Value Line was organized in 1982
and is the successor to substantially all of the operations of Arnold Bernhard
& Co., Inc. which with its predecessor has been in business since 1931.
/diamond/ PORTFOLIO MANAGER:
A committee of employees of Value Line, Inc. is jointly and primarily
responsible for the day-to-day management of the portfolio.
52
<PAGE>
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 management by the Sub-Adviser. The table below lists those
percentages by portfolio.
<TABLE>
<CAPTION>
PORTFOLIO PERCENTAGE OF AVERAGE DAILY NET ASSETS
- - --------- --------------------------------------
<S> <C>
WRL Janus Growth 0.40%(1)
WRL AEGON Bond 0.20% (Prior to January 1, 1998, Janus Capital
Corporation, previous Sub-Adviser, received 0.25%)
WRL Janus Global 0.40%(2)
WRL J.P. Morgan Money Market 0.15%
WRL AEGON Balanced 0.40%, less 50% of amount of excess expenses(3)
WRL VKAM Emerging Growth 0.40%, less 50% of amount of excess expenses(3)
WRL LKCM Strategic Total Return 0.40%
WRL Alger Aggressive Growth 0.40%
WRL Dean Asset Allocation 0.40%, less 50% of amount of excess expenses(3)
WRL C.A.S.E. Growth 0.40%
WRL Federated 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
WRL NWQ Value Equity 0.40%, less 50% of amount of excess expenses(3)
WRL GE International Equity 50% of the fees received by the investment adviser(5)
WRL GE U.S. Equity 0.40%
WRL Third Avenue Value 0.40%, less 50% of amount of excess expenses(3)
WRL J.P. Morgan Real Estate Securities 0.40%
WRL T. Rowe Price Small Cap 0.35%
WRL Pilgrim Baxter Mid Cap 0.50% of the first $100 million of portfolio's average
daily net assets; 0.40% of assets in excess of
$100 million (from first dollar)(4)
WRL Salomon All Cap 0.30% of the first $20 million of portfolio's average daily
net assets; 0.50% of the next $20-100 million of
average daily net assets; and 0.40% of average
daily net assets over $100 million(4)
WRL Goldman Sachs Growth 0.50% of the first $50 million of portfolio's average
daily net assets; 0.45% of the next $50-100 million
in assets; and 0.40% of assets in excess of $100 million
after the first year of the contract, the minimum fees will be
$150,000 (in aggregate)(4)
WRL T. Rowe Price Dividend Growth 0.50% of first $100 million of average daily net assets
and 0.40% of assets over $100 million (from first dollar)(4)
WRL Goldman Sachs Small Cap 0.50% after the first year of the contract, minimum fees will
be $150,000
WRL Dreyfus Mid Cap 0.45% of the first $100 million of the portfolio's
average daily net assets; 0.40% of assets in excess
of $100 million (from first dollar)
WRL Value Line Aggressive Growth 0.40%, less 50% of amount of excess expenses(3)
WRL Great Companies -- America(SM) 0.40%, less 50% of amount of excess expenses(3)
WRL Great Companies -- Technology(SM) 0.40%, less 50% of amount of excess expenses(3)
</TABLE>
- - --------------
(1) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the first $3 billion of the portfolio's average daily net assets
(resulting in a net fee of 0.3875%) and 0.25% of assets above $3 billion
(resulting in a net fee of 0.375%). This waiver will terminate on June 25,
2000.
(2) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the portfolio's average daily net assets above $2 billion (resulting in a
net fee of 0.3875%). This waiver will terminate on June 25, 2000.
(3) Excess expenses are those expenses paid by the Investment Adviser on behalf
of a portfolio pursuant to any expense limitation.
(4) The average daily net assets will be determined on a combined basis with
the same name fund managed by the sub-adviser for IDEX Mutual Funds.
(5) Prior to May 1, 2000, Scottish Equitable served as co-manager of this
portfolio and the portfolio was know as WRL GE/Scottish Equitable
International Equity.
53
<PAGE>
The method of computing each Sub-Adviser's fees is set forth above. For the
years ended December 31, 1999, 1998 and 1997 each Sub-Adviser was paid fees for
their services in the following amounts (fees are not included for WRL Value
Line Aggressive Growth, WRL Great Companies - America(SM) or WRL Great Companies
- - - Technology(SM) as these portfolios had not yet commenced operations as of
December 31, 1999):
SUB-ADVISORY FEES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
SUB-ADVISER PORTFOLIO 1999 1998 1997
- - ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Alger WRL Alger Aggressive Growth $2,936,966 $1,680,802 $1,124,900
VKAM WRL VKAM Emerging Growth 4,473,352 2,704,049 2,037,749
Janus WRL Janus Growth(4) 12,744,800 9,055,804 6,858,412
WRL Janus Global(5) 5,146,976 3,768,835 2,795,909
WRL J.P. Morgan Money Market N/A N/A N/A
WRL AEGON Bond(1) 325,052 N/A 239,843
EQSF WRL Third Avenue Value 72,841 55,964 N/A
C.A.S.E. WRL C.A.S.E. Growth 334,939 257,951 167,446
NWQ WRL NWQ Value Equity 607,482 729,083 450,409
Dean WRL Dean Asset Allocation 1,311,787 1,355,313 1,039,770
LKCM WRL LKCM Strategic Total Return 2,383,168 2,242,509 1,851,835
Federated WRL Federated Growth & Income 300,086 287,959 202,218
AIMI WRL AEGON Balanced 421,229 340,271 245,951
WRL AEGON Bond(1) 325,052 294,882 N/A
J.P. Morgan WRL J.P. Morgan Real Estate Securities 12,266 4,669 N/A
WRL J.P. Morgan Money Market 404,622 241,729 193,113
GEIM WRL GE U.S. Equity(2) 588,987 277,671 70,140
WRL GE International Equity(2)(3) 86,818 69,749 27,889
SEIM WRL GE International Equity(2)(3) 77,845 67,890 27,962
GSAM WRL Goldman Sachs Small Cap 6,577 N/A N/A
WRL Goldman Sachs Growth 14,672 N/A N/A
Dreyfus WRL Dreyfus Mid Cap 3,971 N/A N/A
Salomon WRL Salomon All Cap 8,475 N/A N/A
T. Rowe Price WRL T. Rowe Price Dividend Growth 17,211 N/A N/A
WRL T. Rowe Price Small Cap 15,071 N/A N/A
Pilgrim Baxter WRL Pilgrim Baxter Mid Cap Growth 42,533 N/A N/A
</TABLE>
- - ------------------------------
(1) Prior to January 1, 1998, Janus served as sub-adviser to Bond 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 Sub-Adviser to the WRL AEGON Bond (formerly Bond),
and will receive monthly compensation from the Investment Adviser at the
annual rate of 0.20% of average daily net assets of the portfolio.
(2) Prior to May 1, 2000 this portfolio was known as WRL GE/Scottish Equitable
International Equity.
(3) GEIM and SEIM served as Co-sub-advisers for the WRL GE International Equity
until May 1, 2000.
(4) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the first $3 billion of the portfolio's average daily net assets
(resulting in a net fee of 0.3875%) and 0.25% of assets above $3 billion
(resulting in a net fee of 0.375%). This waiver will terminate on June 25,
2000.
(5) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the portfolio's average daily net assets above $2 billion (resulting in a
net fee of 0.3875%). This waiver will terminate on June 25, 2000.
Through June 25, 2000, provided that it continues to serve as sub-adviser for
the portfolios, Janus Capital will compensate WRL for its services in
connection with promotion, marketing and distribution in an amount equal to
0.0375% of the average daily net assets of WRL Janus Growth on the first $3
billion of assets and 0.075% on assets in excess of $3 billion. With respect to
WRL Janus Global, the amount will be equal to 0.0375% of the portfolio's
average daily net assets above $2 billion.
/diamond/ JOINT TRADING ACCOUNTS
Subject to approval by the Fund's Board, the WRL Janus Growth and WRL Janus
Global may transfer uninvested cash balances on a daily basis into certain
joint trading accounts. Assets in the joint trading accounts are
54
<PAGE>
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 WRL Janus Growth and WRL Janus
Global 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.
/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.
The Board is required to review and approve the Code of Ethics for each
Sub-Adviser. Each Sub-Adviser is also 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/ ADMINISTRATIVE AND TRANSFER AGENCY SERVICES
Effective January 1, 1997, the Fund entered into an Administrative Services and
Transfer Agency Agreement with WRL Services located at 570 Carillon Parkway,
St. Petersburg, Florida 33716, 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.
PORTFOLIO TRANSACTIONS AND BROKERAGE
/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 held during the year. The WRL Third Avenue
Value investment policies and objective, which emphasizes long-term holdings,
should tend to keep the number of portfolio transactions relatively low.
Because of this, the WRL Third Avenue Value does not expect its annual
portfolio turnover rate to exceed 50%. The WRL J.P. Morgan Real Estate
Securities 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. Increased turnover results in higher brokerage costs or mark-up
charges for a portfolio; these charges are ultimately borne by the
policyowners.
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.
55
<PAGE>
The following table provides the portfolios' turnover rates for the fiscal
years ended December 31, 1999, 1998 and 1997 (no information is included for
WRL Value Line Aggressive Growth, WRL Great Companies -- America(SM) and WRL
Great Companies -- Technology(SM) as these portfolios had not yet commenced
operations as of December 31, 1999):
PORTFOLIO TURNOVER RATES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
PORTFOLIO 1999 1998 1997
- - --------- ------ ------ ------
<S> <C> <C> <C>
WRL Alger Aggressive Growth 101.71% 117.44% 136.18%
WRL VKAM Emerging Growth 117.72% 99.50% 99.78%
WRL GE/Scottish Equitable International Equity(2) 99.77% 71.74% 54.33%
WRL Janus Global 68.10% 87.36% 97.54%
WRL Janus Growth 70.95% 35.29% 85.88%
WRL Third Avenue Value 9.56% 4.35% N/A
WRL C.A.S.E. Growth 143.52% 205.28% 196.50%
WRL GE U.S. Equity 44.01% 63.08% 92.35%
WRL NWQ Value Equity 34.19% 43.60% 17.28%
WRL Dean Asset Allocation 88.78% 76.62% 63.76%
WRL LKCM Strategic Total Return 45.42% 49.20% 48.20%
WRL J.P. Morgan Real Estate Securities 189.80% 100.80% N/A
WRL Federated Growth & Income 117.14% 97.17% 155.77%
WRL AEGON Balanced 74.88% 83.94% 77.06%
WRL AEGON Bond 26.40% 51.60% 213.03%
WRL J.P. Morgan Money Market(1) N/A N/A N/A
WRL Goldman Sachs Small Cap 340.66% N/A N/A
WRL Goldman Sachs Growth 40.46% N/A N/A
WRL Dreyfus Mid Cap 94.19% N/A N/A
WRL Salomon All Cap 216.29% N/A N/A
WRL T. Rowe Price Dividend Growth 43.76% N/A N/A
WRL T. Rowe Price Small Cap 159.02% N/A N/A
WRL Pilgrim Baxter Mid Cap Growth 155.71% N/A N/A
</TABLE>
- - ------------------------------
(1) WRL J.P. Morgan 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.
(2) This portfolio was previously known as WRL GE/Scottish Equitable
International Equity.
For the year ended December 31, 1997, the Bond portfolio's increase in turnover
rate was the result of portfolio management strategies in trying to maintain
benchmark treasury issues. There was also a significant increase in the
turnover rate for the WRL Federated Growth & Income for the year ended December
31, 1997 because the portfolio changed its investment objective from a utility
based portfolio to a defensive equity portfolio and the portfolio managers
implemented a proprietary defensive equity model in selecting new stocks.
The future annual turnover rates cannot be precisely predicted, although an
annual turnover rate in excess of 100% is not presently anticipated for the WRL
Alger Aggressive Growth, WRL Dean Asset Allocation, WRL Federated Growth &
Income and WRL AEGON Balanced; 50% for the WRL NWQ Value Equity and WRL Third
Avenue Value; 150% for the WRL Janus Growth; and 200% for the WRL Janus Global.
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.
56
<PAGE>
Decisions as to the assignment of portfolio brokerage business for a portfolio
and negotiation of its commission rates are made by the Sub-Adviser, whose
policy is to obtain "best execution" (prompt and reliable execution at the most
favorable security price) of all portfolio transactions. In placing portfolio
transactions, the Sub-Adviser may give consideration to brokers who provide
supplemental investment research, in addition to such research obtained for a
flat fee, to the Sub-Adviser, and pay spreads or commissions to such brokers or
dealers furnishing such services which are in excess of spreads or commissions
which another broker or dealer may charge for the same transaction.
In selecting brokers and in negotiating commissions, the Sub-Adviser considers
such factors as: the broker's reliability; the quality of its execution
services on a continuing basis; the financial condition of the firm; and
research products and services provided, which include: (i) furnishing advice,
either directly or through publications or writings, as to the value of
securities, the advisability of purchasing or selling specific securities and
the availability of securities or purchasers or sellers of securities and (ii)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends and portfolio strategy and products and other
services (such as third party publications, reports and analyses, and computer
and electronic access, equipment, software, information and accessories) that
assist each Sub-Adviser in carrying out its responsibilities.
Supplemental research obtained through brokers or dealers will be in addition
to, and not in lieu of, the services required to be performed by a Sub-Adviser.
The expenses of a Sub-Adviser will not necessarily be reduced as a result of
the receipt of such supplemental information. A Sub-Adviser may use such
research products and services in servicing other accounts in addition to the
respective portfolio. If a Sub-Adviser determines that any research product or
service has a mixed use, such that it also serves functions that do not assist
in the investment decision-making process, the Sub-Adviser will allocate the
costs of such service or product accordingly. The portion of the product or
service that a Sub-Adviser determines will assist it in the investment
decision-making process may be paid for in brokerage commission dollars. Such
allocation may create a conflict of interest for the Sub-Adviser. Conversely,
such supplemental information obtained by the placement of business for a
Sub-Adviser will be considered by and may be useful to the Sub-Adviser in
carrying out its obligations to a portfolio.
When a portfolio purchases or sells a security in the OTC market, the
transaction takes place directly with a principal market-maker, without the use
of a broker, except in those circumstances where, in the opinion of the
Sub-Adviser, better prices and executions are likely to be achieved through the
use of a broker.
Securities held by a portfolio may also be held by other separate accounts,
mutual funds or other accounts for which the Investment Adviser or Sub-Adviser
serves as an adviser, or held by the Investment Adviser or Sub-Adviser for
their own accounts. Because of different investment objectives or other
factors, a particular security may be bought by the Investment Adviser or Sub-
Adviser for one or more clients when one or more clients are selling the same
security. If purchases or sales of securities for a portfolio or other entities
for which they act as investment adviser or for their advisory clients arise
for consideration at or about the same time, transactions in such securities
will be made, insofar as feasible, for the respective entities and clients in a
manner deemed equitable to all. To the extent that transactions on behalf of
more than one client of the Investment Adviser or Sub-Adviser during the same
period may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
On occasions when the Investment Adviser or a Sub-Adviser deems the purchase or
sale of a security to be in the best interests of a portfolio as well as other
accounts or companies, it may to the extent permitted by applicable laws and
regulations, but will not be obligated to, aggregate the securities to be sold
or purchased for 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., One
World Trade Center, Suite 9333, New York, New York 10038; M. J. Whitman, Inc.;
M. J. Whitman Senior Debt Corp., 767 Third Avenue, New York, New York
10017-2023; Van Kampen Funds Inc., 1 Parkview Plaza, P.O. Box 5555, Oakbrook
Terrace, Illinois 60181, Dreyfus Brokerage Services, Inc., 401 North Maile
Drive, Beverly Hills, CA 90210, Dreyfus Investment Services
57
<PAGE>
Corp., Union Trust Building, 501 Grant St., Pittsburg, PA 15219 and AEGON USA
Securities, Inc., P.O. Box 1449, Cedar Rapids, Iowa 52499. As stated above, any
such placement of portfolio business will be subject to the ability of the
broker-dealer to provide best execution and to the Conduct Rules of the
National Association of Securities Dealers, Inc.
COMMISSIONS PAID BY THE PORTFOLIOS
<TABLE>
<CAPTION>
AGGREGATE COMMISSIONS AFFILIATED BROKERAGE COMMISSIONS
YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31,
-------------------------------------- --------------------------------------------------------
PORTFOLIO 1999 1998 1997 1999 % 1998 % 1997 %
- - --------- ----------- ----------- ----------- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
WRL Alger Aggressive Growth(1) $ 907,331 $ 916,267 $ 754,459 $903,540 99.58% $912,105 99.55% $749,587 99.35%
WRL VKAM Emerging Growth(5) 1,305,965 920,884 627,400 9,346 <1% 1,308 < 1% N/A N/A
WRL Janus Global 2,219,248 2,373,255 2,305,145 N/A N/A N/A N/A N/A N/A
WRL Janus Growth 2,717,764 1,023,925 1,367,104 N/A N/A N/A N/A N/A N/A
WRL C.A.S.E. Growth 326,987 323,967 335,147 N/A N/A N/A N/A N/A N/A
WRL Third Avenue Value(4)(7) 7,817 20,572 N/A 7,452 95.33% 20,568 99.98%
WRL Dean Asset
Allocation 521,249 339,951 352,964 N/A N/A N/A N/A N/A N/A
WRL LKCM Strategic
Total Return 513,667 469,460 348,083 N/A N/A N/A N/A N/A N/A
WRL Federated Growth &
Income 281,782 262,012 175,035 N/A N/A N/A N/A N/A N/A
WRL AEGON Balanced 179,262 153,672 105,731 N/A N/A N/A N/A N/A N/A
WRL NWQ Value Equity 168,551 191,139 157,512 N/A N/A N/A N/A N/A N/A
WRL GE International Equity(3) 136,293 121,485 102,616 N/A N/A N/A N/A N/A N/A
WRL GE U.S. Equity(2)(6) 133,539 102,182 39,301 241 <1% 325 <1% N/A N/A
WRL J.P. Morgan Real
Estate Securities(7) 17,545 8,206 N/A N/A N/A N/A N/A N/A N/A
WRL Goldman Sachs Small
Cap(9)(10) 14,335 N/A N/A 158 1.10% N/A N/A N/A N/A
WRL Goldman Sachs
Growth(9)(11) 10,724 N/A N/A 198 1.85% N/A N/A N/A N/A
WRL Dreyfus Mid Cap(9) 3,922 N/A N/A N/A N/A N/A N/A N/A N/A
WRL Salomon All Cap(9) 32,734 N/A N/A N/A N/A N/A N/A N/A N/A
WRL T. Rowe Price Dividend
Growth(9) 9,115 N/A N/A N/A N/A N/A N/A N/A N/A
WRL T. Rowe Price Small Cap(9) 15,525 N/A N/A N/A N/A N/A N/A N/A N/A
WRL Pilgrim Baxter Mid Cap
Growth(9) 26,811 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- - --------------
(1) The percentage of the portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through Fred Alger Company,
Incorporated for the fiscal year ended December 31, 1999, 1998 and 1997
was 98.90%, 99.27% and 98.37%, respectively.
(2) Portfolio commenced operations on January 2, 1997.
(3) Portfolio commenced operatoins January 2, 1997 and was known as WRL
GE/Scottish Equitable International Equity.
(4) The percentage of the portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through M.J. Whitman, Inc.
for the fiscal year ended December 31, 1999, 1998 and 1997 was 88.40%,
97.91%, and N/A, respectively.
(5) The percentage of the portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through Morgan Stanley &
Co., Incorporated for the fiscal year ended December 31, 1999, 1998 and
1997 was 1.06%, < 1% and N/A, respectively.
(6) The percentage of the portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through Paine Webber, Inc.
for the fiscal year ended December 31, 1999, 1998 and 1997 was < 1%, < 1%
and N/A, respectively.
(7) Portfolio commenced operations May 1, 1998.
(8) Portfolio commenced operations January 2, 1998
(9) Portfolio commenced operations May 3, 1999.
(10) The percentage of the portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through Goldman Sachs & Co.
for the fiscal year ended December 31, 1999, 1998 and 1997 was 36.91%, N/A
and N/A, respectively.
(11) The percentage of the portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through Goldman Sachs & Co.
for the fiscal year ended December 31, 1999, 1998 and 1997 was 2.44%, N/A
and N/A, respectively.
WRL Alger Aggressive Growth paid all its affiliated brokerage commissions to
Fred Alger & Company, Incorporated; WRL Third Avenue Value portfolio paid all
affiliated brokerage to M.J. Whitman, Inc.; WRL VKAM Emerging Growth paid all
affiliated brokerage to Morgan Stanley & Co., Incorporated; and WRL GE U.S.
Equity paid all affiliated commissions to Paine Webber, Inc. WRL Goldman Sachs
Small Cap and WRL Goldman Sachs Growth paid all its affiliated commissions to
Goldman Sachs & Co.
The WRL AEGON Bond and the WRL J.P. Morgan Money Market did not pay any
brokerage commissions for the years ended December 31, 1999, 1998, and 1997.
During the fiscal year ended December 31, 1999, WRL AEGON Balanced, WRL VKAM
Emerging Growth, WRL C.A.S.E. Growth, WRL Federated Growth & Income, WRL LKCM
Strategic Total Return, WRL NWQ Value Equity, WRL Dean Asset Allocation and WRL
Dryefus Mid Cap had transactions in the amounts of $68,190,393, $17,302,500,
$237,551,656, $37,9014, 146, $71,811,819, $14,620,351, $11,192,679 and $112,572,
respectively, which resulted in brokerage commissions of $127,677, $2,036,975,
$204,538, $71,676, $115,848, $1,019,464, $21,725 and $190, respectively, that
were directed to brokers for brokerage and research services provided. WRL GE
International Equity, WRL GE U.S. Equity, WRL Janus Growth, WRL T. Rowe Price
Dividend Growth, WRL Goldman Sachs Growth, WRL Salomon All Cap and WRL Pilgrim
Baxter Mid Cap Growth had brokerage commissions in the amounts of $2,707,
$20,309, $56,193, $23,749, $190, $109, $7,714, $1,098 and $518,856,
respectively, that were directed to beokerage and research services provided.
58
<PAGE>
PURCHASE AND REDEMPTION OF SHARES
/diamond/ DETERMINATION OF OFFERING PRICE
Shares of the portfolios are currently sold only to the separate accounts to
fund the benefits under the Policies and the annuity contracts. The portfolios
may, in the future, offer their shares to other insurance company separate
accounts. The separate accounts invest in shares of a portfolio in accordance
with the allocation instructions received from holders of the policies and the
annuity contracts. Such allocation rights are further described in the
prospectuses and disclosure documents for the policies and the annuity
contracts. Shares of the portfolios are sold and redeemed at their respective
net asset values as described in the prospectus.
/diamond/ NET ASSET VALUATION
As stated in the prospectus, the net asset value of the portfolios' shares is
ordinarily determined, once daily, as of the close of the regular session of
business on the New York Stock Exchange ("Exchange") (usually 4:00 p.m.,
Eastern Time) on each day the Exchange is open. (Currently the Exchange is
closed on New Year's Day, Martin Luther King's Birthday, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.) The per share net asset value of a portfolio is determined by
dividing the total value of the securities and other assets, less liabilities,
by the total number of shares outstanding. In determining net asset value,
securities listed on the national securities exchanges and traded on the NASDAQ
National Market are valued at the closing prices on such markets, or if such a
price is lacking for the trading period immediately preceding the time of
determination, such securities are valued at their current bid price. Foreign
securities and currencies are converted to U.S. dollars using the exchange rate
in effect at the close of the Exchange. Other securities for which quotations
are not readily available are valued at fair values as determined in good faith
by a portfolio's Investment Adviser under the supervision of the Fund's Board
of Directors. Money market instruments maturing in 60 days or less are valued
on the amortized cost basis. Values of gold bullion held by a portfolio are
based upon daily quotes provided by banks or brokers dealing in such
commodities.
CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief description of how performance is calculated.
The following sections describe how performance data is calculated in greater
detail.
/diamond/ TOTAL RETURN
Total return quotations for each of the portfolios are computed by finding the
average annual compounded rates of return over the relevant periods that would
equate the initial amount invested to the ending redeemable value, according to
the following equation:
P (1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value (at the end
of the applicable period of a hypothetical
$1,000 payment made at the beginning
of the applicable period)
The total return quotation calculations for a portfolio reflect the deduction
of a proportionate share of the portfolio's investment advisory fee and
portfolio expenses and assume that all dividends and capital gains during the
period are reinvested in the portfolio when made. The calculations also assume
a complete redemption as of the end of the particular period.
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 WRL J.P. Morgan Money Market yield,
see "Yield Quotations - WRL J.P. Morgan Money Market ", 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:
59
<PAGE>
a-b
YIELD = 2 [ ( --- + 1)6 - 1]
cd
Where: a = dividends and interest earned dur-
ing the period by the portfolio
b = expenses accrued for the period
(net of reimbursement)
c = the average daily number of shares
outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per
share on the last day of the period
The yield of the WRL AEGON Bond as computed above for the thirty day period
ended December 31, 1998 was 5.26%.
/diamond/ YIELD QUOTATIONS - WRL J.P. MORGAN MONEY MARKET
From time to time the WRL J.P. Morgan 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 WRL J.P. Morgan Money Market for the seven-day period ended
December 31, 1998, was 4.96% and was equivalent to a compound effective yield
of 5.08%. The current yield for the WRL J.P. Morgan Money Market 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 WRL J.P. Morgan Money Market 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 WRL J.P. Morgan 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 WRL J.P. Morgan Money Market'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 WRL J.P. Morgan Money Market, 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 either qualified, and expects to continue to qualify, for
treatment as a regulated investment company ("RIC") under the Internal Revenue
Code of 1986, as amended (the "Code"). In order to qualify for that treatment,
a portfolio must distribute to its Policyowners for each taxable year at least
90% of its investment company taxable income ("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) 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 (3) 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. If each portfolio qualifies as a regulated
60
<PAGE>
investment company and distributes to its shareholders substantially all of its
net income and net capital gains, then each portfolio should have little or no
income taxable to it under the Code.
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 generally includes all securities of the same issuer). For
purposes of section 817(h), all securities of the same issuer, all interests in
the same real property project, and all interest in the same commodity are
treated as a single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities and political
subdivisions all will be considered securities issued by the same issuer.
If a portfolio fails to qualify as a regulated investment company, the
portfolio will be subject to federal, and possibly state, corporate taxes on
its taxable income and gains (without any deduction for its distributions to
its shareholders) and distributions to its shareholders will constitute
ordinary income to the extent of such Fund's available earnings and profits.
Owners of variable life insurance and annuity contracts which have invested in
such a portfolio might be taxed currently on the investment earnings under
their contracts and thereby lose the benefit of tax deferral. In addition, if a
portfolio failed to comply with the diversification requirements of section
817(h) of the Code and the regulations thereunder, owners of variable life
insurance and annuity contracts which have invested in the portfolio could be
taxed on the investment earnings under their contracts and thereby lose the
benefit of tax deferral. For additional information concerning the consequences
of failure to meet the requirements of section 817(h), see the 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, 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.
Foreign Investments - portfolios investing in foreign securities or currencies
(which may include [list portfolios so authorized] may be required to pay
withholding, income or other taxes to foreign governments or U.S. possession.
Foreign tax withholding from dividends and interest, if any, is generally at a
rate between 10% and 35%. The investment yield of any portfolio that invests in
foreign securities or currencies is reduced by these foreign taxes. Holders of
Policies and Annuity Contracts investing in such portfolios bear the cost of
any foreign taxes but will not be able to claim a foreign tax credit or
deduction for these foreign taxes. 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.
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.
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 the portfolio 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. A portfolio, however, may
qualify for, and may make, an election permitted under Section 853 of the Code
so that shareholders may be eligible to claim a credit or deduction on their
Federal income tax returns for, and will be required to treat as part of the
amounts distributed to them, their pro rata portion of qualified taxes paid or
incurred by the portfolio to foreign countries (which taxes relate primarily to
investment income). The portfolio may make an election under Section 853 of the
Code, provided that more than 50% of the value of the portfolio's total assets
at the close of the taxable year consists of
61
<PAGE>
securities in foreign corporations, and the portfolio satisfies applicable
distribution provisions of the Code. The foreign tax credit available to
shareholders is subject to certain limitations imposed by the Code. In addition,
another election is available that would involve marking to market a portfolio's
PFIC stock at the end of each taxable year (and on certain other dates
prescribed in the Code), with the result that unrealized gains are treated as
though they were realized although any such gains recognized will be ordinary
income rather than capital gain. If this election were made, tax at the
portfolio level under the PFIC rules would be eliminated, but a portfolio could,
in limited circumstances, incur nondeductible interest charges. A portfolio's
intention to qualify annually as a regulated investment company may limit a
portfolio's election with respect to PFIC stock.
The foregoing is only a general summary of some of the important Federal income
tax considerations generally affecting the portfolios and their shareholders.
No attempt is made to present a complete explanation of the Federal tax
treatment of the portfolios' activities, and this discussion and the discussion
in the prospectuses and/or statements of additional information for the
Policies and Annuity Contracts are not intended as a substitute for careful tax
planning. Accordingly, potential investors are urged to consult their own tax
advisors for more detailed information and for information regarding any state,
local, or foreign taxes applicable to the policies, annuity contracts and the
holders thereof.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common stock
for each portfolio. The Fund is currently comprised of the following portfolios:
WRL VKAM Emerging Growth, WRL T. Rowe Price Small Cap, WRL Goldman Sachs Small
Cap, WRL Alger Aggressive Growth, WRL Value Line Aggressive Growth, WRL GE
International Equity, WRL Janus Global, WRL Dreyfus Mid Cap, WRL Salomon All
Cap, WRL Pilgrim Baxter Mid Cap Growth, WRL Janus Growth, WRL Goldman Sachs
Growth, WRL C.A.S.E. Growth, WRL GE U.S. Equity, WRL NWQ Value Equity, WRL Great
Companies -- America(SM), WRL Great Companies -- Technology (SM), WRL T. Rowe
Price Dividend Growth, WRL Dean Asset Allocation, WRL LKCM Strategic Total
Return, WRL Federated Growth & Income, WRL AEGON Balanced, WRL J.P. Morgan Real
Estate Securities, WRL AEGON Bond and WRL J.P. Morgan Money Market.
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 WRL Value Line
Aggressive Growth, WRL Great Companies -- America(SM) or WRL Great Companies --
Technology(SM), which commenced operations on May 1, 2000) of the Fund for the
year ended December 31, 1999 and the report of the Fund's independent
accountants are included in the 1999 Annual Report, and are incorporated herein
by reference to such report.
OTHER INFORMATION
/diamond/ INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
PricewaterhouseCoopers LLP, located at 400 North Ashley Street, Suite 2800,
Tampa, Florida 33602, serves as the Fund's independent certified public
accountants. The Fund has engaged PricewaterhouseCoopers LLP to examine, in
accordance with generally accepted auditing standards, the financial statements
of each of the Fund's portfolios.
/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.
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<PAGE>
APPENDIX A
DESCRIPTION OF PORTFOLIO SECURITIES
The following is intended only as a supplement to the information
contained in the Prospectus and should be read only in conjunction with the
Prospectus. Terms defined in the Prospectus and not defined herein have the
same meanings as those in the Prospectus.
1. CERTIFICATE OF DEPOSIT.* A certificate of deposit generally is a
short-term, interest bearing negotiable certificate issued by a commercial bank
or savings and loan association against funds deposited in the issuing
institution.
2. EURODOLLAR CERTIFICATE OF DEPOSIT.* A Eurodollar certificate of
deposit is a short-term obligation of a foreign subsidiary of a U.S. bank
payable in U.S. dollars.
3. FLOATING RATE NOTE.* A floating rate note is debt issued by a
corporation or commercial bank that is typically several years in term but
whose interest rate is reset every one to six months.
4. 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 and 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.
A-2
<PAGE>
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 SEC 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.
A-3
<PAGE>
APPENDIX B
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 capac-
ity to pay principal and interest then for higher rated bonds.
BB, B, and Predominantly speculative with respect to the issuer's capacity to
CC, CC, C meet required interest and principal payments. BB - lowest degree of
speculation; C- the highest degree of speculation. Quality and
protective characteristics outweighed by large uncertainties or major
risk exposure to adverse conditions.
D In default.
</TABLE>
PLUS (+) OR MINUS (-) - The ratings from "AA" to "BBB" may be modified by the
addition of a plus or minus to show relative standing within the major rating
categories.
UNRATED - Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
<TABLE>
<S> <C> <C>
MOODY'S INVESTORS SERVICE, INC. Aaa Highest qualty, 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 Medum-grade obligations; neither highly protected nor poorly
secured. Interest and principal appear adequate for the present but
certain protective elements may be lacking or may be unreliable over
any great length of time.
Ba More unceratin, 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 assur-
ance of timely interest and principal payments or maintenance of
other contract terms over time.
Caa Poor standing, may be in default; elements of danger with respect to
principal or interest payments.
Ca Speculative in a high degree; could be in default or have other
marked short-comings.
C Lowest-rated; extremely poor prospects of ever attaining investment
standing.
</TABLE>
UNRATED - Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is 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.
B-1
<PAGE>
WRL SERIES FUND, INC.
WRL VKAM EMERGING GROWTH
WRL T. ROWE PRICE SMALL CAP
WRL GOLDMAN SACHS SMALL CAP
WRL PILGRIM BAXTER MID CAP GROWTH
WRL ALGER AGGRESSIVE GROWTH
WRL THIRD AVENUE VALUE
WRL GE INTERNATIONAL EQUITY
WRL JANUS GLOBAL
WRL JANUS GROWTH
WRL GOLDMAN SACHS GROWTH
WRL GE U.S. EQUITY
WRL SALOMON ALL CAP
WRL C.A.S.E. GROWTH
WRL DREYFUS MID CAP
WRL NWQ VALUE EQUITY
WRL T. ROWE PRICE DIVIDEND GROWTH
WRL DEAN ASSET ALLOCATION
WRL LKCM STRATEGIC TOTAL RETURN
WRL J.P. MORGAN REAL ESTATE SECURITIES
WRL FEDERATED GROWTH & INCOME
WRL AEGON BALANCED
WRL AEGON BOND
WRL J.P. MORGAN MONEY MARKET
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 570 Carillon Parkway, St. Petersburg, FL 33716 or by calling the
Fund at (800) 851-9777.
Investment Adviser:
WRL INVESTMENT MANAGEMENT, INC.
Sub-Advisers:
VAN KAMPEN ASSET MANAGEMENT INC.
T. ROWE PRICE ASSOCIATES, INC.
GOLDMAN SACHS ASSET MANAGEMENT INC.
PILGRIM BAXTER & ASSOCIATES, LTD.
FRED ALGER MANAGEMENT, INC.
EQSF ADVISERS, INC.
GE INVESTMENT MANAGEMENT INCORPORATED
JANUS CAPITAL CORPORATION
SALOMON BROTHERS ASSET MANAGEMENT INC.
C.A.S.E. MANAGEMENT, INC.
THE DREYFUS CORPORATION
NWQ INVESTMENT MANAGEMENT COMPANY, INC.
DEAN INVESTMENT ASSOCIATES
LUTHER KING CAPITAL MANAGEMENT CORPORATION
J.P. MORGAN INVESTMENT MANAGEMENT INC.
FEDERATED INVESTMENT COUNSELING
AEGON USA INVESTMENT MANAGEMENT, INC.
The date of the Prospectus to which this Statement of Additional Information
relates and the date of this Statement of Additional Information is May 1,
2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page in this Statement
of
Additional Information
-----------------------
<S> <C>
FUND HISTORY 1
INVESTMENT OBJECTIVES AND POLICIES 2
Investment Restrictions 2
WRL VKAM Emerging Growth 2
WRL T. Rowe Price Small Cap 3
WRL Goldman Sachs Small Cap 4
WRL Pilgrim Baxter Mid Cap Growth 5
WRL Alger Aggressive Growth 6
WRL Third Avenue Value 6
WRL GE International Equity 7
WRL Janus Global 8
WRL Janus Growth 9
WRL Goldman Sachs Growth 9
WRL GE U.S. Equity 10
WRL Salomon All Cap 11
WRL C.A.S.E. Growth 11
WRL Dreyfus Mid Cap 12
WRL NWQ Value Equity 13
WRL T. Rowe Price Dividend Growth 15
WRL Dean Asset Allocation 14
WRL LKCM Strategic Total Return 14
WRL J.P. Morgan Real Estate Securities 15
WRL Federated Growth & Income 16
WRL AEGON Balanced 17
WRL AEGON Bond 17
WRL J.P. Morgan Money Market 18
INVESTMENT POLICIES 19
Lending 19
Borrowing 19
Short Sales 20
Foreign Securities 20
Foreign Bank Obligations 21
Forward Foreign Currency Contracts 21
When-Issued, Delayed Settlement and Forward Delivery Securities 21
Investment Funds (WRL GE International Equity) 22
Repurchase and Reverse Repurchase Agreements 22
Temporary Defensive Position 22
U.S. Government Securities 23
Non-Investment Grade Debt Securities 23
Convertible Securities 23
Investments in Futures, Options and Other Derivative Instruments 24
Zero Coupon, Pay-In-Kind and Step Coupon Securities 34
Warrants and Rights 34
Mortgage-Backed Securities 34
Asset-Backed Securities 35
Pass-Through Securities 35
Other Income Producing Securities 35
Illiquid and Restricted/144A Securities 36
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page in this Statement
of
Additional Information
-----------------------
<S> <C>
Money Market Reserves
(WRL T. Rowe Price Small Cap and
WRL T. Rowe Price Dividend Growth) 36
Other Investment Companies 36
Quality and Diversification Requirements
(WRL J.P. Morgan Money Market) 37
Bank and Thrift Obligations 37
Investments in the Real Estate Industry and Real Estate Investment Trusts
("REITs") 38
Variable Rate Master Demand Notes 38
Debt Securities and Fixed-Income Investing 39
High Yield/High-Risk Securities 39
Trade Claims 40
MANAGEMENT OF THE FUND 40
Directors and Officers 40
The Investment Adviser 43
The Sub-Advisers 46
Joint Trading Accounts 54
Personal Securities Transactions 54
Administrative and Transfer Agency Services 54
PORTFOLIO TRANSACTIONS AND BROKERAGE 54
Portfolio Turnover 54
Placement of Portfolio Brokerage 55
PURCHASE AND REDEMPTION OF SHARES 58
Determination of Offering Price 58
Net Asset Valuation 58
CALCULATION OF PERFORMANCE
RELATED INFORMATION 58
Total Return 58
Yield Quotations 58
Yield Quotations - WRL J.P. Morgan Money Market 59
TAXES 59
CAPITAL STOCK OF THE FUND 61
REGISTRATION STATEMENT 61
FINANCIAL STATEMENTS 61
OTHER INFORMATION 61
Independent Certified Public Accountants 61
Custodian 61
Appendix A - Description of Portfolio Securities A-1
Appendix B - Brief Explanation of
Rating Categories B-1
</TABLE>
ii
<PAGE>
/diamond/ FUND HISTORY
The Fund was incorporated under the laws of the State of Maryland on August 21,
1985 and is registered with the Securities and Exchange Commission ("SEC") as
an open-end management investment company.
The Fund offers its shares only for purchase by the separate accounts of life
companies to fund benefits under variable life insurance policies or variable
annuity contracts issued by AUSA Life Insurance Company, Inc. ("AUSA"), PFL
Life Insurance Company ("PFL"), Western Reserve Life Assurance Co. of Ohio
("WRL") Peoples Benefit Life Insurance Company ("Peoples") and Transamerica
Occidental Life Insurance Company ("Transamerica"), (the "Life Companies").
Shares may be offered to other life insurance companies in the future.
Because Fund shares are sold to separate accounts established to receive and
invest premiums received under variable life insurance policies and purchase
payments received under the variable annuity contracts, it is conceivable that,
in the future, it may become disadvantageous for variable life insurance
separate accounts and variable annuity separate accounts of the Life Companies
to invest in the Fund simultaneously. Neither the Life Companies nor the Fund
currently foresees any such disadvantages or conflicts, either to variable life
insurance policyholders or to variable annuity contract owners. Any Life
Company may notify the Fund's Board of a potential or existing conflict. The
Fund's Board will then determine if a material conflict exists and what action,
if any, should be taken in response. Such action could include the sale of Fund
shares by one or more of the separate accounts, which could have adverse
consequences. Material conflicts could result from, for example, (1) changes in
state insurance laws, (2) changes in Federal income tax laws, or (3)
differences in voting instructions between those given by variable life
insurance policyholders and those given by variable annuity contract owners.
The Fund's Board might conclude that separate funds should be established for
variable life and variable annuity separate accounts. If this happens, the
affected Life Companies will bear the attendant expenses of establishing
separate funds. As a result, variable life insurance policyholders and variable
annuity contract owners would no longer have the economies of scale typically
resulting from a larger combined fund.
The Fund offers a separate class of common stock for each portfolio. All shares
of a portfolio have equal voting rights, but only shares of a particular
portfolio are entitled to vote on matters concerning only that portfolio. Each
of the issued and outstanding shares of a portfolio is entitled to one vote and
to participate equally in dividends and distributions declared by the portfolio
and, upon liquidation or dissolution, to participate equally in the net assets
of the portfolio remaining after satisfaction of outstanding liabilities. The
shares of a portfolio, when issued, will be fully paid and nonassessable, have
no preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights. The holders
of more than 50% of the shares of the Fund voting for the election of directors
can elect all of the directors of the Fund if they so choose. In such event,
holders of the remaining shares would not be able to elect any directors.
Only the separate accounts of the Life Companies may hold shares of the Fund
and are entitled to exercise the rights directly as described above. To the
extent required by law, the Life Companies will vote the Fund's shares held in
the separate accounts, including Fund shares which are not attributable to
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 Investment Company Act of 1940, as
amended (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.
1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the WRL VKAM Emerging Growth, WRL T. Rowe Price
Small Cap, WRL Goldman Sachs Small Cap, WRL Alger Aggressive Growth, WRL GE
International Equity, WRL Janus Global, WRL Third Avenue Value, WRL Dreyfus Mid
Cap, WRL Salomon All Cap, WRL Pilgrim Baxter Mid Cap Growth, WRL Janus Growth,
WRL Goldman Sachs Growth, WRL C.A.S.E. Growth, WRL GE U.S. Equity, WRL NWQ
Value Equity, WRL T. Rowe Price Dividend Growth, WRL Dean Asset Allocation, WRL
LKCM Strategic Total Return, WRL Federated Growth & Income, WRL AEGON Balanced,
WRL J.P. Morgan Real Estate Securities, WRL AEGON Bond and WRL J.P. Morgan
Money Market (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 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, its 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 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/ WRL VKAM 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.
2
<PAGE>
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 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/ WRL T. ROWE PRICE SMALL CAP AND
WRL T. ROWE PRICE DIVIDEND 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. Borrow money except for temporary or emergency purposes (not for
leveraging or investment) in an amount exceeding 331/3% of the value of the
portfolio's total assets (including amount borrowed) less liabilities (other
than borrowings). Any borrowings that exceed 331/3% of the value of the
portfolio's total assets by reason of a decline in net assets will be reduced
within three business days to the extent necessary to comply with the 331/3%
limitation. This policy shall not prohibit reverse repurchase agreements or
deposits of assets to margin or guarantee positions in futures, options, swaps
or forward contracts, or the segregation of assets in connection with such
contracts.
3. Purchase or sell physical commodities (but this shall not prevent the
portfolio from entering into future contracts and options thereon).
4. Invest more than 25% of the portfolio's total 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' acceptance.
5. Lend any security although the portfolio may lend portfolio securities
provided that the aggregate of such loans do not exceed 331/3% of the value of
the portfolio's total assets. The portfolio may purchase money market
securities, enter into repurchase agreements and acquire publicly distributed
or privately placed debt securities, and purchase debt.
6. 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).
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7. Issue senior securities, except as permitted by the 1940 Act.
8. Underwrite securities issued by other persons, except to the extent
that the portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of its
portfolio securities in the ordinary course of pursuing its investment
objective.
Furthermore, the portfolios have adopted the following non-fundamental
restrictions which may be changed by the Board of Directors of the Fund without
shareholder approval:
(A) A portfolio may not purchase additional securities when money
borrowed exceeds 5% of its total assets. This restriction shall not apply to
temporary borrowings until the portfolio's net assets exceed $40,000,000.
(B) A portfolio may not purchase a futures contract or an option thereon,
if, with respect to positions in futures or options on futures which do not
represent bona fide hedging, the aggregate initial margin and premiums on such
options would exceed 5% of the portfolio's net asset value.
(C) 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 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.
(D) A portfolio may not invest in companies for the purpose of exercising
control or management.
(E) A portfolio may not purchase securities of open-end or closed-end
investment companies except (i) in compliance with the 1940 Act; or (ii)
securities of the Reserve Investment Funds.
(F) A portfolio may not purchase securities on margin, except (i) for use
of short-term credit necessary for clearance of purchases of portfolio
securities; and (ii) it may make margin deposits in connection with futures
contracts or other permissible investments.
(G) A portfolio may not mortgage, pledge, hypothecate or, in any manner,
transfer any security owned by the portfolio as security for indebtedness
except as may be necessary in connection with permissible borrowings or
investments and then such mortgaging, pledging or hypothecating may not exceed
331/3% of the portfolio's total assets at the time of borrowing or investment.
(H) A portfolio may not sell securities short, except short sales
"against the box."
/diamond/ WRL GOLDMAN SACHS GROWTH AND
WRL GOLDMAN SACHS SMALL CAP
Each 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. Borrow money except (a) the portfolio may borrow from banks (as
defined in the 1940 Act) or through reverse repurchase agreements in amounts up
to 331/3% of its total assets (including the amount borrowed), (b) the
portfolio may, to the extent permitted by applicable law, borrow up to an
additional 5% of its total assets for temporary purposes, (c) the portfolio may
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of portfolio securities, (d) the portfolio may purchase
securities on margin to the extent permitted by applicable law and (e) the
portfolio may engage in mortgage dollar rolls which are accounted for as
financings.
3. Purchase or sell physical commodities (but this shall not prevent the
portfolio from investing in currency and financial instruments and contracts
that are commodities or commodity contracts).
4. 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.
5. Make loans, except through (a) the purchase of debt obligations in
accordance with the portfolio's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other financial
institutions, and (c) loans of securities as permitted by applicable law.
6. 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).
7. Issue senior securities, except as permitted by the 1940 Act.
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8. Underwrite securities issued by other persons, except to the extent
that the portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of its
portfolio securities in the ordinary course of pursuing its investment
objective.
Furthermore, the portfolios have adopted the following non-fundamental
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or policyowner approval:
(A) A portfolio may not invest in companies for the purpose of exercising
control or management.
(B) 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 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.
(C) A portfolio may not purchase additional securities when money
borrowed exceeds 5% of its total assets. This restriction shall not apply to
temporary borrowings until the portfolio's net assets exceed $40,000,000.
(D) A portfolio may not make short sales of securities, except short
sales "against the box."
/diamond/ WRL PILGRIM BAXTER MID CAP 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. Borrow money except for temporary or emergency purposes (not for
leveraging or investment) in an amount exceeding 10% of the value of the
portfolio's total assets. This borrowing provision is included solely to
facilitate the orderly sale of portfolio securities to accommodate substantial
redemption requests if they should occur and is not for investment purposes.
All borrowings in excess of 5% of the portfolio's total assets will be repaid
before making investments.
3. Make loans, except that the portfolio, in accordance with its
investment objectives and policies, may purchase or hold debt securities, and
enter into repurchase agreements as described in the portfolio's prospectus and
this Statement of Additional Information.
4. Purchase or sell real estate, real estate limited partnership
interests, futures contracts, commodities or commodity contracts, except that
this shall not prevent the portfolio from (i) investing in readily marketable
securities of issuers which can invest in real estate or commodities,
institutions that issue mortgages, or real estate investment trusts which deal
in real estate or interests therein, pursuant to the portfolio's investment
objective and policies, and (ii) entering into futures contracts and options
thereon that are listed on a national securities or commodities exchange where,
as a result thereof, no more than 5% of the portfolio's total assets (taken at
market value at the time of entering into the futures contracts) would be
committed to margin deposits on such futures contracts and premiums paid for
unexpired options on such futures contracts; provided that, in the case of an
option that is "in-the-money" at the time of purchase, the "in-the-money"
amount, as defined under the Commodities Futures Trading Commission
regulations, may be excluded in computing the 5% limit. The portfolio (as a
matter of operating policy) will utilize only listed futures contracts and
options thereon.
5. Act as an underwriter of securities of other issuers except as it may
be deemed an underwriter in selling a portfolio security.
6. Issue senior securities, except as permitted by the 1940 Act.
7. 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.
Furthermore, the portfolio has adopted the following non-fundamental
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or policyowner approval:
(A) The portfolio may not invest in companies for the purpose of
exercising control.
(B) The portfolio may not pledge, mortgage or hypothecate assets, except
(i) to secure temporary borrowings as permitted by the portfolio's limitation
on permitted borrowings, or (ii) in connection with permitted transactions
regarding options and futures contracts.
(C) 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 1933 Act, or any successor to such Rule,
Section 4(2) commercial paper or any other securities as to which the Board of
Directors has made a determination as to liquidity, as permitted under the 1940
Act.
(D) Purchase securities of other investment companies except as permitted
by the 1940 Act and the rules and regulations thereunder.
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With respect to restriction 7 above, the portfolio may use (with the
consent of the Investment Adviser) industry classifications reflected by
Bloomberg Sub-Groups for the comunications equipment, electronic components and
accessories, and the computer and other data processing service sectors, if
applicable at the time of determination.
/diamond/ WRL ALGER AGGRESSIVE 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. 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.
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/ WRL THIRD AVENUE VALUE
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.
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
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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
331/3% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).
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. This restriction shall not apply to transactions involving
selling securities "short against the box."
(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/ WRL GE INTERNATIONAL EQUITY
(FORMERLY WRL GE/SCOTTISH EQUITABLE
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 331/3% of the value of the
portfolio's total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that exceed 331/3% of the value of the
portfolio's total assets by reason of a decline in net assets will be reduced
within three business days to the extent necessary to comply with the 331/3%
limitation. This policy shall not prohibit reverse repurchase agreements or
deposits of assets to margin or guarantee positions in futures, options, swaps
or forward contracts, or the segregation of assets in connection with such
contracts.
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
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<PAGE>
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 Asset
Management Incorporated ("GEAM"), created specifically to serve as a vehicle
for the collective investment of cash balances of the portfolio and other
accounts advised by GEAM, 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 SEC and Bloomberg Inc. In addition, the portfolio may select its own
industry classifications, provided such classifications are reasonable.
/diamond/ WRL JANUS GLOBAL
The portfolio may not, as a matter of fundamental policy:
1. (a) With respect to 75% of the portfolio's assets, invest in the
securities (other than Government securities as defined in the 1940 Act) of any
one issuer if immediately thereafter, more than 5% of the portfolio's total
assets would be invested in securities of that issuer; or (b) with respect to
100% of the portfolio's assets, own more than either (i) 10% in principal
amount of the outstanding debt securities of an issuer, or (ii) 10% of the
outstanding voting securities of an issuer, except that such restrictions shall
not apply to Government securities, bank money market instruments or bank
repurchase agreements.
2. Invest more than 25% of the portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services; for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction, provided that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this shall not
prevent the portfolio from purchasing or selling options, futures, swaps and
forward contracts or from investing in securities or other instruments backed
by physical commodities).
4. Invest directly in real estate or interests in real estate; however,
the portfolio may own debt or equity securities issued by companies engaged in
those businesses.
5. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
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
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<PAGE>
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/ WRL JANUS GROWTH, WRL C.A.S.E. GROWTH AND WRL AEGON BOND
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
9
<PAGE>
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 policyowner approval:
(A) A portfolio may not, as a matter of non-fundamental policy: (i) enter
into any futures contracts or options on futures contracts for purposes other
than bona fide hedging transactions within the meaning of Commodity Futures
Trading Commission regulations if the aggregate initial margin deposits and
premiums required to establish positions in futures contracts and related
options that do not fall within the definition of bona fide hedging transactions
would exceed 5% of the fair market value of the portfolio's net assets, after
taking into account unrealized profits and losses on such contracts it has
entered into and (ii) enter into any futures contracts or options on futures
contracts if the aggregate amount of the portfolio's commitments under
outstanding futures contracts positions and options on futures contracts would
exceed the market value of its total assets.
(B) A portfolio may not mortgage or pledge any securities owned or held
by the portfolio in amounts that exceed, in the aggregate, 15% of the
portfolio's net assets, provided that this limitation does not apply to reverse
repurchase agreements or in the case of assets deposited to provide margin or
guarantee positions in options, futures contracts, swaps, forward contracts or
other derivative instruments or the segregation of assets in connection with
such transactions.
(C) A portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities sold
short, and provided that transactions in options, futures contracts, swaps,
forward contracts and other derivative instruments are not deemed to constitute
selling securities short.
(D) A portfolio may not purchase securities on margin, except that a
portfolio may obtain such short-term credits as are necessary for the clearance
of transactions, and provided that margin payments and other deposits made in
connection with transactions in options, futures contracts, swaps, forward
contracts, and other derivative instruments shall not be deemed to constitute
purchasing securities on margin.
(E) A portfolio may 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/ WRL GE U.S. EQUITY
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
10
<PAGE>
instruments backed by real-estate, including mortgage-backed securities, or
securities of companies engaged in the real estate business).
5. Lend any security or make any other loan if, as a result, more than
30% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or repurchase
agreements).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
7. Borrow money or issue senior securities (as defined in the 1940 Act),
except that the portfolio may borrow money from banks for temporary or
emergency purposes (not for leveraging or investment) in an aggregate amount
not exceeding 331/3% of the value of its total assets (including the amount
borrowed) less liabilities (other than borrowings) at the time the borrowing is
made. Whenever borrowings, including reverse repurchase agreements, of 5% or
more of the portfolio's total assets are outstanding, the portfolio will not
purchase securities.
Furthermore, the portfolio has adopted the following non-fundamental investment
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or 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 GEAM, created
specifically to serve as a vehicle for the collective investment of cash
balances of the portfolio and other accounts advised by GEAM 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
portfolio 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/ WRL SALOMON ALL CAP
The portfolio may not, as a matter of fundamental policy:
1. Purchase or sell real estate, real estate mortgages, commodities or
commodity contracts; however, the portfolio may: (a) purchase interests in real
estate investment trusts or companies which invest in or own real estate if the
securities of such trusts or companies are registered under the Securities Act
of 1933 and are readily marketable or holding or selling real estate received
in connection with securities it holds; and (b) may enter into futures
contracts, including futures contracts on interest rates, stock indices and
currencies,
11
<PAGE>
and options thereon, and may engage in forward currency contracts and buy, sell
and write options on currencies and shall not be prohibited from 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.
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. Borrow money, except that the portfolio may borrow from banks for
investment purposes up to an aggregate of 15% of the value of its total assets
taken at the time of borrowing. The portfolio may borrow for temporary or
emergency purposes an aggregate amount not to exceed 5% of the value of its
total assets at the time of borrowing.
4. Issue senior securities, except as permitted by the 1940 Act.
5. Underwrite securities issued by other persons, except to the extent
that the portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of its
portfolio securities in the ordinary course of pursuing its investment
objective.
6. Make loans, except that the portfolio may purchase debt obligations in
which the portfolio may invest consistent with its investment objectives and
policies or enter into, and make loans of its portfolio securities, as
permitted under the 1940 Act.
Furthermore, the portfolio has adopted the following non-fundamental
restrictions that may be changed by the Board of Directors of the Fund without
shareholder or policyowner approval:
(A) 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.
(B) The portfolio may not invest in companies for the purpose of
exercising control or management.
(C) The portfolio may not sell securities short. This restriction shall
not apply to transactions involving selling securities "short against the box."
/diamond/ WRL DREYFUS MID CAP
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 such issuer.
2. Purchase any securities which would cause more than 25% of the value
of the portfolio's total assets at the time of such purchase to be invested in
the securities of one or more issuers conducting their principal activities in
the same industry. (For purposes of this limitation, U.S. Government
securities, and state or municipal governments and their political subdivisions
are not considered members of any industry. In addition, this limitation does
not apply to investments in domestic banks, including U.S. branches of foreign
banks and foreign branches of U.S. banks.)
3. Borrow money or issue senior securities as defined in the 1940 Act
except that (a) the portfolio may borrow money in an amount not exceeding
one-third of the portfolio's total assets at the time of such borrowings, and
(b) the portfolio may issue multiple classes of shares. The purchase or sale of
futures contracts and related options shall not be considered to involve the
borrowing of money or issuance of senior securities.
4. Make loans or lend securities, if as a result thereof more than
one-third of the portfolio's total assets would be subject to all such loans.
For purposes of this limitation debt instruments and repurchase agreements
shall not be treated as loans.
5. Purchase or sell real estate 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 real estate,
including mortgage loans, or securities of companies that engage in real estate
business or invest or deal in real estate interests therein).
6. Underwrite securities issued by any other person, except to the extent
that the purchase of securities and later disposition of such securities in
accordance with the portfolio's investment program may be deemed an
underwriting.
7. Purchase or sell commodities except that the portfolio may enter into
futures contracts and related options, forward currency contracts and other
similar instruments.
Furthermore, the portfolio has adopted the following non-fundamental
restrictions which may be changed by
12
<PAGE>
the Board of Directors of the Fund without shareholder or policyowner approval:
(A) The portfolio shall 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 futures contracts and options are
not deemed to constitute selling short.
(B) The portfolio shall 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 in connection with
futures contracts and options on futures contracts shall not constitute
purchasing securities on margin.
(C) The portfolio will invest no more than 15% of the value of its net
assets in illiquid securities, including repurchase agreements with remaining
maturities in excess of seven days, time deposits with maturities in excess of
seven days and other securities which are not readily marketable. For purposes
of this limitations, illiquid securities shall not include Section 4(2) paper
and securities which may be resold under Rule 144A under the Securities Act of
1933, provided the Board of Directors, or its delegate, determines that such
securities are liquid based upon the trading market for the specific security.
(D) The portfolio may not invest in securities of other investment
companies, except as they may be acquired as part of a merger, consolidation or
acquisition of assets and except to the extent otherwise permitted by the 1940
Act.
(E) The portfolio shall not purchase any security while borrowings
representing more than 5% of the portfolio's total assets are outstanding. This
restriction shall not apply to temporary borrowings until the portfolio's net
assets exceed $40,000,000.
/diamond/ WRL NWQ VALUE EQUITY
The portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the portfolio in the securities of such issuer exceeds
5% of the value of the portfolio's total assets, or (b) the portfolio owns more
than 10% of the outstanding voting securities of such issuer.
2. Invest more than 25% of the portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services; for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction. In addition, there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Make loans except (i) by purchasing debt securities in accordance with
its investment objectives and policies or by entering into repurchase
agreements or (ii) by lending the portfolio securities to banks, brokers,
dealers and other financial institutions so long as such loans are not
inconsistent with the 1940 Act or the rules and regulations or interpretations
of the SEC thereunder.
4. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments.
5. Purchase or sell real estate or real estate limited partnerships (but
this shall not prevent the portfolio from investing in securities or other
instruments backed by real estate, including mortgage-backed securities, or
securities of companies engaged in the real estate business).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
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
13
<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.
/diamond/ WRL DEAN ASSET ALLOCATION
The portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the portfolio in the securities of such issuer exceeds
5% of the value of the portfolio's total assets, or (b) the portfolio owns more
than 10% of the outstanding voting securities of such issuer.
2. Invest more than 25% of the portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services; for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction. In addition, there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments.
4. Purchase or sell real estate (but this shall not prevent the portfolio
from investing in securities or other instruments backed by real estate,
including mortgage-backed securities, or securities of companies engaged in the
real estate business).
5. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper or debt securities).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
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. 20.)
/diamond/ WRL LKCM STRATEGIC TOTAL RETURN
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.
14
<PAGE>
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
portfolio from investing in securities or other instruments backed by physical
commodities).
4. Purchase or sell real estate (but this shall not prevent the portfolio
from investing in securities or other instruments backed by real estate,
including mortgage-backed securities, or securities of companies engaged in the
real estate business).
5. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper or debt securities).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
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/ WRL J.P. MORGAN REAL ESTATE SECURITIES
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 of deposit,
bankers' acceptances, debentures or other securities, whether or not the
purchase is made upon the original issuance of the securities.
15
<PAGE>
5. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
6. Borrow money except for temporary or emergency purposes (not for
leveraging or investment) in an amount not exceeding 331/3% of the value of the
portfolio's total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that exceed 331/3% of the value of the
portfolio's total assets by reason of the decline in net assets will be reduced
within three business days to the extent necessary to comply with the 331/3%
limitation. This policy shall not prohibit reverse repurchase agreements or
deposits of assets to margin or guarantee positions in futures, options, swaps
or forward contracts, or the segregation of assets in connection with such
contracts.
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 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.
(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/ WRL FEDERATED GROWTH & INCOME
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 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
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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/ WRL AEGON BALANCED
The portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the portfolio in the securities of such issuer exceeds
5% of the value of the portfolio's total assets, or (b) the portfolio owns more
than 10% of the outstanding voting securities of such issuer.
2. Invest more than 25% of the portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services, for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction. In addition, there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
portfolio from purchasing or selling options, futures, swaps and forward
contracts or from investing in securities or other instruments backed by
physical commodities).
4. Purchase or sell real estate (but this shall not prevent the portfolio
from investing in securities or other instruments backed by real estate,
including mortgage-backed securities, or securities of companies engaged in the
real estate business).
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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. 20.)
/diamond/ WRL J.P. MORGAN MONEY MARKET
The portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the portfolio's total assets, purchase the
securities of any one issuer (other than cash items and "Government securities"
as defined in the 1940 Act) if immediately after and as a result of such
purchase (a) the value of the holdings of the portfolio in the securities of
such issuer exceeds 5% of the value of the portfolio's total assets, or (b) the
portfolio owns more than 10% of the outstanding voting securities of any one
class of securities of such issuer.
2. Invest more than 25% of the value of the portfolio's assets in any
particular industry (other than Government securities or obligations of U.S.
branches of U.S. banks).
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities.
4. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real estate (including real estate limited partnerships), commodities,
or commodity contracts or interest in oil, gas or mineral exploration or
development programs or leases. However, the portfolio may purchase debt
securities or commercial paper issued by companies which invest in real estate
or interest therein, including real estate investment trusts.
5. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of portfolio securities of the portfolio.
6. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).
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
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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.
/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.
State laws and regulations may impose additional limitations on borrowings.
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 WRL GE International Equity, WRL GE U.S. Equity, WRL VKAM Emerging Growth,
WRL LKCM Strategic Total Return, WRL T. Rowe Price Dividend Growth, WRL T. Rowe
Price Small Cap, WRL Salomon All Cap, WRL Goldman Sachs Growth, WRL Goldman
Sachs Small Cap, WRL Dreyfus Mid Cap and WRL Pilgrim Baxter Mid Cap Growth 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.
/diamond/ BORROWING
Subject to its investment restrictions, 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 WRL GE International
Equity, WRL GE U.S. Equity, WRL T. Rowe Price Small Cap, WRL T. Rowe Price
Dividend Growth, WRL Dreyfus Mid Cap, WRL J. P. Morgan Real Estate Securities,
and WRL Goldman Sachs Small Cap, WRL Goldman Sachs Growth; 15% for WRL Salomon
All Cap;
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10% of total assets for the WRL NWQ Value Equity and WRL Pilgrim Baxter Mid Cap
Growth; 5% of total assets for the WRL Third Avenue Value and 25% of total
assets for all other portfolios.
To secure borrowings, a portfolio may not mortgage or pledge its securities in
amounts that exceed 15% of its net assets (10% for the WRL NWQ Value Equity and
5% for the WRL Third Avenue Value).
The portfolios with a common Sub-Adviser may also borrow (or lend) money to
other portfolios or funds that permit such transactions and are also advised by
that Sub-Adviser, provided each portfolio or fund seeks and obtains permission
from the SEC. There is no assurance that such permission would be granted.
The WRL Alger Aggressive Growth 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.
/diamond/ SHORT SALES
Each portfolio other than WRL Goldman Sachs Small Cap, may sell securities
"short against the box." A short sale is the sale of a security that the
portfolio does not own. A short sale is "against the box" if at all times when
the short position is open, the portfolio owns an equal amount of the
securities sold short or securities convertible into, or exchangeable without
further consideration for, securities of the same issue as the securities sold
short.
/diamond/ FOREIGN SECURITIES
Subject to a portfolio's investment restricitions and policies, 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:
o CURRENCY TRADING COSTS. A portfolio incurs costs in converting
foreign currencies into U.S. dollars, and vice versa.
o 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.
o LESS INFORMATION AVAILABLE. There is generally less public
information available about foreign companies.
o MORE DIFFICULT BUSINESS NEGOTIATIONS. A portfolio may find it
difficult to enforce obligations in foreign countries or to
negotiate favorable brokerage commission rates.
o REDUCED LIQUIDITY/INCREASED VOLATILITY. Some foreign securities are
less liquid and their prices more volatile, than securities of
comparable U.S. companies.
o SETTLEMENT DELAYS. Settling foreign securities may take longer than
settlements in the U.S.
o HIGHER CUSTODY CHARGES. Custodianship of shares may cost more for
foreign securities than it does for U.S. securities.
o 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.
o POLITICAL INSTABILITY. In some countries, political instability, war
or diplomatic developments could affect investments.
These risks may be greater in emerging countries or in countries with limited
or emerging markets, In particular, developing countries have relatively
unstable governments, economies based on only a few industries, and securities
markets that trade only a small number of securities. As a result, securities
of issuers located in developing countries may have limited marketability and
may be subject to abrupt or erratic price fluctuations.
At times, a portfolio's foreign securities may be listed on exchanges or traded
in markets which are open on days (such as Saturday) when the portfolio does
not compute a price or accept orders for purchase, sale or exchange of shares.
As a result, the net asset value of the portfolio may be significantly affected
by trading on days when policyholders cannot make transactions.
A portfolio may also purchase American Depositary Receipts ("ADRs"), which are
dollar-denominated
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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.
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 ADS.
FOREIGN EXCHANGE TRANSACTIONS. To the extent a portfolio invests directly in
foreign securities, a portfolio will engage in foreign exchange transactions.
The foreign currency exchange market is subject to little government
regulation, and such transactions generally occur directly between parties
rather than on an exchange or in an organized market. This means that a
portfolio is subject to the full risk of default by a counterparty in such a
transaction. Because such transactions often take place between different time
zones, a portfolio may be required to complete a currency exchange transaction
at a time outside of normal business hours in the counterparty's location,
making prompt settlement of such transaction impossible. This exposes a
portfolio to an increased risk that the counterparty will be unable to settle
the transaction. Although the counterparty in such transactions is often a bank
or other financial institution, currency transactions are generally not covered
by insurance otherwise applicable to such institutions.
/diamond/ FOREIGN BANK OBLIGATIONS
A portfolio may invest in foreign bank obligations and obligations of foreign
branches of domestic banks. These investments present 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/ 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.
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 trasaction. 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
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equal to the value or purchase commitments until payment is made. Such of the
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 a 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/ INVESTMENT FUNDS (WRL GE INTERNATIONAL EQUITY)
The WRL GE International Equity 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.
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. Reverse repurchase
agreements may be used to provide cash to satisfy unusually heavy redemption
requests or for temporary or emergency purposes without necessity of selling
portfolio securities or to earn additional income on portfolio securities such
as U.S. Treasury bills and notes. While a reverse repurchase agreement is
outstanding, the portfolio will segregate with its custodian cash and
appropriate 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. A portfolio will enter into reverse repurchase
agreements only with parties that the portfolio's Sub-Adviser deems
creditworthy, and that have been reviewed by the Board of Directors of the
Fund. The WRL Goldman Sachs Small Cap and WRL Goldman Sachs Growth may,
together with other registered investment companies managed by GSAM or its
affiliates, transfer uninvested cash balances into a single joint account, the
daily aggregate balance of which will be invested in one or more repurchase
agreements.
/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/ TEMPORARY DEFENSIVE POSITION
For temporary defensive purposes, 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
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ability to participate in stock market advances or declines decrease.
Furthermore, when a portfolio assumes a temporary defensive position it may not
be able to achieve its investment objective.
/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
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 B 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.
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, converts 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.
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Convertible securities generally rank senior to common stocks in an issuer's
capital structure and are consequently of higher quality and entail less risk
of declines in market value than the issuer's common stock. However, the extent
to which such risk is reduced depends in large measure upon the degree to which
the convertible security sells above its value as a fixed-income security. In
evaluating investment in a convertible security, primary emphasis will be given
to the attractiveness of the underlying common stock. The convertible debt
securities in which a portfolio may invest are subject to the same rating
criteria as the portfolio's investment in non-convertible debt securities.
/diamond/ INVESTMENTS IN FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS
The following investments are subject to limitations as set forth in each
portfolio's investment restrictions and policies:
FUTURES CONTRACTS. A portfolio may enter into contracts for the purchase or
sale for future delivery of equity or fixed-income securities, foreign
currencies or contracts based on financial indices, including interest rates or
indices of U.S. Government or foreign government securities or equity or
fixed-income securities ("futures contracts"). U.S. futures contracts are
traded on exchanges that have been designated "contract markets" by the
Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant ("FCM"), or brokerage firm, which is a member of
the relevant contract market. Through their clearing corporations, the
exchanges guarantee performance of the contracts as between the clearing
members of the exchange. Since all transactions in the futures market are made
through a member of, and are offset or fulfilled through a clearinghouse
associated with, the exchange on which the contracts are traded, a portfolio
will incur brokerage fees when it buys or sells futures contracts.
When a portfolio buys or sells a futures contract, it incurs a contractual
obligation to receive or deliver the underlying instrument (or a cash payment
based on the difference between the underlying instrument's closing price and
the price at which the contract was entered into) at a specified price on a
specified date. Transactions in futures contracts generally would be made 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.
Futures may also be used for managing a portfolio's exposure to change in
securities prices and foreign currencies; as an efficient means of adjusting
its overall exposure to certain markets, or in an effort to enhance income.
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
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investment technique allows a portfolio to maintain a defensive position
without having to sell portfolio securities.
Similarly, when prices of equity securities are expected to increase, futures
contracts may be bought to attempt to hedge against the possibility of having
to buy equity securities at higher prices. This technique is sometimes known as
an anticipatory hedge. Since the fluctuations in the value of futures contracts
should be similar to those of equity securities, a portfolio could take
advantage of the potential rise in the value of equity securities without
buying them until the market has stabilized. At that time, the futures
contracts could be liquidated and the portfolio could buy equity securities on
the cash market. To the extent a portfolio enters into futures contracts for
this purpose, the assets in the segregated asset account maintained to cover
the portfolio's obligations with respect to futures contracts will consist of
liquid assets from its portfolio in an amount equal to the difference between
the contract price and the aggregate value of the initial and variation margin
payments made by the portfolio with respect to the futures contracts.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial margin and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out futures contracts through offsetting
transactions which could distort the normal price relationship between the cash
and futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced and prices in the futures market
distorted. Third, from the point of view of speculators, the margin deposit
requirements in the 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
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otherwise, a portfolio may not be able to promptly liquidate unfavorable
positions and potentially be required to continue to hold a futures position
until the delivery date, regardless of changes in its value. As a result, the
portfolio's access to other assets held to cover its futures positions also
could be impaired.
Although futures contracts by their terms call for the delivery or acquisition
of the underlying commodities or a cash payment based on the value of the
underlying commodities, in most cases the contractual obligation is offset
before the delivery date of the contract by buying, in the case of a
contractual obligation to sell, or selling, in the case of a contractual
obligation to buy, an identical futures contract on a commodities exchange.
Such a transaction cancels the obligation to make or take delivery of the
commodities.
Each portfolio intends to comply with guidelines of eligibility for exclusion
from the definition of the term "commodity pool operator" with the CFTC and the
National Futures Association, which regulate trading in the futures markets.
Such guidelines presently require that to the extent that a portfolio enters
into futures contracts or options on a futures position that are not for bona
fide hedging purposes (as defined by the CFTC), the aggregate initial margin
and premiums on these positions (excluding the amount by which options are
"in-the-money") may not exceed 5% of the portfolio's net assets.
OPTIONS ON FUTURES CONTRACTS. A portfolio may buy and write options on futures
contracts. An option on a futures contract gives the portfolio the right (but
not the obligation) to buy or sell a futures contract at a specified price on
or before a specified date. The purchase and writing of options on futures
contracts is similar in some respects to the purchase and writing of options on
individual securities. See "Options on Securities" on page 28. 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 increased by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is similar in some respect
to the purchase of protective put options on portfolio securities. For example,
a portfolio may buy a put option on a futures contract to attempt to hedge the
portfolio's securities against the risk of falling prices.
The amount of risk a portfolio assumes when it buys an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the options bought.
FORWARD CONTRACTS. 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").
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Additionally, when a portfolio's Sub-Adviser believes that a foreign currency
in which portfolio securities are denominated may suffer a substantial decline
against the U.S. dollar, a portfolio may enter into a forward currency contract
to sell an amount of that foreign currency (or a proxy currency whose
performance is expected to replicate the performance of that currency) for U.S.
dollars approximating the value of some or all of the portfolio securities
denominated in that currency (not exceeding the value of the portfolio's assets
denominated in that currency) or by participating in options or futures
contracts with respect to the currency, or, when the portfolio's Sub-Adviser
believes that the U.S. dollar may suffer a substantial decline against a
foreign currency for a fixed U.S. dollar amount ("position hedge"). This type
of hedge seeks to minimize the effect of currency appreciation as well as
depreciation, but does not protect against a decline in the security's value
relative to other securities denominated in the foreign currency.
A portfolio also may enter into a forward currency contract with respect to a
currency where the portfolio is considering the purchase of investments
denominated in that currency but has not yet done so ("anticipatory hedge").
In any of the above circumstances a portfolio may, alternatively, enter into a
forward currency contract with respect to a different foreign currency when a
portfolio's Sub-Adviser believes that the U.S. dollar value of that currency
will correlate with the U.S. dollar value of the currency in which portfolio
securities of, or being considered for purchase by, the portfolio are
denominated ("cross-hedge"). For example, if a portfolio's Sub-Adviser believes
that a particular foreign currency may decline relative to the U.S. dollar, a
portfolio could enter into a contract to sell that currency or a proxy currency
(up to the value of the portfolio's assets denominated in that currency) in
exchange for another currency that the Sub-Adviser expects to remain stable or
to appreciate relative to the U.S. dollar. Shifting a portfolio's currency
exposure from one foreign currency to another removes the portfolio's
opportunity to profit from increases in the value of the original currency and
involves a risk of increased losses to the portfolio if the portfolio's Sub-
Adviser's projection of future exchange rates is inaccurate.
A portfolio also may enter into forward contracts to buy or sell at a later
date instruments in which a portfolio may invest directly or on financial
indices based on those instruments. The market for those types of forward
contracts is developing and it is not currently possible to identify
instruments on which forward contracts might be created in the future.
A portfolio will cover outstanding forward currency contracts by maintaining
liquid portfolio securities denominated in the currency underlying the forward
contract or the currency being hedged. To the extent that a portfolio is not
able to cover its forward currency positions with underlying portfolio
securities, the Fund's custodian will segregate cash or other liquid assets
having a value equal to the aggregate amount of the portfolio's commitments
under forward contracts entered into with respect to position hedges and
cross-hedges. If the value of the segregated securities declines, additional
cash or liquid assets will be segregated on a daily basis so that the value of
the account will be equal to the amount of the portfolio's commitments with
respect to such contracts. As an alternative to maintaining all or part of the
segregated assets, a portfolio may buy call options permitting the portfolio to
buy the amount of foreign currency subject to the hedging transaction by a
forward sale contract or the portfolio may buy put options permitting the
portfolio to sell the amount of foreign currency subject to a forward buy
contract.
While forward contracts are not currently regulated by the CFTC, the CFTC may
in the future assert authority to regulate forward contracts. In such event a
portfolio's ability to utilize forward contracts in the manner set forth in the
Prospectus may be restricted. Forward contracts will reduce the potential gain
from a positive change in the relationship between the U.S. dollar and foreign
currencies. Unforeseen changes in currency prices may result in poorer overall
performance for a portfolio than if it had not entered into such contracts. The
use of foreign currency forward contracts will not eliminate fluctuations in
the underlying U.S. dollar equivalent value of the proceeds of or rates of
return on a portfolio's foreign currency denominated portfolio securities.
The matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency denominated asset that
is the subject of the hedging transaction generally will not be precise. In
addition, a portfolio may not always be able to enter into forward contracts at
attractive prices and accordingly may be limited in its ability to use these
contracts in seeking to hedge the portfolio's assets.
Also, with regard to a portfolio's use of cross-hedging transactions, there can
be no assurance that historical correlations between the movement of certain
foreign currencies relative to the U.S. dollar will continue. Thus, at any time
poor correlation may exist between movements in the exchange rates of the
foreign currencies underlying a portfolio's cross-hedges and the movements in
the exchange rates of the foreign currencies in which the portfolio's assets
that are subject of the cross-hedging transactions are denominated.
OPTIONS ON FOREIGN CURRENCIES. A portfolio may buy put and call options and may
write covered put and call options on foreign currencies for hedging purposes
in a manner similar to that in which futures contracts or forward contracts on
foreign currencies may be utilized. For example, a decline in the U.S. dollar
value of a foreign currency in which portfolio securities are denominated will
reduce the U.S. dollar value of such securities, even if their value in the
foreign currency remains constant. In
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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 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
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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 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
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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 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
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particular investment or portion of its portfolio. A portfolio also may enter
into these transactions to attempt to protect against any increase in the price
of securities the portfolio may consider buying at a later date. A portfolio
does not intend to use these transactions as a speculative investment. Interest
rate swaps involve the exchange by a portfolio with another party of their
respective commitments to pay or receive interest, E.G., an exchange of
floating rate payments for fixed rate payments. The exchange commitments can
involve payments to be made in the same currency or in different currencies.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a contractually based principal amount from the party selling the
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a contractually based
principal amount from the party selling the interest rate floor.
Swap and swap-related products are specialized OTC instruments and their use
involves risks specific to the markets in which they are entered into. A
portfolio will usually enter into interest rate swaps on a net basis, I.E., the
two payment streams are netted out, with the portfolio receiving or paying, as
the case may be, only the net amount of the two payments. The net amount of the
excess, if any, of a portfolio's obligations over its entitlements with respect
to each interest rate swap will be calculated on a daily basis and an amount of
cash or other liquid assets having an aggregate net asset value of at least
equal to the accrued excess will be segregated with the Fund's custodian. If a
portfolio enters into an interest rate swap on other than a net basis, the
portfolio would segregate assets in the full amount accrued on a daily basis of
the portfolio's obligations with respect to the swap. A portfolio will not
enter into any interest rate swap, cap or floor transaction unless the
unsecured senior debt or the claims-paying ability of the other party thereto
is rated in one of the three highest rating categories of at least one
nationally recognized statistical rating organization at the time of entering
into such transaction. A portfolio's Sub-Adviser will monitor the
creditworthiness of all counterparties on an ongoing basis. If there is a
default by the other party to such a transaction, a portfolio will have
contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. The Sub-Advisers have determined
that, as a result, the swap market has become relatively liquid. Caps and
floors are more recent innovations for which standardized documentation has not
yet been developed and, accordingly, they are less liquid than swaps. To the
extent a portfolio sells (I.E., writes) caps and floors, it will segregate with
the custodian cash or other liquid assets having an aggregate net asset value
at least equal to the full amount, accrued on a daily basis, of the portfolio's
obligations with respect to any caps or floors.
Interest rate swap transactions are subject to limitations set forth in each
portfolio's policies. These transactions may in some instances involve the
delivery of securities or other underlying assets by a portfolio or its
counterparty to collateralize obligations under the swap. Under the
documentation currently used in those markets, the risk of loss with respect to
interest rate swaps is limited to the net amount of the interest 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.
SUPRANATIONAL AGENCIES. A portfolio may invest up to 10% of its assets in debt
obligations of supranational agencies such as: the International Bank for
Reconstruction and Development (commonly referred to as the World Bank), which
was chartered to finance development projects in developing member countries;
the European Community, which is a twelve-nation organization engaged in
cooperative economic activities; the European Coal and Steel Community, which
is an economic union of various European nations' steel and coal industries;
and the Asian Development Bank, which is an international development bank
established to lend funds, promote investment and provide technical assistance
to member nations in the Asian and Pacific regions. Debt obligations of
supranational agencies are not considered Government Securities and are not
supported, directly or indirectly, by the U.S. Government.
INDEX OPTIONS. In seeking to hedge all or a portion of its investments, a
portfolio may purchase and write put and call options on securities indices
listed on U.S. or foreign securities exchanges or traded in the
over-the-counter market, which indices include securities held in the
portfolios. The portfolios with such option writing authority may write only
covered options. A portfolio may also use
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securities index options as a means of participating in a securities market
without making direct purchases of securities.
A securities index measures the movement of a certain group of securities by
assigning relative values to the securities included in the index. Options on
securities indexes are generally similar to options on specific securities.
Unlike options on securities, however, options on securities indices do not
involve the delivery of an underlying security; the option in the case of an
option on a securities index represents the holder's right to obtain from the
writer in cash a fixed multiple of the amount by which the exercise price
exceeds (in the case of a call) or is less than (in the case of a put) the
closing value of the underlying securities index on the exercise date. A
portfolio may purchase and write put and call options on securities indexes or
securities index futures contracts that are traded on a U.S. exchange or board
of trade or a foreign exchange, to the extent permitted under rules and
interpretations of the Commodity Futures Trading Commission ("CFTC"), as a
hedge against changes in market conditions and interest rates, and for duration
management, and may enter into closing transactions with respect to those
options to terminate existing positions. A securities index fluctuates with
changes in the market values of the securities included in the index.
Securities index options may be based on a broad or narrow market index or on
an industry or market segment.
The delivery requirements of options on securities indices differ from options
on securities. Unlike a securities option, which contemplates the right to take
or make delivery of securities at a specified price, an option on a securities
index gives the holder the right to receive a cash "exercise settlement amount"
equal to (i) the amount, if any, by which the fixed exercise price of the
option exceeds (in the case of a put) or is less than (in the case of a call)
the closing value of the underlying index on the date of exercise, multiplied
by (ii) a fixed "index multiplier." Receipt of this cash amount will depend
upon the closing level of the securities index upon which the option is based
being greater than, in the case of a call, or less than, in the case of a put,
the exercise price of the option. The amount of cash received will be equal to
the difference between the closing price of the index and the exercise price of
the option expressed in dollars times a specified multiple. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount. The writer may offset its position in securities index options
prior to expiration by entering into a closing transaction on an exchange or it
may allow the option to expire unexercised.
The effectiveness of purchasing or writing securities index options as a
hedging technique will depend upon the extent to which price movements in the
portion of a securities portfolio being hedged correlate with price movements
of the securities index selected. Because the value of an index option depends
upon movements in the level of the index rather than the price of a particular
security, whether a portfolio realizes a gain or loss from the purchase of
writing of options on an index depends upon movements in the level of prices in
the market generally or, in the case of certain indices, in an industry or
market segment, rather than movements in the price of a particular security. As
a result, successful use by a portfolio of options on securities indices is
subject to the sub-adviser's ability to predict correctly movements in the
direction of the market generally or of a particular industry. This ability
contemplates different skills and techniques from those used in predicting
changes in the price of individual securities.
Securities index options are subject to position and exercise limits and other
regulations imposed by the exchange on which they are traded. The ability of a
portfolio to engage in closing purchase transactions with respect to securities
index options depends on the existence of a liquid secondary market. Although a
portfolio will generally purchase or write securities index options only if a
liquid secondary market for the options purchased or sold appears to exist, no
such secondary market may exist, or the market may cease to exist at some
future date, for some options. No assurance can be given that a closing
purchase transaction can be effected when the sub-adviser desires that a
portfolio engage in such a transaction.
WEBS AND OTHER INDEX-RELATED SECURITIES. A portfolio may invest in shares in an
investment company whose shares are known as "World Equity Benchmark Shares" or
"WEBS." WEBS have been listed for trading on the American Stock Exchange, Inc.
The portfolios also may invest in the CountryBaskets Index Fund, Inc., or
another fund the shares of which are the substantial equivalent of WEBS. A
portfolio may invest in S&P Depositary Receipts, or "SPDRs." SPDRs are
securities that represent ownership in a long-term unit investment trust that
holds a portfolio of common stocks designed to track the performance of the S&P
500 Index. A portfolio investing in a SPDR would be entitled to the dividends
that accrue to the S&P 500 stocks in the underlying portfolio, less trust
expenses.
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
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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 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.
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/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 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
Subject to a portfolio's investment restrictions and policies, 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 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 interst rate
environment, a declining prepayment
34
<PAGE>
rate will extend the weighted average life of these securities which generally
would cause their values to fluctuate more widely in response to changes in
interest rates.
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
Subject to a portfolio's investment restrictions and policies, asset-backed
securities represent interests in pools of consumer loans (generally unrelated
to mortgage loans) and most often are structured as pass-through securities.
Interest and principal payments ultimately depend on payment of the underlying
loans by individuals, although the securities may be supported by letters of
credit or other credit enhancements. The underlying assets (E.G., loans) are
subject to prepayments which shorten the securities' weighted average life and
may lower their returns. If the credit support or enhancement is exhausted,
losses or delays in payment may result if the required payments of principal
and interest are not made. The value of these securities also may change
because of changes in the market's perception of the creditworthiness of the
servicing agent for the pool, the originator of the pool, or the financial
institution providing the credit support or enhancement. A portfolio will
invest its assets in asset-backed securities subject to any limitations set
forth in its investment policies or restrictions.
/diamond/ PASS-THROUGH SECURITIES
Subject to a portfolio's investment restrictions and policies, a portfolio may
invest its net assets in various types of pass-through securities, such as
mortgage-backed securities, asset-backed securities and participation
interests. A pass-through security is a share or certificate of interest in a
pool of debt obligations that have been repackaged by an intermediary, such as
a bank or broker-dealer. The purchaser receives an undivided interest in the
underlying pool of securities. The issuers of the underlying securities make
interest and principal payments to the intermediary which are passed through to
purchasers, such as the portfolio. The most common type of pass-through
securities are mortgage-backed securities. GNMA Certificates are
mortgage-backed securities that evidence an undivided interest in a pool of
mortgage loans. GNMA Certificates differ from traditional bonds in that
principal is paid back monthly by the borrowers over the term of the loan
rather than returned in a lump sum at maturity. The portfolio will generally
purchase "modified pass-through" GNMA Certificates, which entitle the holder to
receive a share of all interest and principal payments paid and owned on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment. GNMA Certificates are backed
as to the timely payment of principal and interest by the full faith and credit
of the U.S. Government.
The Federal Home Loan Mortgage Corporation ("FHLMC") issues two types of
mortgage pass-through securities: mortgage participation certificates ("PCs")
and guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates
in that each PC represents a pro rata share of all interest and principal
payments made and owned on the underlying pool. FHLMC guarantees timely
payments of interest on PCs and the full return of principal. GMCs also
represent a pro rata interest in a pool of mortgages. However, these
instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. This type of security is guaranteed by FHLMC as to
timely payment of principal and interest, but is not backed by the full faith
and credit of the U.S. Government.
FNMA issues guaranteed mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owned on the underlying pool. This type of security is guaranteed by
FNMA as to 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.
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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 regarding income producing securities in
which a portfolio may invest.)
/diamond/ ILLIQUID AND RESTRICTED/144A SECURITIES
A portfolio may invest up to 15% (the WRL J.P. Morgan Money Market may only
invest up to 10%) of its net assets in illiquid securities (I.E., securities
that are not readily marketable).
In recent years, a large institutional market has developed for certain
securities that are not registered under the Securities Act of 1933 ("1933
Act"). Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend on an
efficient institutional market in which such unregistered securities can
readily be resold or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not dispositive of the
liquidity of such investments.
Rule 144A under the 1933 Act established a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. Institutional markets for restricted securities that
might develop as a result of Rule 144A could provide both readily ascertainable
values for restricted securities and the ability to liquidate an investment in
order to satisfy share redemption orders. An insufficient number of qualified
institutional buyers interested in purchasing a Rule 144A-eligible security
held by a portfolio could, however, adversely affect the marketability of such
portfolio security and the portfolio might be unable to dispose of such
security promptly or at reasonable prices.
The Fund's Board of Directors has authorized each portfolio's Sub-Adviser to
make liquidity determinations with respect to Rule 144A securities in
accordance with the guidelines established by the Board of Directors. Under the
guidelines, the portfolio's Sub-Adviser will consider the following factors in
determining whether a Rule 144A security is liquid: 1) the frequency of trades
and quoted prices for the security; 2) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers; 3)
the willingness of dealers to undertake to make a market in the security; and
4) the nature of the marketplace trades, including the time needed to dispose
of the security, the method of soliciting offers and the mechanics of the
transfer. The sale of illiquid securities often requires more time and results
in higher brokerage charges or dealer discounts and other selling expenses than
does the sale of 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/ MONEY MARKET RESERVES
(WRL T. ROWE PRICE SMALL CAP AND
WRL T. ROWE PRICE DIVIDEND GROWTH)
It is expected that WRL T. Rowe Price Dividend Growth and WRL T. Rowe Price
Small Cap portfolios will invest their cash reserves primarily in a money
market fund established for the exclusive use of the T. Rowe Price family of
mutual funds and other clients of T. Rowe Price and Price-Fleming. The Reserve
Investment Fund ("RIF") is a series of Reserve Investment Funds, Inc.
Additional series may be created in the future. This fund was created and
operates under an Exemptive Order issued by the Securities and Exchange
Commission (Investment Company Act Release No. IC-22770, July 29, 1997).
The fund must comply with the requirements of Rule 2a-7 under the 1940 Act
governing money market funds. The RIF invests at least 95% of its total assets
in prime money market instruments receiving the highest credit rating.
The RIF provides a very effecient means of managing the cash reserves of the
portfolios. While the RIF does not pay an advisory fee to the Investment
Manager, it will incur other expenses. However, the RIF is expected by T. Rowe
Price to operate at a very low expense ratio. The portfolios will only invest
in RIF to the extent it is consistent with their objectives and programs.
RIF is not insured or guaranteed by the U.S. government, and there is no
assurance it will maintain a stable net asset value of $1.00 per share.
/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 WRL Janus Growth, or WRL Janus Global portfolio invests in a Janus money
market fund, Janus Capital will remit to such portfolio the fees it receives
from the Janus money market fund to the extent such fees are based on the
portfolio's assets.
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<PAGE>
The WRL GE International Equity and WRL GE 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 WRL GE International Equity and WRL GE 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.
WRL Goldman Sachs Growth and WRL Goldman Sachs Small Cap may also purchase
Standard & Poors Depositary Receipts ("SPDRs"). SPDRs are American Stock
Exchange-traded securities that represent ownerhsip in the SPDR Trust, a trust
which has been established to accumulate and hold a portfolio of common stocks
that is intended to track the price performance and dividend yield of the S&P
500.
/diamond/ QUALITY AND DIVERSIFICATION REQUIREMENTS
(WRL J.P. MORGAN MONEY MARKET)
For the purpose of maintaining a stable net asset value per share, the WRL J.P.
Morgan Money Market 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 B. The portfolio may also purchase unrated securities
that are of comparable quality to the rated securities described above as
determined by the Board of Directors. Additionally, if the issuer of a
particular security has issued other securities of comparable priority and
security and which have been rated in accordance with (ii) above, that security
will be deemed to have the same rating as such other rated securities.
In addition, the Board of Directors of the Fund has adopted procedures which
(i) require the Fund's Directors to approve or ratify purchases by the
portfolio of securities (other than U.S. Government securities) that are rated
by only one NRSRO or that are unrated; (ii) require the portfolio to maintain a
dollar-weighted average portfolio maturity of not more than 90 days and to
invest only in securities with a remaining maturity of not more than 13 months;
and (iii) require the portfolio, in the event of certain downgrading of or
defaults on portfolio holdings, to dispose of the holdings, subject in certain
circumstances to a finding by the Fund's Directors that disposing of the
holding would not be in the portfolio's best interest.
/diamond/ BANK AND THRIFT OBLIGATIONS
Bank and thrift obligations in which a portfolio may invest are limited to
dollar-denominated certificates of deposit, time deposits and bankers'
acceptances issued by bank or thrift institutions. Certificates of deposit are
short-term, unsecured, negotiable obligations of commercial banks and thrift
institutions. Time deposits are non-negotiable deposits maintained in bank or
thrift institutions for specified periods of time at stated interest rates.
Bankers' acceptances are negotiable time drafts drawn on commercial banks
usually in connection with international transactions.
Bank and thrift obligations in which the portfolio invests may be, but are not
required to be, issued by institutions that are insured by the Federal Deposit
Insurance Corporation (the "FDIC"). Bank and thrift institutions organized
under Federal law are supervised and examined by Federal authorities and are
required to be insured by the FDIC. Institutions organized under state law are
supervised and examined by state banking authorities but are insured by the
FDIC only if they so elect. State institutions insured by the FDIC are subject
to Federal examination and to a substantial body of Federal law regulation. As
a result of Federal and state laws and regulations, Federally insured bank and
thrift institutions are, among other things, generally required to maintain
specified levels of reserves and are subject to other supervision and
regulation designed to promote financial soundness.
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
37
<PAGE>
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.
/diamond/ INVESTMENTS IN THE REAL ESTATE INDUSTRY AND REAL ESTATE INVESTMENT
TRUSTS ("REITS")
REITs are pooled investment vehicles which invest primarily in income producing
real estate, or real estate related loans or interests. REITs are generally
classified as equity REITs, mortgage REITs, or hybrid REITs.
Equity REITs invest the majority of their assets directly in real property and
derive income primarily from the collection of rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs invest the majority of their assets in real estate mortgages and
derive income from the collection of interest payments. Hybrid REITs invest
their assets in both real property and mortgages. REITs are not taxed on income
distributed to 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, 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.")
/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
adjustment 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
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<PAGE>
must satisfy a Sub-Adviser that the ratings are within the two highest ratings
of commercial paper.
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/ DEBT SECURITIES AND FIXED-INCOME INVESTING
Debt securities include securities such as corporate bonds and debentures;
commercial paper; trust preferreds, 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 payment prospects and principal security for such bonds appear
adequate for the present, but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have speculative
characteristics. (See Appendix B 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/ 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 B for a description of debt securities rating.)
/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
investment.
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,
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<PAGE>
while not necessarily of lower quality than rated securities, may not have as
broad a market as higher quality securities.
/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 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 AND OFFICERS
The Fund is governed by a Board of Directors. Subject to the supervision of the
Board of Directors, the assets of each portfolio are managed by an investment
adviser and sub-advisers, and by portfolio managers. The Board of Directors is
responsible for managing the business and affairs of the Fund and oversees the
operation of the Fund by its officers. It also reviews the management of the
portfolios' assets by the investment adviser and sub-adviser. Information about
the Directors and officers of the Fund is as follows:
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
- - --------------------- -------------------------- -----------------------------------------------
<S> <C> <C>
PETER R. BROWN DIRECTOR Retired (January, 2000 - present); Chairman of the Board,
(DOB 5/10/28), Peter Brown Construction Company (construction contrac-
11180 6th Street East tors and engineers), Largo, Florida (1963 - 2000); Trustee
Treasure Island, Florida 33706 of IDEX Mutual Funds, Rear Admiral (Ret.) U.S. Navy
Reserve, Civil Engineer Corps.
CHARLES C. HARRIS DIRECTOR Trustee of IDEX Mutual Funds, (March, 1994 - present)
(DOB 7/15/30), former Trustee of IDEX Fund, IDEX II Series Fund and
35 Winston Drive IDEX Fund 3.
Clearwater, Florida 34616
RUSSELL A. KIMBALL, JR. DIRECTOR General Manager, Sheraton Sand Key Resort (resort
(DOB 8/17/44), hotel), Clearwater, Florida (1975 - present)
1160 Gulf Boulevard
Clearwater Beach, Florida 34630
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
- - --------------------- -------------------------- -----------------------------------------------
<S> <C> <C>
JOHN R. KENNEY(1,2) CHAIRMAN OF THE BOARD Chairman of the Board, Director and Co-CEO of Great
(DOB 2/8/38) OF DIRECTORS AND Companies, L.L.C.; Chairman of the Board of Directors
PRESIDENT (1982 - present), Chief Executive Officer (1982 - present),
President (1978 - 1987 and December, 1992 - 1999),
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), St. Petersburg, Florida; Chairman of the Board of
Directors (September, 1996 - present), WRL Investment
Services, Inc., St. Petersburg, Florida; Chairman of the
Board of Directors (February, 1997 - present), AEGON
Asset Management Services, Inc., St.Petersburg, Florida;
Director (December, 1990 - present); IDEX Management,
Inc., (investment adviser), St. Petersburg, Florida; Trustee
and Chairman (September, 1996 - present) of IDEX
Mutual Funds (investment companies) St. Petersburg,
Florida.
PAT BAIRD DIRECTOR AND EXECUTIVE President and Trustee (November, 1999 - present), IDEX
(DOB 1/19/54) VICE PRESIDENT Mutual Funds; Executive Vice President, Chief Operating
433 Edgewood Road, NE, Officer (February, 1996 - present) Executive Vice
Cedar Rapids, Iowa 52499 President and CFO (February, 1995 - February, 1996),
Vice President, Chief Financial Officer (May, 1992 -
February, 1995), AEGON USA.
ALLAN HAMILTON(1,2) TREASURER, PRINCIPAL Vice President and Controller (1987 - present), Treasurer
(DOB 11/26/56) FINANCIAL OFFICER (February, 1997 - present).
JOHN K. CARTER(1,2) VICE PRESIDENT, Vice President, Secretary and Counsel (December, 1999 -
(DOB 04/24/61) SECRETARY AND COUNSEL present), IDEX Mutual Funds; Vice President, Counsel and
Assistant Secretary (April, 2000 - present) of Idex Investor
Services, Inc., AEGON Asset Management Services, Inc.
and WRL Investment Services, Inc.; Vice President,
Counsel, Compliance Officer and Assistant Secretary
(April, 2000 - present) of Idex Management, Inc. and WRL
Investment Management, Inc.; Vice President and Counsel
(March, 1997 - May 1999), Salomon Smith Barney;
Assistant Vice President, Associate Corporate Counsel
and Trust Officer (September, 1993 - March 1997),
Franklin Templeton Mutual Funds.
THOMAS E. PIERPAN(1,2) ASSISTANT SECRETARY Vice President, Secretary and Counsel (December, 1997 -
(DOB 10/18/43) AND VICE PRESIDENT December, 1999); Assistant Secretary (March, 1995 -
December, 1997) of WRL Series Funds, Inc.; Vice
President and Assistant Secretary 1999 - present), Vice
President, Counsel and Secretary (December, 1997 -
1999) of IDEX Mutual Funds (mutual fund); Assistant Vice
President, Counsel and Assistant Secretary (November,
1997 - present) of Intersecurities, Inc. (broker-dealer);
Senior Vice President, General Counsel and Assistant
Secretary (April, 2000 - present) of AEGON Equity Group;
Senior Vice President and General Counsel (1999 -
present), Vice President (November, 1993 - present),
Associate General Counsel (February, 1995 - 1997),
Assistant Secretary, (February, 1995 - present) of Western
Reserve Life Assurance of Ohio.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
- - --------------------- -------------------------- -----------------------------------------------
<S> <C> <C>
ALAN M. YAEGER(1,2) EXECUTIVE VICE Executive Vice President (June, 1993 - present), Chief
(DOB 10/21/46) PRESIDENT Financial Officer (December, 1995 - present), Actuary
(1972 - present), Western Reserve Life Assurance
Company of Ohio; Director (September, 1996 - present),
WRL Investment Management, Inc. (investment adviser)
St. Petersburg, Florida; Director (September, 1996 -
present), WRL Investment Services, Inc., St. Petersburg,
Florida.
</TABLE>
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Bos 5068, Clearwater, Florida 33758-5068.
(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 $10,000 to each Director
who is not affiliated with the Investment Adviser or the Sub-Advisers
("disinterested Director"). Each disinterested Director also receives $1,500,
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, 1999. The compensation table provides
compensation amounts paid to disinterested Directors of the Fund for the fiscal
year ended December 31, 1999.
DIRECTOR'S FEES PAID - YEAR ENDED DECEMBER 31, 1999
PORTFOLIO AMOUNT PAID
- - --------- -----------
WRL VKAM Emerging Growth $8,000
WRL T. Rowe Price Small Cap -0-
WRL Goldman Sachs Small Cap -0-
WRL Alger Aggressive Growth 6,000
WRL GE International Equity(1) -0-
WRL Janus Global 8,000
WRL Third Avenue Value -0-
WRL Dreyfus Mid Cap -0-
WRL Salomon All Cap -0-
WRL Pilgrim Baxter Mid Cap Growth -0-
WRL Janus Growth 11,000
WRL Goldman Sachs Growth -0-
WRL C.A.S.E. Growth 1,000
WRL GE U.S. Equity 1,000
WRL NWQ Value Equity 1,000
WRL T. Rowe Price Dividend Growth -0-
WRL Dean Asset Allocation 2,000
WRL LKCM Strategic Total Return 3,000
WRL Federated Growth & Income 1,000
WRL AEGON Balanced 1,000
WRL J.P. Morgan Real Estate Securities -0-
WRL AEGON Bond 1,000
WRL J.P. Morgan Money Market -0-
- - ------------------------------
(1) Prior to May 1, 2000, this portfolio was named WRL GE/Scottish Equitable
International Equity.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS TOTAL COMPENSATION
AGGREGATE ACCRUED AS ESTIMATED PAID TO DIRECTORS FROM
COMPENSATION FROM PART OF ANNUAL BENEFITS WRL SERIES FUND, INC. AND
NAME OF PERSON, POSITION WRL SERIES FUND, INC. FUND EXPENSES* UPON RETIREMENT IDEX MUTUAL FUNDS
- - ------------------------ --------------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Peter R. Brown, Director $15,500 0 N/A $43,750
Charles C. Harris, Director 15,500 0 N/A 43,750
Russell A. Kimball, Jr., Director 15,500 0 N/A 15,500
</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 Mutual Funds to a disinterested Director or
Trustee on a
42
<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
Mutual Funds (without imposition of sales charge), as elected by the Director.
As of April 1, 1999, 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") located at 570 Carillon
Parkway, St. Petersburg, FL 33716, 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
N.V., 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 (that commenced operations prior to
that date) on December 16, 1996. The Investment Advisory Agreement provides
that it will continue in effect 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 p. 46.
43
<PAGE>
ADVISORY FEE. The method of computing the investment advisory fee is fully
described in the Fund's prospectus. For the years ended December 31, 1999, 1998
and 1997, the Investment Adviser was paid fees for its services to each
portfolio in the following amounts
ADVISORY FEES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------
PORTFOLIO 1999 1998 1997
- - --------- ----------- ----------- -----------
<S> <C> <C> <C>
WRL Alger Aggressive Growth $ 5,873,932 $ 3,361,604 $ 2,249,801
WRL VKAM Emerging Growth 8,946,705 5,408,098 4,075,498
WRL GE International Equity(2) 329,326 275,279 111,702
WRL Janus Global 10,293,952 7,537,671 5,591,818
WRL Janus Growth 25,489,599 18,111,607 13,716,824
WRL Third Avenue Value(3) 145,682 111,928 N/A
WRL C.A.S.E. Growth 669,877 515,902 334,892
WRL GE U.S. Equity (2) 1,177,975 555,341 140,280
WRL NWQ Value Equity(4) 1,214,963 1,458,166 900,818
WRL Dean Asset Allocation 2,623,575 2,710,626 2,079,540
WRL LKCM Strategic Total Return 4,766,336 4,485,018 3,703,670
WRL J.P. Morgan Real Estate Securities(3) 24,531 9,338 N/A
WRL Federated Growth & Income 615,256 578,162 338,267
WRL AEGON Balanced 842,458 680,543 491,901
WRL AEGON Bond(1) 731,366 663,484 479,685
WRL J.P. Morgan Money Market 1,078,993 644,611 514,968
WRL Goldman Sachs Small Cap(4) 11,839 N/A N/A
WRL Goldman Sachs Growth(4) 26,410 N/A N/A
WRL Dreyfus Mid Cap(4) 7,501 N/A N/A
WRL Salomon All Cap(4) 25,424 N/A N/A
WRL T. Rowe Price Dividend Growth(4) 30,980 N/A N/A
WRL T. Rowe Price Small Cap(4) 32,294 N/A N/A
WRL Pilgrim Baxter Mid Cap Growth(4) 76,560 N/A N/A
----------- ----------- -----------
TOTAL $65,035,534 $47,107,378 $34,729,664
=========== =========== ===========
</TABLE>
- - ------------------------------
(1) 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 WRL AEGON Bond (formerly
Bond portfolio) and receives monthly compensation from the Investment
Adviser at the rate of 0.20% of average daily net assets of the portfolio.
(2) Portfolio was previously named WRL GE/Scottish Equitable International
Equity.
(3) Portfolio commenced operations May 1, 1998.
(4) Portfolio commenced operations May 1, 1999.
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
44
<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,
2001, to pay expenses on behalf of the portfolios to the extent normal
operating expenses (including investment advisory fees but excluding interest,
taxes, brokerage fees, commissions and extraordinary charges) exceed, as a
percentage of each portfolio's average daily net assets, 1.00% (0.70% for the
WRL AEGON Bond and WRL J.P. Morgan Money Market, 1.20% for the WRL GE
International Equity). The following expenses were paid by the investment
adviser for the fiscal years ended December 31, 1999, 1998, and 1997 (WRL
served as investment adviser for 1996):
PORTFOLIO EXPENSES PAID BY INVESTMENT ADVISER
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------
PORTFOLIO 1999 1998 1997
- - --------- ------- ------- -------
<S> <C> <C> <C>
WRL Alger Aggressive Growth -0- -0- -0-
WRL VKAM Emerging Growth -0- -0- -0-
WRL GE International Equity 112,088 127,763 179,163
WRL Janus Global -0- -0- -0-
WRL Janus Growth -0- -0- -0-
WRL Third Avenue Value 10,734 14,229 N/A
WRL C.A.S.E. Growth -0- -0- 49,784
WRL GE U.S. Equity -0- -0- 29,464
WRL NWQ Value Equity -0- -0- -0-
WRL Dean Asset Allocation -0- -0- -0-
WRL LKCM Strategic Total Return -0- -0- -0-
WRL J.P. Morgan Real Estate Securities(2) 51,924 28,275 N/A
WRL Federated Growth & Income -0- -0- -0-
WRL AEGON Balanced -0- -0- -0-
WRL AEGON Bond(1) -0- -0- -0-
WRL J.P. Morgan Money Market -0- -0- -0-
WRL Goldman Sachs Small Cap(3) 60,555 N/A N/A
WRL Goldman Sachs Growth(3) 49,677 N/A N/A
WRL Dreyfus Mid Cap(3) 34,541 N/A N/A
WRL Salomon All Cap(3) 53,174 N/A N/A
WRL T. Rowe Price Dividend Growth(3) 46,989 N/A N/A
WRL T. Rowe Price Small Cap(3) 63,542 N/A N/A
WRL Pilgrim Baxter Mid Cap Growth(3) 34,986 N/A N/A
</TABLE>
- - ------------------------------
(1) Prior to January 1, 1998, Janus Capital Corporation served as the
Sub-Adviser for the WRL AEGON Bond.
(2) Portfolio commenced operations on May 1, 1998.
(3) Portfolio commenced operations May 1, 1999.
Effective May 1, 2000, the Investment Adviser has entered into an agreement
with the Fund on behalf of, and pursuant to which, the Investment Adviser will
be reimbursed for operating expenses paid on behalf of a portfolio during the
previous 36 months, but only if, after such reimbursement, the portfolio's
expense ratio does not exceed the expense cap. The agreement has an initial
term through April 30, 2001, and will automatically renew for one-year terms
unless terminated by a 30 day written notice to the Fund.
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. The following Administrative Services fees were paid by
the portfolios for the fiscal year ended December 31, 1999:
45
<PAGE>
ADMINISTRATIVE SERVICES FEES
PORTFOLIO 1999 1998 1997
- - --------- -------- ------- --------
WRL Alger Aggressive Growth $178,687 $73,408 $122,776
WRL VKAM Emerging Growth 214,882 95,721 166,269
WRL GE International Equity 8,983 3,731 3,901
WRL Janus Global 223,428 99,277 165,294
WRL Janus Growth 306,127 143,999 260,374
WRL Third Avenue Value 2,871 1,139 N/A
WRL C.A.S.E. Growth 30,645 14,345 15,798
WRL GE U.S. Equity 27,038 6,364 3,218
WRL NWQ Value Equity 35,693 18,893 23,307
WRL Dean Asset Allocation 50,791 25,722 41,445
WRL LKCM Strategic Total
Return 89,085 47,197 87,766
WRL J.P. Morgan Real Estate
Securities 384 -0- N/A
WRL Federated Growth &
Income 27,663 12,140 16,773
WRL AEGON Balanced 23,945 10,827 18,333
WRL AEGON Bond 32,651 16,871 31,011
WRL J.P. Morgan Money
Market 13,674 6,378 12,092
WRL Goldman Sachs Small
Cap 175 N/A N/A
WRL Goldman Sachs Growth 279 N/A N/A
WRL Dreyfus Mid Cap 73 N/A N/A
WRL Salomon All Cap 283 N/A N/A
WRL T. Rowe Price Dividend
Growth 217 N/A N/A
WRL T. Rowe Price Small Cap 402 N/A N/A
WRL Pilgrim Baxter Mid Cap
Growth 527 N/A N/A
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 AFSG Securities Corporation (AFSG) located at 4333
Edgewood Road NE, Cedar Rapids, Iowa 52494. The Distribution Plan and related
Agreement were approved by the Fund's Board of Directors, including a majority
of Directors who are not "interested persons" of the Fund (as defined in the
1940 Act) on October 3, 1996 as amended by the Board March 29, 1999, and the
Distribution Plan was approved by the shareholders of each portfolio of the
Fund on December 16, 1996 (by all portfolios that had commenced operations on
that date). AFSG is an affiliate of the Investment Adviser.
Under the Distribution Plan and Distribution Agreement, the Fund, on behalf of
the portfolios, will reimburse AFSG after each calendar month for certain Fund
distribution expenses incurred or paid by AFSG, 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 AFSG 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.
AFSG submits to the Directors of the Fund for approval annual distribution
budgets and quarterly reports of distribution expenses with respect to each
portfolio. AFSG 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 AFSG deems fair and are approved by the Fund's Board
of Directors. AFSG has determined that it will not seek payment by the Fund of
distribution expenses incurred with respect to any portfolio before April 30,
2001. (ISI waived payment by the Fund for the fiscal year ended December 31,
1999.) Prior to AFSG 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
Each Sub-Adviser serves, pursuant to each Sub-Advisory Agreement dated January
1, 1997 (January 1, 1998 with respect to the WRL Third Avenue Value and WRL
AEGON Bond; May 1, 1998 with respect to WRL J.P. Morgan Real Estate Securities,
May 1, 1999 with respect to the WRL T. Rowe Price Small Cap, WRL T. Rowe Price
Dividend Growth, WRL Pilgrim Baxter Mid Cap Growth, WRL Salomon All Cap, WRL
Goldman Sachs Growth, WRL Goldman Sachs Small Cap and WRL Dreyfus Mid Cap)
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 for all
agreements prior to January 1, 1997 and by the shareholders of each portfolio
of the Fund on December 16, 1996 (for portfolios that had commenced operations
on that date) (December 9, 1997 with respect to the WRL AEGON Bond). The
Sub-Advisory Agreements provide that they will continue in effect if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
46
<PAGE>
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. WRL Goldman Sachs Growth, WRL Goldman Sachs Small
Cap, WRL T. Rowe Price Small Cap, WRL T. Rowe Price Dividend Growth, WRL
Salomon All Cap, the WRL Pilgrim Baxter Mid Cap Growth and WRL Dreyfus Mid Cap
will continue in effect for an initial term ending April 30, 2001, and from
year to year thereafter, if approved annually. 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. The agreement may
also be terminated under the term of an Exemptive Order granted by the SEC
under section 6(c) of the 1940 Act from section 15(a) and rule 18f-2 under the
1940 Act (Release #23379).
Pursuant to the Sub-Advisory Agreements, each Sub-Adviser provides investment
advisory assistance and portfolio management advice to the Investment Adviser
for their respective portfolio(s). Subject to review by the Investment Adviser
and the Board of Directors of the Fund, the Sub-Advisers are responsible for
the actual management of their respective portfolio(s) and for making decisions
to buy, sell or hold a particular security. Each Sub-Adviser bears all of its
expenses in connection with the performance of its services under their Sub-
Advisory Agreement such as compensating and furnishing office space for their
officers and employees connected with investment and economic research, trading
and investment management of the respective portfolio(s).
Each Sub-Adviser is a registered investment adviser under the Investment
Advisers Act of 1940, as amended. The Sub-Advisers for the portfolios of the
Fund are:
/five diamonds/
FRED ALGER MANAGEMENT, INC.
Fred Alger Management, Inc. ("Alger") serves as Sub-Adviser to the WRL Alger
Aggressive Growth.
Alger, located at One World Trade Center, Suite 9333, New York, New York 10048,
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 is generally engaged in the business of
rendering investment advisory services to institutions and, to a lesser extent,
individuals. Alger has been engaged in the business of rendering investment
advisory services since 1964 and, as of March 31, 2000, had approximately $21.8
billion under management.
/diamond/ PORTFOLIO MANAGER:
DAVID D. ALGER AND DAVID HYUN are primarily responsible for the day-to-day
management of WRL Alger Aggressive Growth. Mr. Alger has been employed by Alger
Management as Executive Vice President and Director of Research Since 1971 and
as President since 1995. Mr. Hyun has been employed by Alger Management as a
senior research analyst since 1991, as a portfolio manager since 1997, and
Senior Vice President since 1998. Mr. Alger has served as portfolio Manager of
WRL Alger Aggressive Growth since its inception. Mr. Hyun has served as
co-portfolio manager of WRL Alger Aggressive Growth sinceFebruary 1998. Mr.
Alger and Mr. Hyun also serve as portfolio managers for other mutual funds and
investment accounts managed by Alger Management.
/five diamonds/
VAN KAMPEN ASSET
MANAGEMENT INC. (`VKAM")
Van Kampen Asset Management Inc. ("VKAM") serves as Sub-Adviser to WRL VKAM
Emerging Growth.
VKAM, located at 1 Parkview Plaza, P.O. Box 5555 Oakbrook Terrace, Illinois
60181, is a wholly owned subsidiary of Van Kampen Investments Inc., which, in
turn, is an indirect wholly owned subsidiary of Morgan Stanley Dean Witter &
Co., a financial services company.
/diamond/ PORTFOLIO MANAGER:
GARY M. LEWIS leads an investment team and is primarily responsible for the
day-to-day management of WRL VKAM Emerging Growth. Mr. Lewis has been Senior
Vice President of Van Kampen since October 1995. Previously, he served as Vice
President and portfolio manager of Van Kampen from 1989 to October 1995.
/five diamonds/
JANUS CAPITAL CORPORATION
Janus Capital Corporation ("Janus") serves as the Sub-Adviser to WRL Janus
Growth and WRL Janus Global.
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 $261 billion as of
February 1, 2000. Kansas City Southern Industries, Inc. ("KCSI") owns 82% of
Janus indirectly through Stilwell Financial, Inc. KCSI, whose address is 114
West 11th Street, Kansas City, Missouri 64105-1804, is a publicly-traded
holding company with a 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.
47
<PAGE>
/diamond/ PORTFOLIO MANAGERS:
EDWARD KEELY has served as manager of the WRL Janus Growth portfolio since
January 2000. He previously served as co-portfolio manager of this portfolio
since January 1999. Prior to joining Janus in 1998, Mr. Keely was a senior vice
president of investments at Founders.
HELEN YOUNG HAYES, CFA AND LAURENCE CHANG, CFA have served as co-portfolio
managers of the WRL Janus Global portfolio since January 2000. Ms. Hayes
previously served as manager of this portfolio since its inception. She has
been employed by Janus since 1987.
Mr. Chang has been employed by Janus since 1993. Before joining Janus, Mr.
Chang was a project director at the National Security Archive.
/five diamonds/
EQSF ADVISERS, INC.
EQSF Advisers, Inc. ("EQSF") serves as Sub-Adviser to WRL Third Avenue Value.
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.
/diamond/ PORTFOLIO MANAGER:
MARTIN J. WHITMAN has served as portfolio manager of WRL Third Avenue Value
since inception. Mr. Whitman is Chairman and Chief Executive 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 42 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, Nabors Industries, Inc. an international oil drilling contractor and
Tejon Ranch Company, an agricultural and land development company.
/five diamonds/
C.A.S.E. MANAGEMENT, INC.
C.A.S.E. Management, Inc. ("C.A.S.E.") serves as sub-adviser to WRL C.A.S.E.
Growth.
C.A.S.E., 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. 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.
/five diamonds/
NWQ INVESTMENT MANAGEMENT COMPANY, INC.
NWQ Investment Management Company, Inc. ("NWQ") serves as sub-adviser to WRL
NWQ Value Equity.
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 $8.1 billion in assets under management as
of December 31, 1999.
/diamond/ PORTFOLIO MANAGER:
An investment policy committee is responsible for the day-to-day management of
WRL NWQ Vaue Equity investments. David A. Polak, CFA, Edward C. Friedel, CFA,
James H. Galbreath, CFA, Phyllis G. Thomas, CFA, Jon D. Bosse, CFA, and Justin
T. Clifford constitute the committee.
EDWARD C. FRIEDEL, CFA serves as senior portfolio manager for WRL NWQ Value
Equity. Mr. Friedel has been a managing director and investment
strategist/portfolio manager of NWQ Investment since 1983. Mr. Friedel is a
graduate of the University of California at Berkeley (BS) and Stanford
University (MBA).
/five diamonds/
DEAN INVESTMENT ASSOCIATES
Dean Investment Associates ("Dean") serves as sub-adviser to WRL Dean Asset
Allocation.
Dean, located at 2480 Kettering Tower, Dayton, Ohio 45423-2480, 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 currently has $ billion of assets under
management.
48
<PAGE>
/diamond/ PORTFOLIO MANAGERS:
The WRL Dean Asset Allocation is managed by a team of 10 senior investment
professionals (Central Investment Committee), with over 137 years of total
investment experience.
JOHN C. RIAZZI, CFA, has served as the senior portfolio Manager of WRL Dean
Asset Allocation 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 five years.
He received a B.A. in Economics from Kenyon College in 1985 and was awarded the
Chartered Financial Analyst designation in 1993.
/five diamonds/
LUTHER KING CAPITAL
MANAGEMENT CORPORATION
Luther King Capital Management Corporation ("LKCM") serves as sub-adviser to
WRL LKCM Strategic Total Return.
LKCM 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 18 years; as of December 31, 1999, the
total assets managed by Luther King was approximately $ billion.
/diamond/ PORTFOLIO MANAGERS:
LUTHER KING, JR., CFA, AND SCOT HOLLMANN, CFA, have served as portfolio
Managers of the WRL LKCM Strategic Total Return 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.
/five diamonds/
FEDERATED INVESTMENT COUNSELING
Federated Investment Counseling ("Federated") serves as the sub-adviser to WRL
Federated Growth & Income.
Federated, located at Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779, is a wholly-owned subsidiary of Federated Investors, Inc. All of
the voting securities of Federated Investors, Inc. are owned by a trust, the
trustees of which are John F. Donahue, his wife, Rhodora Donahue, and his son,
J. Christopher Donahue.
/diamond/ PORTFOLIO MANAGERS:
STEVEN J. LEHMAN and LINDA A. DUESSEL serve as Co-portfolio Managers of the WRL
Federated Growth & Income. Ms. Duessel has been a portfolio Manager of the WRL
Federated Growth & Income since July, 1996. 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.
Ms. Duessel, Senior Vice President, 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 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.
Federated's disciplined investment selection process is rooted in sound
methodologies backed by fundamental and technical research. At Federated,
success in investment management does not depend solely on the skill of a
single portfolio manager. It is a fusion of individual talents and
state-of-the-art industry tools and resources. Federated's investment process
involves teams of portfolio managers and analysts, and investment decisions are
executed by traders who are dedicated to specific market sectors and who handle
trillions of dollars in annual trading volume.
/five diamonds/
AEGON USA INVESTMENT MANAGEMENT, INC.
AEGON USA Investment Management, Inc. ("AIMI") serves as sub-adviser to the WRL
AEGON Bond and the WRL AEGON Balanced.
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
Mutual Funds. AIMI also manages the general account investment portfolios of
the life insurance subsidiaries of AEGON USA and had in excess of $45 billion
under management as of December 31, 1998.
/diamond/ PORTFOLIO MANAGERS:
CLIFFORD A. SHEETS, CFA AND DAVID R. HALFPAP, CFA have served as co-portfolio
managers of this portfolio since January 2000. Mr. Sheets previously served as
co-portfolio manager of this portfolio since 1998. Mr. Sheets joined AIMI in
1990.
Mr. Halfpap has been employed by AIMI since 1975 and is currently a senior vice
president.
49
<PAGE>
MICHAEL VAN METER has served as the senior portfolio Manager of the WRL AEGON
Balanced 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.
/five diamonds/
J.P. MORGAN INVESTMENT MANAGEMENT INC.
J.P. Morgan Investment Management, Inc. ("J.P. Morgan") serves as sub-adviser
to WRL J.P. Morgan Money Market and WRL J.P. Morgan Real Estate Securities.
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.
/diamond/ PORTFOLIO MANAGERS:
JOHN T. DONOHUE AND MARK SETTLES have served as co-portfolio managers of the
WRL J.P. Morgan Money Market Portfolio since January 2000. Mr. Donohue has been
employed by J.P. Morgan since 1997 and is a portfolio manager in the Fixed
Income Group. He previously served as senior money market trader. Mr. Donohue
was a portfolio manager at Goldman Sachs for 10 years prior to his employment
at J.P. Morgan.
MR. SETTLES is a product portfolio manager in the Short Term Fixed Income Group
at J.P. Morgan. Previously, he spent five years trading dollar and
euro-denominated fixed income products in J.P. Morgan's New York and London
trading desks.
DANIEL P. O'CONNOR has served as the portfolio manager of the WRL J.P. Morgan
Real Estate Securities portfolio since its inception. 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 of Real Estate Securities at INVESCO, an
investment management firm. In that position, Mr. O'Connor was responsible for
developing the firm's REIT investment management process. 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.
/five diamonds/
GE ASSET MANAGEMENT INCORPORATED
GE Asset Management Incorporated ("GEAM") serves as a sub-adviser to WRL GE
International Equity and WRL GE U.S. Equity. Prior to May 1, 2000, GEAM served
as co-sub-adviser to WRL GE/Scottish Equitable International Equity.
GEAM is located at 3003 Summer Street, P.O. Box 7900, Stamford, Connecticut
06904. GEAM is a wholly-owned subsidiary of General Electric Company and a
registered investment adviser. As of December 31, 1999, GEAM oversaw $115.8
billion and managed individual and institutional assets of $91.7 billion, of
which more than $18.2 billion was invested in mutual funds.
/diamond/ PORTFOLIO MANAGERS:
RALPH R. LAYMAN is a Director and Executive Vice President of GEAM. Mr. Layman
manages the overall International Equity Investments for GEAM. He leads a team
of portfolio managers for WRL GE International. Mr. Layman joined GEAM in 1991
as Executive Vice President for International Investments.
EUGENE K. BOLTON is Director and Executive Vice President of GEAM. He manages
U.S. Equity investments for GEAM. He leads a team of portfolio managers for the
overall the WRL GE U.S. Equity and has served in that capacity since its
inception. Mr. Bolton joined GEAM in 1984 as Chief Financial Officer and has
been portfolio manager since 1986. Mr. Bolton is currently a director and
executive vice president of GE Investments.
/diamond/
GOLDMAN SACHS ASSET MANAGEMENT
As of September 1, 1999, the Investment Management Division ("IMD") was
established as a new operating division of Goldman, Sachs & Co. and this newly
created entity includes Goldman Sachs Asset Management ("GSAM"). Goldman Sachs
& Co. registered as an investment adviser in 1981. GSAM serves as the sub-
adviser to the WRL Goldman Sachs Growth and WRL Goldman Sachs Small Cap. GSAM
is located at 32 Old Slip, New York, New York 10005. The Goldman Sachs Group,
L.P., which controlled GSAM, merged into the Goldman Sachs Group, Inc. as a
result of an initial public offering.
/diamond/ PORTFOLIO MANAGER:
HERBERT E. EHLERS has served as head of a thirteen person investment team that
has managed the WRL Goldman Sachs Growth since inception. Prior to joining GSAM
in 1997, he was chief investment officer at Liberty Investment Management, Inc.
from 1994-1997.
ROBERT C. JONES, Managing Director, has served as head of an investment team
that has managed the WRL Goldman Sachs Small Cap since inception. Mr. Jones
joined GSAM as a portfolio manager in 1989.
50
<PAGE>
/five diamonds/
SALOMON BROTHERS ASSET
MANAGEMENT INC
Salomon Brothers Asset Management Inc ("SBAM") serves as the sub-adviser to the
WRL Salomon All Cap.
SBAM, located at 7 World Trade Center, New York, NY 10048, is a wholly-owned
subsidiary of Salomon Brothers Holding Company, Inc., which is wholly-owned by
Salomon Smith Barney Holdings Inc., which is, in turn, wholly-owned by
Citigroup.
/diamond/ PORTFOLIO MANAGERS:
ROSS S. MARGOLIES, has managed this portfolio since inception. Mr. Margolies
joined Salomon in 1992.
ROBERT M. DONAHUE, Jr. assists in the day-to-day management of the portfolio.
Prior to joining SBAM in 1997, Mr. Donahue worked as an equity analyst at
Gabelli & Company.
/five diamonds/
THE DREYFUS CORPORATION
The Dreyfus Corporation ("Dreyfus") serves as the sub-adviser to WRL Dreyfus Mid
Cap.
Dreyfus, located at 200 Park Avenue, New York, NY 10166, is a wholly-owned
subsidiary of Mellon Bank, which is a wholly-owned subsidiary of Mellon Bank
Corporation. Dreyfus manages assets in excess of $128 billion, as of December
31, 1999.
/diamond/ PORTFOLIO MANAGER:
JOHN O'TOOLE has served as portfolio manager since its inception and has been
employed by Dreyfus as a portfolio manager since 1994. Mr. O'Toole is a senior
vice president and portfolio manager for Mellon Equity Assocates, LLP, a
wholly-owned subsidiary of Mellon Bank, N.A. He has been with Mellon Bank, N.A.
since 1979.
/five diamonds/
T. ROWE PRICE ASSOCIATES, INC.
T. Rowe Price Associates, Inc. ("T. Rowe Price") serves as sub-Adviser to WRL
T. Rowe Price Small Cap and the WRL T. Rowe Price Dividend Growth.
T. Rowe Price is located at 100 E. Pratt Street, Baltimore, MD 21202.
/diamond/ PORTFOLIO MANAGERS:
TOM HUBER has managed the WRL T. Rowe Price Dividend Growth portfolio since
March, 2000 and heads an Investment Team for this portfolio. He joined T. Rowe
Price in 1994.
RICHARD T. WHITNEY, CFA, has managed the WRL T. Rowe Price Small Cap portfolio
since inception and heads the Investment Team for this portfolio. He joined T.
Rowe Price in 1985.
/five diamonds/
PILGRIM BAXTER AND ASSOCIATES, LTD.
Pilgrim Baxter and Associates, Ltd. ("Pilgrim Baxter") serves as sub-adviser to
the WRL Pilgrim Baxter Mid Cap Growth.
Pilgrim Baxter, located at 825 Duportail Road, Wayne PA 19087, is a
professional investment management firm which, along with its predecessors, has
been in business since 1982. Pilgrim Baxter is a wholly-owned subsidiary of
United Asset Management.
/diamond/ PORTFOLIO MANAGER:
JEFF A. WRONA, CFA, has managed this portfolio since inception. Prior to
joining Pilgrim Baxter, he was a senior portfolio manager at Munder Capital
Management.
51
<PAGE>
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 management by the Sub-Adviser. The table below lists those
percentages by portfolio.
<TABLE>
<CAPTION>
PORTFOLIO PERCENTAGE OF AVERAGE DAILY NET ASSETS
- - --------- --------------------------------------
<S> <C>
WRL Janus Growth 0.40%(1)
WRL AEGON Bond 0.20% (Prior to January 1, 1998, Janus Capital
Corporation, previous Sub-Adviser, received 0.25%)
WRL Janus Global 0.40%(2)
WRL J.P. Morgan Money Market 0.15%
WRL AEGON Balanced 0.40%, less 50% of amount of excess expenses(3)
WRL VKAM Emerging Growth 0.40%, less 50% of amount of excess expenses(3)
WRL LKCM Strategic Total Return 0.40%
WRL Alger Aggressive Growth 0.40%
WRL Dean Asset Allocation 0.40%, less 50% of amount of excess expenses(3)
WRL C.A.S.E. Growth 0.40%
WRL Federated 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
WRL NWQ Value Equity 0.40%, less 50% of amount of excess expenses(3)
WRL GE International Equity 50% of the fees received by the investment adviser(5)
WRL GE U.S. Equity 0.40%
WRL Third Avenue Value 0.40%, less 50% of amount of excess expenses(3)
WRL J.P. Morgan Real Estate Securities 0.40%
WRL T. Rowe Price Small Cap 0.35%
WRL Pilgrim Baxter Mid Cap 0.50% of the first $100 million of portfolio's average
daily net assets; 0.40% of assets in excess of
$100 million (from first dollar)(4)
WRL Salomon All Cap 0.30% of the first $20 million of portfolio's average daily
net assets; 0.50% of the next $20-100 million of
average daily net assets; and 0.40% of average
daily net assets over $100 million(4)
WRL Goldman Sachs Growth 0.50% of the first $50 million of portfolio's average
daily net assets; 0.45% of the next $50-100 million
in assets; and 0.40% of assets in excess of $100 million
after the first year of the contract, the minimum fees will be
$150,000 (in aggregate)(4)
WRL T. Rowe Price Dividend Growth 0.50% of first $100 million of average daily net assets
and 0.40% of assets over $100 million (from first dollar)(4)
WRL Goldman Sachs Small Cap 0.50% after the first year of the contract, minimum fees will
be $150,000
WRL Dreyfus Mid Cap 0.45% of the first $100 million of the portfolio's
average daily net assets; 0.40% of assets in excess
of $100 million (from first dollar)
</TABLE>
- - --------------
(1) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the first $3 billion of the portfolio's average daily net assets
(resulting in a net fee of 0.3875%) and 0.25% of assets above $3 billion
(resulting in a net fee of 0.375%). This waiver will terminate on June 25,
2000.
(2) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the portfolio's average daily net assets above $2 billion (resulting in a
net fee of 0.3875%). This waiver will terminate on June 25, 2000.
(3) Excess expenses are those expenses paid by the Investment Adviser on behalf
of a portfolio pursuant to any expense limitation.
(4) The average daily net assets will be determined on a combined basis with
the same name fund managed by the sub-adviser for IDEX Mutual Funds.
(5) Prior to May 1, 2000, Scottish Equitable served as co-manager of this
portfolio and the portfolio was know as WRL GE/Scottish Equitable
International Equity.
52
<PAGE>
The method of computing each Sub-Adviser's fees is set forth above. For the
years ended December 31, 1999, 1998 and 1997 each Sub-Adviser was paid fees for
their services in the following amounts:
Sub-Advisory Fees
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------
SUB-ADVISER PORTFOLIO 1999 1998 1997
- - ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Alger WRL Alger Aggressive Growth $2,936,966 $1,680,802 $1,124,900
VKAM WRL VKAM Emerging Growth 4,473,352 2,704,049 2,037,749
Janus WRL Janus Growth(4) 12,744,800 9,055,804 6,858,412
WRL Janus Global(5) 5,146,976 3,768,835 2,795,909
WRL J.P. Morgan Money Market N/A N/A N/A
WRL AEGON Bond(1) 325,052 N/A 239,843
EQSF WRL Third Avenue Value 72,841 55,964 N/A
C.A.S.E. WRL C.A.S.E. Growth 334,939 257,951 167,446
NWQ WRL NWQ Value Equity 607,482 729,083 450,409
Dean WRL Dean Asset Allocation 1,311,787 1,355,313 1,039,770
LKCM WRL LKCM Strategic Total Return 2,383,168 2,242,509 1,851,835
Federated WRL Federated Growth & Income 300,086 287,959 202,218
AIMI WRL AEGON Balanced 421,229 340,271 245,951
WRL AEGON Bond(1) 325,052 294,882 N/A
J.P. Morgan WRL J.P. Morgan Real Estate Securities 12,266 4,669 N/A
WRL J.P. Morgan Money Market 404,622 241,729 193,113
GEIM WRL GE U.S. Equity(2) 588,987 277,671 70,140
WRL GE International Equity(2)(3) 86,818 69,749 27,889
SEIM WRL GE International Equity(2)(3) 77,845 67,890 27,962
GSAM WRL Goldman Sachs Small Cap 6,577 N/A N/A
WRL Goldman Sachs Growth 14,672 N/A N/A
Dreyfus WRL Dreyfus Mid Cap 3,971 N/A N/A
Salomon WRL Salomon All Cap 8,475 N/A N/A
T. Rowe Price WRL T. Rowe Price Dividend Growth 17,211 N/A N/A
WRL T. Rowe Price Small Cap 15,071 N/A N/A
Pilgrim Baxter WRL Pilgrim Baxter Mid Cap Growth 42,533 N/A N/A
</TABLE>
- - ------------------------------
(1) Prior to January 1, 1998, Janus served as sub-adviser to Bond 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 Sub-Adviser to the WRL AEGON Bond (formerly Bond),
and will receive monthly compensation from the Investment Adviser at the
annual rate of 0.20% of average daily net assets of the portfolio.
(2) Prior to May 1, 2000 this portfolio was known as WRL GE/Scottish Equitable
International Equity.
(3) GEIM and SEIM served as Co-sub-advisers for the WRL GE International Equity
until May 1, 2000.
(4) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the first $3 billion of the portfolio's average daily net assets
(resulting in a net fee of 0.3875%) and 0.25% of assets above $3 billion
(resulting in a net fee of 0.375%). This waiver will terminate on June 25,
2000.
(5) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the portfolio's average daily net assets above $2 billion (resulting in a
net fee of 0.3875%). This waiver will terminate on June 25, 2000.
Through June 25, 2000, provided that it continues to serve as sub-adviser for
the portfolios, Janus Capital will compensate WRL for its services in
connection with promotion, marketing and distribution in an amount equal to
0.0375% of the average daily net assets of WRL Janus Growth on the first $3
billion of assets and 0.075% on assets in excess of $3 billion. With respect to
WRL Janus Global, the amount will be equal to 0.0375% of the portfolio's
average daily net assets above $2 billion.
/diamond/ JOINT TRADING ACCOUNTS
Subject to approval by the Fund's Board, the WRL Janus Growth and WRL Janus
Global 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 WRL Janus Growth and WRL Janus Global 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.
53
<PAGE>
/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.
The Board is required to review and approve the Code of Ethics for each
Sub-Adviser. Each Sub-Adviser is also 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/ ADMINISTRATIVE AND TRANSFER AGENCY SERVICES
Effective January 1, 1997, the Fund entered into an Administrative Services and
Transfer Agency Agreement with WRL Services located at 570 Carillon Parkway,
St. Petersburg, Florida 33716, 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.
PORTFOLIO TRANSACTIONS AND BROKERAGE
/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 held during the year. The WRL Third Avenue
Value investment policies and objective, which emphasizes long-term holdings,
should tend to keep the number of portfolio transactions relatively low.
Because of this, the WRL Third Avenue Value does not expect its annual
portfolio turnover rate to exceed 50%. The WRL J.P. Morgan Real Estate
Securities 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. Increased turnover results in higher brokerage costs or mark-up
charges for a portfolio; these charges are ultimately borne by the
policyowners.
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.
54
<PAGE>
The following table provides the portfolios' turnover rates for the fiscal years
ended December 31, 1999, 1998 and 1997:
PORTFOLIO TURNOVER RATES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
PORTFOLIO 1999 1998 1997
- - --------- ------ ------ ------
<S> <C> <C> <C>
WRL Alger Aggressive Growth 101.71% 117.44% 136.18%
WRL VKAM Emerging Growth 117.72% 99.50% 99.78%
WRL GE/Scottish Equitable International Equity(2) 99.77% 71.74% 54.33%
WRL Janus Global 68.10% 87.36% 97.54%
WRL Janus Growth 70.95% 35.29% 85.88%
WRL Third Avenue Value 9.56% 4.35% N/A
WRL C.A.S.E. Growth 143.52% 205.28% 196.50%
WRL GE U.S. Equity 44.01% 63.08% 92.35%
WRL NWQ Value Equity 34.19% 43.60% 17.28%
WRL Dean Asset Allocation 88.78% 76.62% 63.76%
WRL LKCM Strategic Total Return 45.42% 49.20% 48.20%
WRL J.P. Morgan Real Estate Securities 189.80% 100.80% N/A
WRL Federated Growth & Income 117.14% 97.17% 155.77%
WRL AEGON Balanced 74.88% 83.94% 77.06%
WRL AEGON Bond 26.40% 51.60% 213.03%
WRL J.P. Morgan Money Market(1) N/A N/A N/A
WRL Goldman Sachs Small Cap 340.66% N/A N/A
WRL Goldman Sachs Growth 40.46% N/A N/A
WRL Dreyfus Mid Cap 94.19% N/A N/A
WRL Salomon All Cap 216.29% N/A N/A
WRL T. Rowe Price Dividend Growth 43.76% N/A N/A
WRL T. Rowe Price Small Cap 159.02% N/A N/A
WRL Pilgrim Baxter Mid Cap Growth 155.71% N/A N/A
</TABLE>
- - ------------------------------
(1) WRL J.P. Morgan 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.
(2) This portfolio was previously known as WRL GE/Scottish Equitable
International Equity.
For the year ended December 31, 1997, the Bond portfolio's increase in turnover
rate was the result of portfolio management strategies in trying to maintain
benchmark treasury issues. There was also a significant increase in the
turnover rate for the WRL Federated Growth & Income for the year ended December
31, 1997 because the portfolio changed its investment objective from a utility
based portfolio to a defensive equity portfolio and the portfolio managers
implemented a proprietary defensive equity model in selecting new stocks.
The future annual turnover rates cannot be precisely predicted, although an
annual turnover rate in excess of 100% is not presently anticipated for the WRL
Alger Aggressive Growth, WRL Dean Asset Allocation, WRL Federated Growth &
Income and WRL AEGON Balanced; 50% for the WRL NWQ Value Equity and WRL Third
Avenue Value; 150% for the WRL Janus Growth; and 200% for the WRL Janus Global.
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
55
<PAGE>
the most favorable security price) of all portfolio transactions. In placing
portfolio transactions, the Sub-Adviser may give consideration to brokers who
provide supplemental investment research, in addition to such research obtained
for a flat fee, to the Sub-Adviser, and pay spreads or commissions to such
brokers or dealers furnishing such services which are in excess of spreads or
commissions which another broker or dealer may charge for the same transaction.
In selecting brokers and in negotiating commissions, the Sub-Adviser considers
such factors as: the broker's reliability; the quality of its execution
services on a continuing basis; the financial condition of the firm; and
research products and services provided, which include: (i) furnishing advice,
either directly or through publications or writings, as to the value of
securities, the advisability of purchasing or selling specific securities and
the availability of securities or purchasers or sellers of securities and (ii)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends and portfolio strategy and products and other
services (such as third party publications, reports and analyses, and computer
and electronic access, equipment, software, information and accessories) that
assist each Sub-Adviser in carrying out its responsibilities.
Supplemental research obtained through brokers or dealers will be in addition
to, and not in lieu of, the services required to be performed by a Sub-Adviser.
The expenses of a Sub-Adviser will not necessarily be reduced as a result of
the receipt of such supplemental information. A Sub-Adviser may use such
research products and services in servicing other accounts in addition to the
respective portfolio. If a Sub-Adviser determines that any research product or
service has a mixed use, such that it also serves functions that do not assist
in the investment decision-making process, the Sub-Adviser will allocate the
costs of such service or product accordingly. The portion of the product or
service that a Sub-Adviser determines will assist it in the investment
decision-making process may be paid for in brokerage commission dollars. Such
allocation may create a conflict of interest for the Sub-Adviser. Conversely,
such supplemental information obtained by the placement of business for a
Sub-Adviser will be considered by and may be useful to the Sub-Adviser in
carrying out its obligations to a portfolio.
When a portfolio purchases or sells a security in the OTC market, the
transaction takes place directly with a principal market-maker, without the use
of a broker, except in those circumstances where, in the opinion of the
Sub-Adviser, better prices and executions are likely to be achieved through the
use of a broker.
Securities held by a portfolio may also be held by other separate accounts,
mutual funds or other accounts for which the Investment Adviser or Sub-Adviser
serves as an adviser, or held by the Investment Adviser or Sub-Adviser for
their own accounts. Because of different investment objectives or other
factors, a particular security may be bought by the Investment Adviser or Sub-
Adviser for one or more clients when one or more clients are selling the same
security. If purchases or sales of securities for a portfolio or other entities
for which they act as investment adviser or for their advisory clients arise
for consideration at or about the same time, transactions in such securities
will be made, insofar as feasible, for the respective entities and clients in a
manner deemed equitable to all. To the extent that transactions on behalf of
more than one client of the Investment Adviser or Sub-Adviser during the same
period may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
On occasions when the Investment Adviser or a Sub-Adviser deems the purchase or
sale of a security to be in the best interests of a portfolio as well as other
accounts or companies, it may to the extent permitted by applicable laws and
regulations, but will not be obligated to, aggregate the securities to be sold
or purchased for 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., One
World Trade Center, Suite 9333, New York, New York 10038; M. J. Whitman, Inc.;
M. J. Whitman Senior Debt Corp., 767 Third Avenue, New York, New York
10017-2023; Van Kampen Funds Inc., 1 Parkview Plaza, P.O. Box 5555, Oakbrook
Terrace, Illinois 60181, Dreyfus Brokerage Services, Inc., 401 North Maile
Drive, Beverly Hills, CA 90210, Dreyfus Investment Services Corp., Union Trust
Building, 501 Grant St., Pittsburg, PA 15219 and AEGON USA Securities, Inc.,
P.O. Box 1449,
56
<PAGE>
Cedar Rapids, Iowa 52499. As stated above, any such placement of portfolio
business will be subject to the ability of the broker-dealer to provide best
execution and to the Conduct Rules of the National Association of Securities
Dealers, Inc.
COMMISSIONS PAID BY THE PORTFOLIOS
<TABLE>
<CAPTION>
AGGREGATE COMMISSIONS AFFILIATED BROKERAGE COMMISSIONS
YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31
------------------------------------- ---------------------------------------------------------
Portfolio 1999 1998 1997 1999 % 1998 % 1997 %
- - --------- ----------- ----------- ----------- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
WRL Alger Aggressive Growth(1) $ 907,331 $ 916,267 $ 754,459 $903,540 99.58% $912,105 99.55% $749,587 99.35%
WRL VKAM Emerging Growth(5) 1,305,965 920,884 627,400 9,346 <1% 1,308 < 1% N/A N/A
WRL Janus Global 2,219,248 2,373,255 2,305,145 N/A N/A N/A N/A N/A N/A
WRL Janus Growth 2,717,764 1,023,925 1,367,104 N/A N/A N/A N/A N/A N/A
WRL C.A.S.E. Growth 326,987 323,967 335,147 N/A N/A N/A N/A N/A N/A
WRL Third Avenue Value(4)(7) 7,817 20,572 N/A 7,452 95.33% 20,568 99.98%
WRL Dean Asset
Allocation 521,249 339,951 352,964 N/A N/A N/A N/A N/A N/A
WRL LKCM Strategic
Total Return 513,667 469,460 348,083 N/A N/A N/A N/A N/A N/A
WRL Federated Growth &
Income 281,782 262,012 175,035 N/A N/A N/A N/A N/A N/A
WRL AEGON Balanced 179,262 153,672 105,731 N/A N/A N/A N/A N/A N/A
WRL NWQ Value Equity 168,551 191,139 157,512 N/A N/A N/A N/A N/A N/A
WRL GE International Equity(3) 136,293 121,485 102,616 N/A N/A N/A N/A N/A N/A
WRL GE U.S. Equity(2)(6) 133,539 102,182 39,301 241 <1% 325 <1% N/A N/A
WRL J.P. Morgan Real
Estate Securities(7) 17,545 8,206 N/A N/A N/A N/A N/A N/A N/A
WRL Goldman Sachs Small
Cap(9)(10) 14,335 N/A N/A 158 1.10% N/A N/A N/A N/A
WRL Goldman Sachs
Growth(9)(11) 10,724 N/A N/A 198 1.85% N/A N/A N/A N/A
WRL Dreyfus Mid Cap(9) 3,922 N/A N/A N/A N/A N/A N/A N/A N/A
WRL Salomon All Cap(9) 32,734 N/A N/A N/A N/A N/A N/A N/A N/A
WRL T. Rowe Price Dividend
Growth(9) 9,115 N/A N/A N/A N/A N/A N/A N/A N/A
WRL T. Rowe Price Small Cap(9) 15,525 N/A N/A N/A N/A N/A N/A N/A N/A
WRL Pilgrim Baxter Mid Cap
Growth(9) 26,811 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- - --------------
(1) The percentage of the portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through Fred Alger Company,
Incorporated for the fiscal year ended December 31, 1999, 1998 and 1997
was 98.90%, 99.27% and 98.37%, respectively.
(2) Portfolio commenced operations on January 2, 1997.
(3) Portfolio commenced operatoins January 2, 1997 and was known as WRL
GE/Scottish Equitable International Equity.
(4) The percentage of the portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through M.J. Whitman, Inc.
for the fiscal year ended December 31, 1999, 1998 and 1997 was 88.40%,
97.91%, and N/A, respectively.
(5) The percentage of the portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through Morgan Stanley &
Co., Incorporated for the fiscal year ended December 31, 1999, 1998 and
1997 was 1.06%, < 1% and N/A, respectively.
(6) The percentage of the portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through Paine Webber, Inc.
for the fiscal year ended December 31, 1999, 1998 and 1997 was < 1%, < 1%
and N/A, respectively.
(7) Portfolio commenced operations May 1, 1998.
(8) Portfolio commenced operations January 2, 1998
(9) Portfolio commenced operations May 3, 1999.
(10) The percentage of the portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through Goldman Sachs & Co.
for the fiscal year ended December 31, 1999, 1998 and 1997 was 36.91%, N/A
and N/A, respectively.
(11) The percentage of the portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through Goldman Sachs & Co.
for the fiscal year ended December 31, 1999, 1998 and 1997 was 2.44%, N/A
and N/A, respectively.
WRL Alger Aggressive Growth paid all its affiliated brokerage commissions to
Fred Alger & Company, Incorporated; WRL Third Avenue Value portfolio paid all
affiliated brokerage to M.J. Whitman, Inc.; WRL VKAM Emerging Growth paid all
affiliated brokerage to Morgan Stanley & Co., Incorporated; and WRL GE U.S.
Equity paid all affiliated commissions to Paine Webber, Inc. WRL Goldman Sachs
Small Cap and WRL Goldman Sachs Growth paid all its affiliated commissions to
Goldman Sachs & Co.
The WRL AEGON Bond and the WRL J.P. Morgan Money Market did not pay any
brokerage commissions for the years ended December 31, 1999, 1998, and 1997.
57
<PAGE>
PURCHASE AND REDEMPTION OF SHARES
/diamond/ DETERMINATION OF OFFERING PRICE
Shares of the portfolios are currently sold only to the separate accounts to
fund the benefits under the Policies and the annuity contracts. The portfolios
may, in the future, offer their shares to other insurance company separate
accounts. The separate accounts invest in shares of a portfolio in accordance
with the allocation instructions received from holders of the policies and the
annuity contracts. Such allocation rights are further described in the
prospectuses and disclosure documents for the policies and the annuity
contracts. Shares of the portfolios are sold and redeemed at their respective
net asset values as described in the prospectus.
/diamond/ NET ASSET VALUATION
As stated in the prospectus, the net asset value of the portfolios' shares is
ordinarily determined, once daily, as of the close of the regular session of
business on the New York Stock Exchange ("Exchange") (usually 4:00 p.m.,
Eastern Time) on each day the Exchange is open. (Currently the Exchange is
closed on New Year's Day, Martin Luther King's Birthday, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.) The per share net asset value of a portfolio is determined by
dividing the total value of the securities and other assets, less liabilities,
by the total number of shares outstanding. In determining net asset value,
securities listed on the national securities exchanges and traded on the NASDAQ
National Market are valued at the closing prices on such markets, or if such a
price is lacking for the trading period immediately preceding the time of
determination, such securities are valued at their current bid price. Foreign
securities and currencies are converted to U.S. dollars using the exchange rate
in effect at the close of the Exchange. Other securities for which quotations
are not readily available are valued at fair values as determined in good faith
by a portfolio's Investment Adviser under the supervision of the Fund's Board
of Directors. Money market instruments maturing in 60 days or less are valued
on the amortized cost basis. Values of gold bullion held by a portfolio are
based upon daily quotes provided by banks or brokers dealing in such
commodities.
CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief description of how performance is calculated.
The following sections describe how performance data is calculated in greater
detail.
/diamond/ TOTAL RETURN
Total return quotations for each of the portfolios are computed by finding the
average annual compounded rates of return over the relevant periods that would
equate the initial amount invested to the ending redeemable value, according to
the following equation:
P (1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value (at the end
of the applicable period of a hypothetical
$1,000 payment made at the beginning
of the applicable period)
The total return quotation calculations for a portfolio reflect the deduction
of a proportionate share of the portfolio's investment advisory fee and
portfolio expenses and assume that all dividends and capital gains during the
period are reinvested in the portfolio when made. The calculations also assume
a complete redemption as of the end of the particular period.
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 WRL J.P. Morgan Money Market yield,
see "Yield Quotations - WRL J.P. Morgan Money Market ", 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:
58
<PAGE>
a-b
YIELD = 2 [ ( --- + 1)6 - 1]
cd
Where: a = dividends and interest earned during
the period by the portfolio
b = expenses accrued for the period
(net of reimbursement)
c = the average daily number of shares
outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per
share on the last day of the period
The yield of the WRL AEGON Bond as computed above for the thirty day period
ended December 31, 1998 was 5.26%.
/diamond/ YIELD QUOTATIONS - WRL J.P. MORGAN MONEY MARKET
From time to time the WRL J.P. Morgan 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 WRL J.P. Morgan Money Market for the seven-day period ended
December 31, 1999, was % and was equivalent to a compound effective yield
of %. The current yield for the WRL J.P. Morgan Money Market 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 WRL J.P. Morgan Money Market 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 WRL J.P. Morgan 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 WRL J.P. Morgan Money Market'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 WRL J.P. Morgan Money Market, 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 either qualified, and expects to continue to qualify, for
treatment as a regulated investment company ("RIC") under the Internal Revenue
Code of 1986, as amended (the "Code"). In order to qualify for that treatment,
a portfolio must distribute to its Policyowners for each taxable year at least
90% of its investment company taxable income ("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) 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 (3) 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. If each portfolio qualifies as a regulated
59
<PAGE>
investment company and distributes to its shareholders substantially all of its
net income and net capital gains, then each portfolio should have little or no
income taxable to it under the Code.
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 generally includes all securities of the same issuer). For
purposes of section 817(h), all securities of the same issuer, all interests in
the same real property project, and all interest in the same commodity are
treated as a single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities and political
subdivisions all will be considered securities issued by the same issuer.
If a portfolio fails to qualify as a regulated investment company, the
portfolio will be subject to federal, and possibly state, corporate taxes on
its taxable income and gains (without any deduction for its distributions to
its shareholders) and distributions to its shareholders will constitute
ordinary income to the extent of such Fund's available earnings and profits.
Owners of variable life insurance and annuity contracts which have invested in
such a portfolio might be taxed currently on the investment earnings under
their contracts and thereby lose the benefit of tax deferral. In addition, if a
portfolio failed to comply with the diversification requirements of section
817(h) of the Code and the regulations thereunder, owners of variable life
insurance and annuity contracts which have invested in the portfolio could be
taxed on the investment earnings under their contracts and thereby lose the
benefit of tax deferral. For additional information concerning the consequences
of failure to meet the requirements of section 817(h), see the 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, 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.
Foreign Investments - portfolios investing in foreign securities or currencies
(which may include [list portfolios so authorized] may be required to pay
withholding, income or other taxes to foreign governments or U.S. possession.
Foreign tax withholding from dividends and interest, if any, is generally at a
rate between 10% and 35%. The investment yield of any portfolio that invests in
foreign securities or currencies is reduced by these foreign taxes. Holders of
Policies and Annuity Contracts investing in such portfolios bear the cost of
any foreign taxes but will not be able to claim a foreign tax credit or
deduction for these foreign taxes. 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.
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.
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 the portfolio 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. A portfolio, however, may
qualify for, and may make, an election permitted under Section 853 of the Code
so that shareholders may be eligible to claim a credit or deduction on their
Federal income tax returns for, and will be required to treat as part of the
amounts distributed to them, their pro rata portion of qualified taxes paid or
incurred by the portfolio to foreign countries (which taxes relate primarily to
investment income). The portfolio may make an election under Section 853 of the
Code, provided that more than 50% of the value of the portfolio's total assets
at the close of the taxable year consists of
60
<PAGE>
securities in foreign corporations, and the portfolio satisfies applicable
distribution provisions of the Code. The foreign tax credit available to
shareholders is subject to certain limitations imposed by the Code. In addition,
another election is available that would involve marking to market a portfolio's
PFIC stock at the end of each taxable year (and on certain other dates
prescribed in the Code), with the result that unrealized gains are treated as
though they were realized although any such gains recognized will be ordinary
income rather than capital gain. If this election were made, tax at the
portfolio level under the PFIC rules would be eliminated, but a portfolio could,
in limited circumstances, incur nondeductible interest charges. A portfolio's
intention to qualify annually as a regulated investment company may limit a
portfolio's election with respect to PFIC stock.
The foregoing is only a general summary of some of the important Federal income
tax considerations generally affecting the portfolios and their shareholders.
No attempt is made to present a complete explanation of the Federal tax
treatment of the portfolios' activities, and this discussion and the discussion
in the prospectuses and/or statements of additional information for the
Policies and Annuity Contracts are not intended as a substitute for careful tax
planning. Accordingly, potential investors are urged to consult their own tax
advisors for more detailed information and for information regarding any state,
local, or foreign taxes applicable to the policies, annuity contracts and the
holders thereof.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each portfolio. The Fund is currently comprised of the following
portfolios: WRL VKAM Emerging Growth, WRL T. Rowe Price Small Cap, WRL Goldman
Sachs Small Cap, WRL Alger Aggressive Growth, WRL Value Line Aggressive Growth,
WRL GE International Equity, WRL Janus Global, WRL Dreyfus Mid Cap, WRL Salomon
All Cap, WRL Pilgrim Baxter Mid Cap Growth, WRL Janus Growth, WRL Goldman Sachs
Growth, WRL C.A.S.E. Growth, WRL GE U.S. Equity, WRL NWQ Value Equity, WRL
Great Companies -- AmericaSM, WRL Great Companies -- Technology SM, WRL T. Rowe
Price Dividend Growth, WRL Dean Asset Allocation, WRL LKCM Strategic Total
Return, WRL Federated Growth & Income, WRL AEGON Balanced, WRL J.P. Morgan Real
Estate Securities, WRL AEGON Bond and WRL J.P. Morgan Money Market.
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 of the Fund for the year
ended December 31, 1999 and the report of the Fund's independent accountants
are included in the 1999 Annual Report, and are incorporated herein by
reference to such report.
OTHER INFORMATION
/diamond/ INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
PricewaterhouseCoopers LLP, located at 400 North Ashley Street, serves as the
Fund's independent certified public accountants. The Fund has engaged
PricewaterhouseCoopers LLP to examine, in accordance with generally accepted
auditing standards, the financial statements of each of the Fund's portfolios.
/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.
61
<PAGE>
APPENDIX A
DESCRIPTION OF PORTFOLIO SECURITIES
The following is intended only as a supplement to the information
contained in the Prospectus and should be read only in conjunction with the
Prospectus. Terms defined in the Prospectus and not defined herein have the
same meanings as those in the Prospectus.
1. CERTIFICATE OF DEPOSIT.* A certificate of deposit generally is a
short-term, interest bearing negotiable certificate issued by a commercial bank
or savings and loan association against funds deposited in the issuing
institution.
2. EURODOLLAR CERTIFICATE OF DEPOSIT.* A Eurodollar certificate of
deposit is a short-term obligation of a foreign subsidiary of a U.S. bank
payable in U.S. dollars.
3. FLOATING RATE NOTE.* A floating rate note is debt issued by a
corporation or commercial bank that is typically several years in term but
whose interest rate is reset every one to six months.
4. 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 and 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.
A-2
<PAGE>
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 SEC 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.
A-3
<PAGE>
APPENDIX B
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 capac-
ity to pay principal and interest then for higher rated bonds.
BB, B, and Predominantly speculative with respect to the issuer's capacity to
CC, CC, C meet required interest and principal payments. BB - lowest degree of
speculation; C- the highest degree of speculation. Quality and
protective characteristics outweighed by large uncertainties or major
risk exposure to adverse conditions.
D In default.
</TABLE>
PLUS (+) OR MINUS (-) - The ratings from "AA" to "BBB" may be modified by the
addition of a plus or minus to show relative standing within the major rating
categories.
UNRATED - Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
<TABLE>
<S> <C> <C>
MOODY'S INVESTORS SERVICE, INC. Aaa Highest qualty, 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 Medum-grade obligations; neither highly protected nor poorly
secured. Interest and principal appear adequate for the present but
certain protective elements may be lacking or may be unreliable over
any great length of time.
Ba More unceratin, 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 assur-
ance of timely interest and principal payments or maintenance of
other contract terms over time.
Caa Poor standing, may be in default; elements of danger with respect to
principal or interest payments.
Ca Speculative in a high degree; could be in default or have other
marked short-comings.
C Lowest-rated; extremely poor prospects of ever attaining investment
standing.
</TABLE>
UNRATED - Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is 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.
B-1
<PAGE>
WRL SERIES FUND, INC.
WRL VKAM EMERGING GROWTH
WRL ALGER AGGRESSIVE GROWTH
WRL THIRD AVENUE VALUE
WRL GE INTERNATIONAL EQUITY
WRL JANUS GLOBAL
WRL JANUS GROWTH
WRL GE U.S. EQUITY
WRL C.A.S.E. GROWTH
WRL NWQ VALUE EQUITY
WRL DEAN ASSET ALLOCATION
WRL LKCM STRATEGIC TOTAL RETURN
WRL FEDERATED GROWTH & INCOME
WRL AEGON BALANCED
WRL AEGON BOND
WRL J.P. MORGAN MONEY MARKET
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 570 Carillon Parkway, St. Petersburg, FL 33716 or by calling the
Fund at (800) 851-9777.
Investment Adviser:
WRL INVESTMENT MANAGEMENT, INC.
Sub-Advisers:
VAN KAMPEN ASSET MANAGEMENT INC.
FRED ALGER MANAGEMENT, INC.
EQSF ADVISERS, INC.
GE INVESTMENT MANAGEMENT INCORPORATED
JANUS CAPITAL CORPORATION
C.A.S.E. MANAGEMENT, INC.
NWQ INVESTMENT MANAGEMENT COMPANY, INC.
DEAN INVESTMENT ASSOCIATES
LUTHER KING CAPITAL MANAGEMENT CORPORATION
J.P. MORGAN INVESTMENT MANAGEMENT INC.
FEDERATED INVESTMENT COUNSELING
AEGON USA INVESTMENT MANAGEMENT, INC.
The date of the Prospectus to which this Statement of Additional Information
relates and the date of this Statement of Additional Information is May 1,
2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT
OF
ADDITIONAL INFORMATION
-----------------------
<S> <C>
FUND HISTORY 1
INVESTMENT OBJECTIVES AND POLICIES 2
Investment Restrictions 2
WRL VKAM Emerging Growth 2
WRL Alger Aggressive Growth 3
WRL Third Avenue Value 4
WRL GE International Equity 4
WRL Janus Global 5
WRL Janus Growth 6
WRL GE U.S. Equity 8
WRL C.A.S.E. Growth 9
WRL NWQ Value Equity 9
WRL Dean Asset Allocation 9
WRL LKCM Strategic Total Return 10
WRL Federated Growth & Income 11
WRL AEGON Balanced 12
WRL AEGON Bond 13
WRL J.P. Morgan Money Market 13
INVESTMENT POLICIES 14
Lending 14
Borrowing 14
Short Sales 15
Foreign Securities 15
Foreign Bank Obligations 15
Forward Foreign Currency Contracts 16
When-Issued, Delayed Settlement and Forward Delivery Securities 16
Investment Funds (WRL GE International Equity) 17
Repurchase and Reverse Repurchase Agreements 17
Temporary Defensive Position 17
U.S. Government Securities 17
Non-Investment Grade Debt Securities 18
Convertible Securities 18
Investments in Futures, Options and Other Derivative Instruments 18
Zero Coupon, Pay-In-Kind and Step Coupon Securities 28
Warrants and Rights 29
Mortgage-Backed Securities 29
Asset-Backed Securities 29
Pass-Through Securities 30
Other Income Producing Securities 30
Illiquid and Restricted/144A Securities 30
Other Investment Companies 31
Quality and Diversification Requirements
(WRL J.P. Morgan Money Market) 31
Bank and Thrift Obligations 32
Investments in the Real Estate Industry and Real Estate Investment Trusts
("REITs") 32
Variable Rate Master Demand Notes 32
Debt Securities and Fixed-Income Investing 33
High Yield/High-Risk Securities 33
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT
OF
ADDITIONAL INFORMATION
-----------------------
<S> <C>
Trade Claims 33
MANAGEMENT OF THE FUND 34
Directors and Officers 34
The Investment Adviser 36
The Sub-Advisers 39
Joint Trading Accounts 44
Personal Securities Transactions 44
Administrative and Transfer Agency Services 45
PORTFOLIO TRANSACTIONS AND BROKERAGE 45
Portfolio Turnover 45
Placement of Portfolio Brokerage 46
PURCHASE AND REDEMPTION OF SHARES 48
Determination of Offering Price 48
Net Asset Valuation 48
CALCULATION OF PERFORMANCE
RELATED INFORMATION 48
Total Return 48
Yield Quotations 48
Yield Quotations - WRL J.P. Morgan Money Market 49
TAXES 49
CAPITAL STOCK OF THE FUND 51
REGISTRATION STATEMENT 51
FINANCIAL STATEMENTS 51
OTHER INFORMATION 51
Independent Certified Public Accountants 51
Custodian 51
Appendix A - Description of Portfolio Securities A-1
Appendix B - Brief Explanation of
Rating Categories B-1
</TABLE>
ii
<PAGE>
/DIAMOND/
FUND HISTORY
The Fund was incorporated under the laws of the State of Maryland on August 21,
1985 and is registered with the Securities and Exchange Commission ("SEC") as
an open-end management investment company.
The Fund offers its shares only for purchase by the separate accounts of life
companies to fund benefits under variable life insurance policies or variable
annuity contracts issued by AUSA Life Insurance Company, Inc. ("AUSA"), PFL
Life Insurance Company ("PFL"), Western Reserve Life Assurance Co. of Ohio
("WRL"), Peoples Benefit Life Insurance Company ("Peoples") and Transamerica
Occidental Life Insurance Company ("Transamerica") (the "Life Companies").
Shares may be offered to other life insurance companies in the future.
Because Fund shares are sold to separate accounts established to receive and
invest premiums received under variable life insurance policies and purchase
payments received under the variable annuity contracts, it is conceivable that,
in the future, it may become disadvantageous for variable life insurance
separate accounts and variable annuity separate accounts of the Life Companies
to invest in the Fund simultaneously. Neither the Life Companies nor the Fund
currently foresees any such disadvantages or conflicts, either to variable life
insurance policyholders or to variable annuity contract owners. Any Life
Company may notify the Fund's Board of a potential or existing conflict. The
Fund's Board will then determine if a material conflict exists and what action,
if any, should be taken in response. Such action could include the sale of Fund
shares by one or more of the separate accounts, which could have adverse
consequences. Material conflicts could result from, for example, (1) changes in
state insurance laws, (2) changes in Federal income tax laws, or (3)
differences in voting instructions between those given by variable life
insurance policyholders and those given by variable annuity contract owners.
The Fund's Board might conclude that separate funds should be established for
variable life and variable annuity separate accounts. If this happens, the
affected Life Companies will bear the attendant expenses of establishing
separate funds. As a result, variable life insurance policyholders and variable
annuity contract owners would no longer have the economies of scale typically
resulting from a larger combined fund.
The Fund offers a separate class of common stock for each portfolio. All shares
of a portfolio have equal voting rights, but only shares of a particular
portfolio are entitled to vote on matters concerning only that portfolio. Each
of the issued and outstanding shares of a portfolio is entitled to one vote and
to participate equally in dividends and distributions declared by the portfolio
and, upon liquidation or dissolution, to participate equally in the net assets
of the portfolio remaining after satisfaction of outstanding liabilities. The
shares of a portfolio, when issued, will be fully paid and nonassessable, have
no preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights. The holders
of more than 50% of the shares of the Fund voting for the election of directors
can elect all of the directors of the Fund if they so choose. In such event,
holders of the remaining shares would not be able to elect any directors.
Only the separate accounts of the Life Companies may hold shares of the Fund
and are entitled to exercise the rights directly as described above. To the
extent required by law, the Life Companies will vote the Fund's shares held in
the separate accounts, including Fund shares which are not attributable to
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 Investment Company Act of 1940, as
amended (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.
1
<PAGE>
INVESTMENT OBJECTIVES AND POLICES
The investment objectives of the WRL VKAM Emerging Growth, WRL Alger Aggressive
Growth, WRL GE International Equity, WRL Janus Global, WRL Third Avenue Value,
WRL Janus Growth, WRL C.A.S.E. Growth, WRL GE U.S. Equity, WRL NWQ Value
Equity, WRL Dean Asset Allocation, WRL LKCM Strategic Total Return, WRL
Federated Growth & Income, WRL AEGON Balanced, WRL AEGON Bond and WRL J.P.
Morgan Money Market (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 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, its 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 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/
WRL VKAM 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
2
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equivalent in kind and amount to the securities sold short, provided that
margin payments and other deposits in connection with transactions in options,
futures contracts and options on futures contracts shall not be deemed to
constitute selling securities short.
(B) The portfolio may not purchase securities on margin, except that the
portfolio may obtain such short-term credits as are necessary for the clearance
of transactions and that margin payments and other deposits in connection with
transactions in options, futures contracts and options on futures contracts
shall not be deemed to constitute purchasing securities on margin.
(C) The portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Limitations (i) and (ii) do not apply to
money market funds or to securities received as dividends, through offers of
exchange, or as a result of a consolidation, merger or other reorganization.
(D) The portfolio may not mortgage or pledge any securities owned or held
by the portfolio in amounts that exceed, in the aggregate, 15% of the
portfolio's net assets, provided that this limitation does not apply in the
case of assets deposited to provide margin or guarantee positions in options,
futures contracts and options on futures contracts or the segregation of assets
in connection with such contracts.
(E) The portfolio may 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/
WRL ALGER AGGRESSIVE 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. 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.
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
3
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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/
WRL THIRD AVENUE VALUE
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.
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
331/3% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).
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. This restriction shall not apply to transactions involving
selling securities "short against the box."
(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/
WRL GE INTERNATIONAL EQUITY
(FORMERLY WRL GE/SCOTTISH EQUITABLE
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
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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 331/3% of the value of the
portfolio's total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that exceed 331/3% of the value of the
portfolio's total assets by reason of a decline in net assets will be reduced
within three business days to the extent necessary to comply with the 331/3%
limitation. This policy shall not prohibit reverse repurchase agreements or
deposits of assets to margin or guarantee positions in futures, options, swaps
or forward contracts, or the segregation of assets in connection with such
contracts.
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 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 Asset
Management Incorporated ("GEAM"), created specifically to serve as a vehicle
for the collective investment of cash balances of the portfolio and other
accounts advised by GEAM 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 SEC and Bloomberg Inc. In addition, the portfolio may select its own
industry classifications, provided such classifications are reasonable.
/DIAMOND/
WRL JANUS GLOBAL
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
5
<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, provided that there shall
be no limitation on the purchase of obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities, or of certificates of
deposit and bankers' acceptances.
3. Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this shall not
prevent the portfolio from purchasing or selling options, futures, swaps and
forward contracts or from investing in securities or other instruments backed
by physical commodities).
4. Invest directly in real estate or interests in real estate; however,
the portfolio may own debt or equity securities issued by companies engaged in
those businesses.
5. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
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/
WRL JANUS GROWTH, WRL C.A.S.E. GROWTH AND WRL AEGON BOND
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
6
<PAGE>
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 policyowner approval:
(A) A portfolio may not, as a matter of non-fundamental policy: (i) enter
into any futures contracts or options on futures contracts for purposes other
than bona fide hedging transactions within the meaning of Commodity Futures
Trading Commission regulations if the aggregate initial margin deposits and
premiums required to establish positions in futures contracts and related
options that do not fall within the definition of bona fide hedging transactions
would exceed 5% of the fair market value of the portfolio's net assets, after
taking into account unrealized profits and losses on such contracts it has
entered into and (ii) enter into any futures contracts or options on futures
contracts if the aggregate amount of the portfolio's commitments under
outstanding futures contracts positions and options on futures contracts would
exceed the market value of its total assets.
(B) A portfolio may not mortgage or pledge any securities owned or held
by the portfolio in amounts that exceed, in the aggregate, 15% of the
portfolio's net assets, provided that this limitation does not apply to reverse
repurchase agreements or in the case of assets deposited to provide margin or
guarantee positions in options, futures contracts, swaps, forward contracts or
other derivative instruments or the segregation of assets in connection with
such transactions.
(C) A portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities sold
short, and provided that transactions in options, futures contracts, swaps,
forward contracts and other derivative instruments are not deemed to constitute
selling securities short.
(D) A portfolio may not purchase securities on margin, except that a
portfolio may obtain such short-term credits as are necessary for the clearance
of transactions, and provided that margin payments and other deposits made in
connection with transactions in options, futures contracts, swaps, forward
contracts, and other derivative instruments shall not be deemed to constitute
purchasing securities on margin.
(E) A portfolio may 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.
7
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/DIAMOND/
WRL GE U.S. EQUITY
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 331/3% of the value of its total assets (including the amount
borrowed) less liabilities (other than borrowings) at the time the borrowing is
made. Whenever borrowings, including reverse repurchase agreements, of 5% or
more of the portfolio's total assets are outstanding, the portfolio will not
purchase securities.
Furthermore, the portfolio has adopted the following non-fundamental investment
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or 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 GEAM, created
specifically to serve as a vehicle for the collective investment of cash
balances of the portfolio and other accounts advised by GEAM 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,
8
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except to the extent that exercise by the portfolio 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/
WRL NWQ VALUE EQUITY
The portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the portfolio in the securities of such issuer exceeds
5% of the value of the portfolio's total assets, or (b) the portfolio owns more
than 10% of the outstanding voting securities of such issuer.
2. Invest more than 25% of the portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services; for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction. In addition, there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Make loans except (i) by purchasing debt securities in accordance with
its investment objectives and policies or by entering into repurchase
agreements or (ii) by lending the portfolio securities to banks, brokers,
dealers and other financial institutions so long as such loans are not
inconsistent with the 1940 Act or the rules and regulations or interpretations
of the SEC thereunder.
4. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments.
5. Purchase or sell real estate or real estate limited partnerships (but
this shall not prevent the portfolio from investing in securities or other
instruments backed by real estate, including mortgage-backed securities, or
securities of companies engaged in the real estate business).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
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/
WRL DEAN ASSET ALLOCATION
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.
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<PAGE>
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. 20.)
/DIAMOND/
WRL LKCM STRATEGIC TOTAL RETURN
The portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the portfolio in the securities of such issuer exceeds
5% of the value of the portfolio's total assets, or (b) the portfolio owns more
than 10% of the outstanding voting securities of such issuer.
2. Invest more than 25% of the portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services, for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction. In addition, there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
portfolio from investing in securities or other instruments backed by physical
commodities).
4. Purchase or sell real estate (but this shall not prevent the portfolio
from investing in securities or other instruments backed by real estate,
including mortgage-backed securities, or securities of companies engaged in the
real estate business).
5. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper or debt securities).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
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<PAGE>
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/
WRL FEDERATED GROWTH & INCOME
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 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
11
<PAGE>
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/
WRL AEGON BALANCED
The portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the portfolio in the securities of such issuer exceeds
5% of the value of the portfolio's total assets, or (b) the portfolio owns more
than 10% of the outstanding voting securities of such issuer.
2. Invest more than 25% of the portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services, for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction. In addition, there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
portfolio from purchasing or selling options, futures, swaps and forward
contracts or from investing in securities or other instruments backed by
physical commodities).
4. Purchase or sell real estate (but this shall not prevent the portfolio
from investing in securities or other instruments backed by real estate,
including mortgage-backed securities, or securities of companies engaged in the
real estate business).
5. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchase of commercial paper or debt securities).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
7. Borrow money, except for temporary or emergency purposes (not for
leveraging or investment) in
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<PAGE>
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. 20.)
/DIAMOND/
WRL J.P. MORGAN MONEY MARKET
The portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the portfolio's total assets, purchase the
securities of any one issuer (other than cash items and "Government securities"
as defined in the 1940 Act) if immediately after and as a result of such
purchase (a) the value of the holdings of the portfolio in the securities of
such issuer exceeds 5% of the value of the portfolio's total assets, or (b) the
portfolio owns more than 10% of the outstanding voting securities of any one
class of securities of such issuer.
2. Invest more than 25% of the value of the portfolio's assets in any
particular industry (other than Government securities or obligations of U.S.
branches of U.S. banks).
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities.
4. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real estate (including real estate limited partnerships), commodities,
or commodity contracts or interest in oil, gas or mineral exploration or
development programs or leases. However, the portfolio may purchase debt
securities or commercial paper issued by companies which invest in real estate
or interest therein, including real estate investment trusts.
5. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of portfolio securities of the portfolio.
6. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).
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.
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<PAGE>
(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.
/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.
State laws and regulations may impose additional limitations on borrowings.
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 WRL GE International Equity, WRL GE U.S. Equity, WRL VKAM Emerging Growth
and WRL LKCM Strategic Total Return, 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.
/DIAMOND/
BORROWING
Subject to its investment restrictions, 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 WRL GE International
Equity and WRL GE U.S. Equity, 10% of total assets for the WRL NWQ Value Equity
and 5% of total assets for the WRL Third Avenue Value, and 25% of total assets
for all other portfolios.
To secure borrowings, a portfolio may not mortgage or pledge its securities in
amounts that exceed 15% of its net assets (10% for the WRL NWQ Value Equity and
5% for the WRL Third Avenue Value).
The portfolios with a common Sub-Adviser may also borrow (or lend) money to
other portfolios or funds that permit such transactions and are also advised by
that Sub-Adviser, provided each portfolio or fund seeks and obtains permission
from the SEC. There is no assurance that such permission would be granted.
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The WRL Alger Aggressive Growth 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.
/DIAMOND/
SHORT SALES
Each portfolio may sell securities "short against the box." A short sale is the
sale of a security that the portfolio does not own. A short sale is "against
the box" if at all times when the short position is open, the portfolio owns an
equal amount of the securities sold short or securities convertible into, or
exchangeable without further consideration for, securities of the same issue as
the securities sold short.
/DIAMOND/
FOREIGN SECURITIES
Subject to a portfolio's investment restricitions and policies, 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/ HIGHER 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 may be greater in emerging countries or in countries with limited
or emerging markets, In particular, developing countries have relatively
unstable governments, economies based on only a few industries, and securities
markets that trade only a small number of securities. As a result, securities
of issuers located in developing countries may have limited marketability and
may be subject to abrupt or erratic price fluctuations.
At times, a portfolio's foreign securities may be listed on exchanges or traded
in markets which are open on days (such as Saturday) when the portfolio does
not compute a price or accept orders for purchase, sale or exchange of shares.
As a result, the net asset value of the portfolio may be significantly affected
by trading on days when policyholders cannot make transactions.
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.
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 ADS.
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FOREIGN EXCHANGE TRANSACTIONS. To the extent a portfolio invests directly in
foreign securities, a portfolio will engage in foreign exchange transactions.
The foreign currency exchange market is subject to little government
regulation, and such transactions generally occur directly between parties
rather than on an exchange or in an organized market. This means that a
portfolio is subject to the full risk of default by a counterparty in such a
transaction. Because such transactions often take place between different time
zones, a portfolio may be required to complete a currency exchange transaction
at a time outside of normal business hours in the counterparty's location,
making prompt settlement of such transaction impossible. This exposes a
portfolio to an increased risk that the counterparty will be unable to settle
the transaction. Although the counterparty in such transactions is often a bank
or other financial institution, currency transactions are generally not covered
by insurance otherwise applicable to such institutions.
/DIAMOND/
FOREIGN BANK OBLIGATIONS
A portfolio may invest in foreign bank obligations and obligations of foreign
branches of domestic banks. These investments present 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/
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.
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 trasaction. 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 or purchase
commitments until payment is made. Such of the 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 a risk to a portfolio if the
other party to the transaction defaults on its obligation to
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make payment or delivery, and the portfolio is delayed or prevented from
completing the transaction.
/DIAMOND/
INVESTMENT FUNDS (WRL GE INTERNATIONAL EQUITY)
The WRL GE International Equity 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.
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. Reverse repurchase
agreements may be used to provide cash to satisfy unusually heavy redemption
requests or for temporary or emergency purposes without necessity of selling
portfolio securities or to earn additional income on portfolio securities such
as U.S. Treasury bills and notes. While a reverse repurchase agreement is
outstanding, the portfolio will segregate with its custodian cash and
appropriate 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. A portfolio will enter into reverse repurchase
agreements only with parties that the portfolio's Sub-Adviser deems
creditworthy, and that have been reviewed by the Board of Directors of the
Fund.
/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/
TEMPORARY DEFENSIVE POSITION
For temporary defensive purposes, 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 decrease. Furthermore, when a
portfolio assumes a temporary defensive position it may not be able to achieve
its investment objective.
/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
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agency's obligations (such as securities of the Federal National Mortgage
Association); or only by the credit of the issuing agency.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. Government are: Federal Land Banks; Central
Bank for Cooperatives; Federal Intermediate Credit Banks; Federal Home Loan
Banks; Farmers Home Administration; and Federal National Mortgage Association
("FNMA").
/DIAMOND/
NON-INVESTMENT GRADE DEBT SECURITIES
Subject to limitations set forth in a portfolio's investment policies, a
portfolio may invest its assets in debt securities below the four highest
grades ("lower grade debt securities" commonly referred to as "junk bonds"), as
determined by Moody's Investors Service, Inc. ("Moody's") (lower than Baa) or
Standard & Poor's Corporation ("S&P") (lower than BBB). Bonds and preferred
stock rated "B" or "b" by Moody's are not considered investment grade debt
securities. (See Appendix B 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.
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, converts 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
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fixed-income securities, foreign currencies or contracts based on financial
indices, including interest rates or indices of U.S. Government or foreign
government securities or equity or fixed-income securities ("futures
contracts"). U.S. futures contracts are traded on exchanges that have been
designated "contract markets" by the Commodity Futures Trading Commission
("CFTC") and must be executed through a futures commission merchant ("FCM"), or
brokerage firm, which is a member of the relevant contract market. Through
their clearing corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange. Since all
transactions in the futures market are made through a member of, and are offset
or fulfilled through a clearinghouse associated with, the exchange on which the
contracts are traded, a portfolio will incur brokerage fees when it buys or
sells futures contracts.
When a portfolio buys or sells a futures contract, it incurs a contractual
obligation to receive or deliver the underlying instrument (or a cash payment
based on the difference between the underlying instrument's closing price and
the price at which the contract was entered into) at a specified price on a
specified date. Transactions in futures contracts generally would be made 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.
Futures may also be used for managing a portfolio's exposure to change in
securities prices and foreign currencies; as an efficient means of adjusting
its overall exposure to certain markets, or in an effort to enhance income.
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 in the futures market are subject to initial margin and
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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.
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
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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 28. 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 increased by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is similar in some respect
to the purchase of protective put options on portfolio securities. For example,
a portfolio may buy a put option on a futures contract to attempt to hedge the
portfolio's securities against the risk of falling prices.
The amount of risk a portfolio assumes when it buys an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the options bought.
FORWARD CONTRACTS. A portfolio may enter into forward foreign currency exchange
contracts ("forward currency contracts") to attempt to minimize the risk to the
portfolio from adverse changes in the relationship between the U.S. dollar and
other currencies. A forward currency contract is an obligation to buy or sell
an amount of a specified currency for an agreed price (which may be in U.S.
dollars or a foreign currency) at a future date which is individually
negotiated between currency traders and their customers. A portfolio may invest
in forward currency contracts with stated contract values of up to the value of
the portfolio's assets.
A portfolio may exchange foreign currencies for U.S. dollars and for other
foreign currencies in the normal course of business and may buy and sell
currencies through forward currency contracts in order to fix a price for
securities it has agreed to buy or sell. A portfolio may enter into a forward
currency contract, for example, when it enters into a contract to buy or sell a
security denominated in or exposed to fluctuations in a foreign currency in
order to "lock in" the U.S. dollar price of the security ("transaction hedge").
Additionally, when a portfolio's Sub-Adviser believes that a foreign currency
in which portfolio securities are denominated may suffer a substantial decline
against the U.S. dollar, a portfolio may enter into a forward currency contract
to sell an amount of that foreign currency (or a proxy currency whose
performance is expected to replicate the performance of that currency) for U.S.
dollars approximating the value of some or all of the portfolio securities
denominated in that currency (not exceeding the value of the portfolio's assets
denominated in that currency) or by participating in options or futures
contracts with respect to the currency, or, when the portfolio's Sub-Adviser
believes that the U.S. dollar may suffer a substantial decline against a
foreign currency for a fixed U.S. dollar amount ("position hedge"). This type
of hedge seeks to minimize the effect of currency appreciation as well as
depreciation, but does not protect against a decline in the security's value
relative to other securities denominated in the foreign currency.
A portfolio also may enter into a forward currency contract with respect to a
currency where the portfolio is considering the purchase of investments
denominated in that currency but has not yet done so ("anticipatory hedge").
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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 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
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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 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
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the portfolio owns the underlying security covered by the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or has segregated additional cash consideration with its
custodian) upon conversion or exchange of other securities held in its
portfolio. A call option is also deemed to be covered if the portfolio holds a
call on the same security and in the same principal amount as the call written
and the exercise price of the call held (i) is equal to or less than the
exercise price of the call written or (ii) is greater than the exercise price
of the call written if the difference is maintained by the portfolio in cash
and high-grade liquid assets in a segregated account with its custodian.
A portfolio collateralizes its obligation under a written call option for
cross-hedging purposes by segregating with its custodian cash or other liquid
assets in an amount not less than the market value of the underlying security,
marked-to-market daily. A portfolio would write a call option for cross-hedging
purposes, instead of writing a covered call option, when the premium to be
received from the cross-hedge transaction would exceed that which would be
received from writing a covered call option and the portfolio's Sub-Adviser
believes that writing the option would achieve the desired hedge.
If a put or call option written by a portfolio was exercised, the portfolio
would be obligated to buy or sell the underlying security at the exercise
price. Writing a put option involves the risk of a decrease in the market value
of the underlying security, in which case the option could be exercised and the
underlying security would then be sold by the option holder to the portfolio at
a higher price than its current market value. Writing a call option involves
the risk of an increase in the market value of the underlying security, in
which case the option could be exercised and the underlying security would then
be sold by the portfolio to the option holder at a lower price than its current
market value. Those risks could be reduced by entering into an offsetting
transaction. The portfolio retains the premium received from writing a put or
call option whether or not the option is exercised.
The writer of an option may have no control when the underlying security must
be sold, in the case of a call option, or bought, in the case of a put option,
since with regard to certain options, the writer may be assigned an exercise
notice at any time prior to the termination of the obligation. Whether or not
an option expires unexercised, the writer retains the amount of the premium.
This amount, of course, may, in the case of a covered call option, be offset by
a decline in the market value of the underlying security during the option
period. If a call option is exercised, the writer experiences a profit or loss
from the sale of the underlying security. If a put option is exercised, the
writer must fulfill the obligation to buy the underlying security.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is
that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the holder
of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously bought. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
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
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interrupt normal operations on an Exchange, (v) the facilities of an Exchange
or the Options Clearing Corporation ("OCC") may not at all times be adequate to
handle current trading volume, or (vi) one or more Exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that
class or series of options) would cease to exist, although outstanding options
on that Exchange that had been issued by the OCC as a result of trades on that
Exchange would continue to be exercisable in accordance with their terms.
A portfolio may write options in connection with buy-and-write transactions;
that is, a portfolio may buy a security and then write a call option against
that security. The exercise price of a call option may be below ("in-the-
money"), equal to ("at-the-money") or above ("out-of-the-money") the current
value of the underlying security at the time the option is written.
Buy-and-write transactions using in-the-money call options may be used when it
is expected that the price of the underlying security will remain flat or
decline moderately during the option period. Buy-and-write transactions using
at-the-money call options may be used when it is expected that the price of the
underlying security will remain fixed or advance moderately during the option
period. Buy-and-write transactions using out-of-the-money call options may be
used when it is expected that the premiums received from writing the call
option plus the appreciation in the market price of the underlying security up
to the exercise price will be greater than the appreciation in the price of the
underlying security alone. If the call options are exercised in such
transactions, a portfolio's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
portfolio's purchase price of the security and the exercise price. If the
options are not exercised and the price of the underlying security declines,
the amount of such decline will be offset by the amount of premium received.
The writing of covered put options is similar in terms of risk and return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and a portfolio's gain will be limited to the
premium received. If the market price of the underlying security declines or
otherwise is below the exercise price, the portfolio may elect to close the
position or take delivery of the security at the exercise price and a
portfolio's return will be the premium received from the put options minus the
amount by which the market price of the security is below the exercise price.
A portfolio may buy put options to attempt to hedge against a decline in the
value of its securities. By using put options in this way, a portfolio will
reduce any profit it might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.
A portfolio may buy call options to attempt to hedge against an increase in the
price of securities that the portfolio may buy in the future. The premium paid
for the call option plus any transaction costs will reduce the benefit, if any,
realized by a portfolio upon exercise of the option, and, unless the price of
the underlying security rises sufficiently, the option may expire worthless to
the portfolio.
In purchasing an option, a portfolio would be in a position to realize a gain
if, during the option period, the price of the underlying security increased
(in the case of a call) or decreased (in 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
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interest on a contractually based principal amount from the party selling the
interest rate floor.
Swap and swap-related products are specialized OTC instruments and their use
involves risks specific to the markets in which they are entered into. A
portfolio will usually enter into interest rate swaps on a net basis, I.E., the
two payment streams are netted out, with the portfolio receiving or paying, as
the case may be, only the net amount of the two payments. The net amount of the
excess, if any, of a portfolio's obligations over its entitlements with respect
to each interest rate swap will be calculated on a daily basis and an amount of
cash or other liquid assets having an aggregate net asset value of at least
equal to the accrued excess will be segregated with the Fund's custodian. If a
portfolio enters into an interest rate swap on other than a net basis, the
portfolio would segregate assets in the full amount accrued on a daily basis of
the portfolio's obligations with respect to the swap. A portfolio will not
enter into any interest rate swap, cap or floor transaction unless the
unsecured senior debt or the claims-paying ability of the other party thereto
is rated in one of the three highest rating categories of at least one
nationally recognized statistical rating organization at the time of entering
into such transaction. A portfolio's Sub-Adviser will monitor the
creditworthiness of all counterparties on an ongoing basis. If there is a
default by the other party to such a transaction, a portfolio will have
contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. The Sub-Advisers have determined
that, as a result, the swap market has become relatively liquid. Caps and
floors are more recent innovations for which standardized documentation has not
yet been developed and, accordingly, they are less liquid than swaps. To the
extent a portfolio sells (I.E., writes) caps and floors, it will segregate with
the custodian cash or other liquid assets having an aggregate net asset value
at least equal to the full amount, accrued on a daily basis, of the portfolio's
obligations with respect to any caps or floors.
Interest rate swap transactions are subject to limitations set forth in each
portfolio's policies. These transactions may in some instances involve the
delivery of securities or other underlying assets by a portfolio or its
counterparty to collateralize obligations under the swap. Under the
documentation currently used in those markets, the risk of loss with respect to
interest rate swaps is limited to the net amount of the interest 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.
SUPRANATIONAL AGENCIES. A portfolio may invest up to 10% of its assets in debt
obligations of supranational agencies such as: the International Bank for
Reconstruction and Development (commonly referred to as the World Bank), which
was chartered to finance development projects in developing member countries;
the European Community, which is a twelve-nation organization engaged in
cooperative economic activities; the European Coal and Steel Community, which
is an economic union of various European nations' steel and coal industries;
and the Asian Development Bank, which is an international development bank
established to lend funds, promote investment and provide technical assistance
to member nations in the Asian and Pacific regions. Debt obligations of
supranational agencies are not considered Government Securities and are not
supported, directly or indirectly, by the U.S. Government.
INDEX OPTIONS. In seeking to hedge all or a portion of its investments, a
portfolio may purchase and write put and call options on securities indices
listed on U.S. or foreign securities exchanges or traded in the
over-the-counter market, which indices include securities held in the
portfolios. The portfolios with such option writing authority may write only
covered options. A portfolio may also use securities index options as a means
of participating in a securities market without making direct purchases of
securities.
A securities index measures the movement of a certain group of securities by
assigning relative values to the securities included in the index. Options on
securities indexes are generally similar to options on specific securities.
Unlike options on securities, however, options on securities indices do not
involve the delivery of an underlying security; the option in the case of an
option on a securities index represents the holder's right to obtain from the
writer in cash a fixed multiple of the amount by which the exercise price
exceeds (in the case of a call) or is less than (in the case of a put) the
closing value of the underlying securities index on the exercise date. A
portfolio may purchase and write put and call options
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on securities indexes or securities index futures contracts that are traded on
a U.S. exchange or board of trade or a foreign exchange, to the extent
permitted under rules and interpretations of the Commodity Futures Trading
Commission ("CFTC"), as a hedge against changes in market conditions and
interest rates, and for duration management, and may enter into closing
transactions with respect to those options to terminate existing positions. A
securities index fluctuates with changes in the market values of the securities
included in the index. Securities index options may be based on a broad or
narrow market index or on an industry or market segment.
The delivery requirements of options on securities indices differ from options
on securities. Unlike a securities option, which contemplates the right to take
or make delivery of securities at a specified price, an option on a securities
index gives the holder the right to receive a cash "exercise settlement amount"
equal to (i) the amount, if any, by which the fixed exercise price of the
option exceeds (in the case of a put) or is less than (in the case of a call)
the closing value of the underlying index on the date of exercise, multiplied
by (ii) a fixed "index multiplier." Receipt of this cash amount will depend
upon the closing level of the securities index upon which the option is based
being greater than, in the case of a call, or less than, in the case of a put,
the exercise price of the option. The amount of cash received will be equal to
the difference between the closing price of the index and the exercise price of
the option expressed in dollars times a specified multiple. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount. The writer may offset its position in securities index options
prior to expiration by entering into a closing transaction on an exchange or it
may allow the option to expire unexercised.
The effectiveness of purchasing or writing securities index options as a
hedging technique will depend upon the extent to which price movements in the
portion of a securities portfolio being hedged correlate with price movements
of the securities index selected. Because the value of an index option depends
upon movements in the level of the index rather than the price of a particular
security, whether a portfolio realizes a gain or loss from the purchase of
writing of options on an index depends upon movements in the level of prices in
the market generally or, in the case of certain indices, in an industry or
market segment, rather than movements in the price of a particular security. As
a result, successful use by a portfolio of options on securities indices is
subject to the sub-adviser's ability to predict correctly movements in the
direction of the market generally or of a particular industry. This ability
contemplates different skills and techniques from those used in predicting
changes in the price of individual securities.
Securities index options are subject to position and exercise limits and other
regulations imposed by the exchange on which they are traded. The ability of a
portfolio to engage in closing purchase transactions with respect to securities
index options depends on the existence of a liquid secondary market. Although a
portfolio will generally purchase or write securities index options only if a
liquid secondary market for the options purchased or sold appears to exist, no
such secondary market may exist, or the market may cease to exist at some
future date, for some options. No assurance can be given that a closing
purchase transaction can be effected when the sub-adviser desires that a
portfolio engage in such a transaction.
WEBS AND OTHER INDEX-RELATED SECURITIES. A portfolio may invest in shares in an
investment company whose shares are known as "World Equity Benchmark Shares" or
"WEBS." WEBS have been listed for trading on the American Stock Exchange, Inc.
The portfolios also may invest in the CountryBaskets Index Fund, Inc., or
another fund the shares of which are the substantial equivalent of WEBS. A
portfolio may invest in S&P Depositary Receipts, or "SPDRs." SPDRs are
securities that represent ownership in a long-term unit investment trust that
holds a portfolio of common stocks designed to track the performance of the S&P
500 Index. A portfolio investing in a SPDR would be entitled to the dividends
that accrue to the S&P 500 stocks in the underlying portfolio, less trust
expenses.
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
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is impossible to predict the amount of trading interest that may exist in those
instruments in the future. Particular risks exist with respect to the use of
each of the foregoing instruments and could result in such adverse consequences
to a portfolio as the possible loss of the entire premium paid for an option
bought by the portfolio, the inability of the portfolio, as the writer of a
covered call option, to benefit from the appreciation of the underlying
securities above the exercise price of the option and the possible need to
defer closing out positions in certain instruments to avoid adverse tax
consequences. As a result, no assurance can be given that a portfolio will be
able to use those instruments effectively for the purposes set forth above.
In connection with certain of its hedging transactions, assets must be
segregated with the Fund's custodian bank to ensure that the portfolio will be
able to meet its obligations under these instruments. Assets held in a
segregated account generally may not be disposed of for so long as the
portfolio maintains the positions giving rise to the segregation requirement.
Segregation of a large percentage of the portfolio's assets could impede
implementation of the portfolio's investment policies or the portfolio's
ability to meet redemption requests or other current obligations.
ADDITIONAL RISKS OF OPTIONS ON FOREIGN CURRENCIES, FORWARD CONTRACTS AND
FOREIGN INSTRUMENTS. Unlike transactions entered into by a portfolio in futures
contracts, options on foreign currencies and forward contracts are not traded
on contract markets regulated by the CFTC or (with the exception of certain
foreign currency options) by the SEC. To the contrary, such instruments are
traded through financial institutions acting as market-makers, although foreign
currency options are also traded OTC. In an OTC trading environment, many of
the protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of
time. Although the buyer of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, an option writer and a buyer or seller of futures or forward
contracts could lose amounts substantially in excess of any premium received or
initial margin or collateral posted due to the potential additional margin and
collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges are available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the OCC, thereby reducing the
risk of counterparty default. Further, a liquid secondary market in options
traded on a national securities exchange may be more readily available than in
the OTC market, potentially permitting a portfolio to liquidate open positions
at a profit prior to exercise or expiration, or to limit losses in the event of
adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign 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
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quality of the issuer. Pay-in-kind securities may pay all or a portion of their
interest or dividends in the form of additional securities. Because they do not
pay current income, the price of pay-in-kind securities can be very volatile
when interest rates change.
Current Federal income tax law requires holders of zero coupon securities and
step coupon securities to report the portion of the original issue discount on
such securities that accrues that year as interest income, even though the
holders receive no cash payments of interest during the year. In order to
qualify as a "regulated investment company" under the Internal Revenue Code,
each portfolio must distribute its investment company taxable income, including
the original issue discount accrued on zero coupon or step coupon bonds.
Because a portfolio will not receive cash payments on a current basis in
respect of accrued original-issue discount on zero coupon bonds or step coupon
bonds during the period before interest payments begin, in some years a
portfolio may have to distribute cash obtained from other sources in order to
satisfy the distribution requirements under the Code. A portfolio might obtain
such cash from selling other portfolio holdings. These actions are likely to
reduce the assets to which a portfolio's expenses could be allocated and to
reduce the rate of return for the portfolio. In some circumstances, such sales
might be necessary in order to satisfy cash distribution requirements even
though investment considerations might otherwise make it undesirable for the
portfolio to sell the securities at the time.
Generally, the market prices of zero coupon, step coupon and pay-in-kind
securities are more volatile than the prices of securities that pay interest
periodically and in cash and are likely to respond to changes in interest rates
to a greater degree than other types of debt securities having similar
maturities and credit quality.
/DIAMOND/
WARRANTS AND RIGHTS
Subject to its investment limitations, a portfolio may invest in warrants and
rights. Warrants are, in effect, longer-term call options. They give the holder
the right to purchase a given number of shares of a particular company at
specified prices, usually higher than the market price at the time of issuance,
for a period of years or to perpetuity. The purchaser of a warrant expects the
market price of the security will exceed the purchase price of the warrant plus
the exercise price of the warrant, thus giving him a profit. Of course, because
the market price may never exceed the exercise price before the expiration date
of the warrant, the purchaser of the warrant risks the loss of the entire
purchase price of the warrant. Warrants generally trade in the open market and
may be sold rather than exercised. Warrants are sometimes sold in unit form
with other securities of an issuer. Units of warrants and common stock may be
employed in financing young unseasoned companies. The purchase price of a
warrant varies with the exercise price of the warrant, the current market value
of the underlying security, the life of the warrant and various other
investment factors.
In contrast, rights, which also represent the right to buy common shares,
normally have a subscription price lower than the current market value of the
common stock and a life of two to four weeks.
Warrants and rights may be considered more speculative than certain other types
of investments in that they do not entitle a holder to dividends or voting
rights with respect to the securities which may be purchased, nor do they
represent any rights in the assets of the issuing company. Also, the value of a
warrant or right does not necessarily change with the value of the underlying
securities and a warrant or right ceases to have value if it is not exercised
prior to the expiration date.
/DIAMOND/
MORTGAGE-BACKED SECURITIES
Subject to a portfolio's investment restrictions and policies, 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 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 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 response to changes in interest rates.
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
Subject to a portfolio's investment restrictions and policies, asset-backed
securities represent interests in pools
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of consumer loans (generally unrelated to mortgage loans) and most often are
structured as pass-through securities. Interest and principal payments
ultimately depend on payment of the underlying loans by individuals, although
the securities may be supported by letters of credit or other credit
enhancements. The underlying assets (E.G., loans) are subject to prepayments
which shorten the securities' weighted average life and may lower their
returns. If the credit support or enhancement is exhausted, losses or delays in
payment may result if the required payments of principal and interest are not
made. The value of these securities also may change because of changes in the
market's perception of the creditworthiness of the servicing agent for the
pool, the originator of the pool, or the financial institution providing the
credit support or enhancement. A portfolio will invest its assets in
asset-backed securities subject to any limitations set forth in its investment
policies or restrictions.
/DIAMOND/
PASS-THROUGH SECURITIES
Subject to a portfolio's investment restrictions and policies, a portfolio may
invest its net assets in various types of pass-through securities, such as
mortgage-backed securities, asset-backed securities and participation
interests. A pass-through security is a share or certificate of interest in a
pool of debt obligations that have been repackaged by an intermediary, such as
a bank or broker-dealer. The purchaser receives an undivided interest in the
underlying pool of securities. The issuers of the underlying securities make
interest and principal payments to the intermediary which are passed through to
purchasers, such as the portfolio. The most common type of pass-through
securities are mortgage-backed securities. GNMA Certificates are
mortgage-backed securities that evidence an undivided interest in a pool of
mortgage loans. GNMA Certificates differ from traditional bonds in that
principal is paid back monthly by the borrowers over the term of the loan
rather than returned in a lump sum at maturity. The portfolio will generally
purchase "modified pass-through" GNMA Certificates, which entitle the holder to
receive a share of all interest and principal payments paid and owned on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment. GNMA Certificates are backed
as to the timely payment of principal and interest by the full faith and credit
of the U.S. Government.
The Federal Home Loan Mortgage Corporation ("FHLMC") issues two types of
mortgage pass-through securities: mortgage participation certificates ("PCs")
and guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates
in that each PC represents a pro rata share of all interest and principal
payments made and owned on the underlying pool. FHLMC guarantees timely
payments of interest on PCs and the full return of principal. GMCs also
represent a pro rata interest in a pool of mortgages. However, these
instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. This type of security is guaranteed by FHLMC as to
timely payment of principal and interest, but is not backed by the full faith
and credit of the U.S. Government.
FNMA issues guaranteed mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owned on the underlying pool. This type of security is guaranteed by
FNMA as to 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.
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 regarding income producing securities in
which a portfolio may invest.)
/DIAMOND/
ILLIQUID AND RESTRICTED/144A SECURITIES
A portfolio may invest up to 15% (the WRL J.P. Morgan Money Market 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
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under the Securities Act of 1933 ("1933 Act"). Institutional investors
generally will not seek to sell these instruments to the general public, but
instead will often depend on an efficient institutional market in which such
unregistered securities can readily be resold or on an issuer's ability to
honor a demand for repayment. Therefore, the fact that there are contractual or
legal restrictions on resale to the general public or certain institutions is
not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act established a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. Institutional markets for restricted securities that
might develop as a result of Rule 144A could provide both readily ascertainable
values for restricted securities and the ability to liquidate an investment in
order to satisfy share redemption orders. An insufficient number of qualified
institutional buyers interested in purchasing a Rule 144A-eligible security
held by a portfolio could, however, adversely affect the marketability of such
portfolio security and the portfolio might be unable to dispose of such
security promptly or at reasonable prices.
The Fund's Board of Directors has authorized each portfolio's Sub-Adviser to
make liquidity determinations with respect to Rule 144A securities in
accordance with the guidelines established by the Board of Directors. Under the
guidelines, the portfolio's Sub-Adviser will consider the following factors in
determining whether a Rule 144A security is liquid: 1) the frequency of trades
and quoted prices for the security; 2) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers; 3)
the willingness of dealers to undertake to make a market in the security; and
4) the nature of the marketplace trades, including the time needed to dispose
of the security, the method of soliciting offers and the mechanics of the
transfer. The sale of illiquid securities often requires more time and results
in higher brokerage charges or dealer discounts and other selling expenses than
does the sale of securities eligible for trading on national securities
exchanges or in the OTC markets. The portfolio may be restricted in its ability
to sell such securities at a time when a portfolio's Sub-Adviser deems it
advisable to do so. In addition, in order to meet redemption requests, a
portfolio may have to sell other assets, rather than such illiquid securities,
at a time which is not advantageous.
/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 WRL Janus Growth, or WRL Janus 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 WRL GE International Equity and WRL GE 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 WRL GE International Equity and WRL GE U.S. Equity
portfolios in the GEI Short-Term Investment Fund, an investment fund advised by
GEAM, created specifically to serve as a vehicle for the collective investment
of cash balances of these portfolios and other accounts advised by GEAM 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
(WRL J.P. MORGAN MONEY MARKET)
For the purpose of maintaining a stable net asset value per share, the WRL J.P.
Morgan Money Market 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 B. 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.
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In addition, the Board of Directors of the Fund has adopted procedures which
(i) require the Fund's Directors to approve or ratify purchases by the
portfolio of securities (other than U.S. Government securities) that are rated
by only one NRSRO or that are unrated; (ii) require the portfolio to maintain a
dollar-weighted average portfolio maturity of not more than 90 days and to
invest only in securities with a remaining maturity of not more than 13 months;
and (iii) require the portfolio, in the event of certain downgrading of or
defaults on portfolio holdings, to dispose of the holdings, subject in certain
circumstances to a finding by the Fund's Directors that disposing of the
holding would not be in the portfolio's best interest.
/DIAMOND/
BANK AND THRIFT OBLIGATIONS
Bank and thrift obligations in which a portfolio may invest are limited to
dollar-denominated certificates of deposit, time deposits and bankers'
acceptances issued by bank or thrift institutions. Certificates of deposit are
short-term, unsecured, negotiable obligations of commercial banks and thrift
institutions. Time deposits are non-negotiable deposits maintained in bank or
thrift institutions for specified periods of time at stated interest rates.
Bankers' acceptances are negotiable time drafts drawn on commercial banks
usually in connection with international transactions.
Bank and thrift obligations in which the portfolio invests may be, but are not
required to be, issued by institutions that are insured by the Federal Deposit
Insurance Corporation (the "FDIC"). Bank and thrift institutions organized
under Federal law are supervised and examined by Federal authorities and are
required to be insured by the FDIC. Institutions organized under state law are
supervised and examined by state banking authorities but are insured by the
FDIC only if they so elect. State institutions insured by the FDIC are subject
to Federal examination and to a substantial body of Federal law regulation. As
a result of Federal and state laws and regulations, Federally insured bank and
thrift institutions are, among other things, generally required to maintain
specified levels of reserves and are subject to other supervision and
regulation designed to promote financial soundness.
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.
/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
adjustment 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.
In addition, when purchasing variable rate master demand notes, a Sub-Adviser
will consider the earning
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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/
DEBT SECURITIES AND
FIXED-INCOME INVESTING
Debt securities include securities such as corporate bonds and debentures;
commercial paper; trust preferreds, 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 payment prospects and principal security for such bonds appear
adequate for the present, but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have speculative
characteristics. (See Appendix B 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/
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 B for a description of debt securities rating.)
/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
investment.
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.
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/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 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 AND OFFICERS
The Fund is governed by a Board of Directors. Subject to the supervision of the
Board of Directors, the assets of each portfolio are managed by an investment
adviser and sub-advisers, and by portfolio managers. The Board of Directors is
responsible for managing the business and affairs of the Fund and oversees the
operation of the Fund by its officers. It also reviews the management of the
portfolios' assets by the investment adviser and sub-adviser. Information about
the Directors and officers of the Fund is as follows:
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
- - -------------------------------- ---------------------------- -----------------------------------------------------------
<S> <C> <C>
PETER R. BROWN DIRECTOR Retired (January 2000 - present) Chairman of the Board,
(DOB 5/10/28), Peter Brown Construction Company (construction contrac-
11180 6th Street East tors and engineers), Largo, Florida (1963 - 2000); Trustee
Treasure Island, Florida 33706 of IDEX Mutual Funds, Rear Admiral (Ret.) U.S. Navy
Reserve, Civil Engineer Corps.
CHARLES C. HARRIS DIRECTOR Trustee of IDEX Mutual Funds, (March, 1994 - present)
(DOB 7/15/30), former Trustee of IDEX Fund, IDEX II Series Fund and
35 Winston Drive IDEX Fund 3.
Clearwater, Florida 34616
RUSSELL A. KIMBALL, JR. DIRECTOR General Manager, Sheraton Sand Key Resort (resort
(DOB 8/17/44), hotel), Clearwater, Florida (1975 - present)
1160 Gulf Boulevard
Clearwater Beach, Florida 34630
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
- - -------------------------- ---------------------------- -------------------------------------------------------------
<S> <C> <C>
JOHN R. KENNEY(1,2) CHAIRMAN OF THE BOARD Chairman of the Board, Director and Co-CEO of Great
(DOB 2/8/38) OF DIRECTORS AND Companies, L.L.C.; Chairman of the Board of Directors
PRESIDENT (1982 - present), Chief Executive Officer (1982 - present),
President (1978 - 1987 and December, 1992 - 1999),
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), St. Petersburg, Florida; Chairman of the Board of
Directors (September, 1996 - present), WRL Investment
Services, Inc., St. Petersburg, Florida; Chairman of the
Board of Directors (February, 1997 - present), AEGON
Asset Management Services, Inc., St.Petersburg, Florida;
Director (December, 1990 - present); IDEX Management,
Inc., (investment adviser), St. Petersburg, Florida; Trustee
and Chairman (September, 1996 - present) of IDEX
Mutual Funds (investment companies) St. Petersburg,
Florida.
PAT BAIRD DIRECTOR AND EXECUTIVE President and Trustee (November, 1999 - present), IDEX
(DOB 1/19/54) VICE PRESIDENT Mutual Funds; Executive Vice President, Chief Operating
433 Edgewood Road, NE, Officer (February, 1996 - present) Executive Vice
Cedar Rapids, Iowa 52499 President and CFO (February, 1995 - February, 1996),
Vice President, Chief Financial Officer (May, 1992 -
February, 1995), AEGON USA.
ALLAN HAMILTON(1,2) TREASURER, PRINCIPAL Vice President and Controller (1987 - present), Treasurer
(DOB 11/26/56) FINANCIAL OFFICER (February, 1997 - present).
JOHN K. CARTER(1,2) VICE PRESIDENT, Vice President, Secretary and Counsel (December, 1999 -
(DOB 04/24/61) SECRETARY AND COUNSEL present), IDEX Mutual Funds; Vice President, Counsel and
Assistant Secretary (April, 2000 - present) of Idex Investor
Services, Inc., AEGON Asset Management Services, Inc.
and WRL Investment Services, Inc.; Vice President,
Counsel, Compliance Officer and Assistant Secretary
(April, 2000 - present) of Idex Management, Inc. and WRL
Investment Management, Inc.; Vice President and Counsel
(March, 1997 - May 1999), Salomon Smith Barney;
Assistant Vice President, Associate Corporate Counsel
and Trust Officer (September, 1993 - March 1997),
Franklin Templeton Mutual Funds.
THOMAS E. PIERPAN(1,2) ASSISTANT SECRETARY Vice President, Secretary and Counsel (December, 1997 -
(DOB 10/18/43) AND VICE PRESIDENT December, 1999); Assistant Secretary (March, 1995 -
December, 1997) of WRL Series Funds, Inc.; Vice
President and Assistant Secretary 1999 - present), Vice
President, Counsel and Secretary (December, 1997 -
1999) of IDEX Mutual Funds (mutual fund); Assistant Vice
President, Counsel and Assistant Secretary (November,
1997 - present) of Intersecurities, Inc. (broker-dealer);
Senior Vice President, General Counsel and Assistant
Secretary (April, 2000 - present) of AEGON Equity Group;
Senior Vice President and General Counsel (1999 -
present), Vice President (November, 1993 - present),
Associate General Counsel (February, 1995 - 1997),
Assistant Secretary, (February, 1995 - present) of Western
Reserve Life Assurance of Ohio.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
- - ----------------------- ---------------------------- ---------------------------------------------------------
<S> <C> <C>
ALAN M. YAEGER(1,2) EXECUTIVE VICE Executive Vice President (June, 1993 - present), Chief
(DOB 10/21/46) PRESIDENT Financial Officer (December, 1995 - present), Actuary
(1972 - present), Western Reserve Life Assurance
Company of Ohio; Director (September, 1996 - present),
WRL Investment Management, Inc. (investment adviser)
St. Petersburg, Florida; Director (September, 1996 -
present), WRL Investment Services, Inc., St. Petersburg,
Florida.
</TABLE>
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Bos 5068, Clearwater, Florida 33758-5068.
(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 $10,000 to each Director
who is not affiliated with the Investment Adviser or the Sub-Advisers
("disinterested Director"). Each disinterested Director also receives $1,500,
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, 1999. The compensation table provides compensation
amounts paid to disinterested Directors of the Fund for the fiscal year ended
December 31, 1999.
DIRECTOR'S FEES PAID - YEAR ENDED DECEMBER 31, 1999
PORTFOLIO AMOUNT PAID
- - --------------------------------- ------------
WRL VKAM Emerging Growth $8,000
WRL Alger Aggressive Growth 6,000
WRL GE International Equity(1) -0-
WRL Janus Global 8,000
WRL Third Avenue Value -0-
WRL Janus Growth 11,000
WRL C.A.S.E. Growth 1,000
WRL GE U.S. Equity 1,000
WRL NWQ Value Equity 1,000
WRL Dean Asset Allocation 2,000
WRL LKCM Strategic Total Return 3,000
WRL Federated Growth & Income 1,000
WRL AEGON Balanced 1,000
WRL AEGON Bond 1,000
WRL J.P. Morgan Money Market -0-
- - ------------------------------
(1) Prior to May 1, 2000 this portfolio was named WRL GE/Scottish Equitable
International Equity.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS TOTAL COMPENSATION
AGGREGATE ACCRUED AS ESTIMATED PAID TO DIRECTORS FROM
COMPENSATION FROM PART OF ANNUAL BENEFITS WRL SERIES FUND, INC. AND
NAME OF PERSON, POSITION WRL SERIES FUND, INC. FUND EXPENSES* UPON RETIREMENT IDEX MUTUAL FUNDS
- - ----------------------------------- ----------------------- ---------------- ----------------- --------------------------
<S> <C> <C> <C> <C>
Peter R. Brown, Director $15,500 0 N/A $43,750
Charles C. Harris, Director 15,500 0 N/A 43,750
Russell A. Kimball, Jr., Director 15,500 0 N/A 15,500
</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 Mutual Funds to a disinterested Director or
Trustee on a current basis for services rendered as director. Deferred
compensation amounts will accumulate based on the value of Class A shares of a
portfolio of IDEX Mutual Funds (without imposition of sales charge), as elected
by the Director. As of April 1, 1999, 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.
36
<PAGE>
/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") located at 570 Carillon
Parkway, St. Petersburg, FL 33716, 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
N.V., 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 (that commenced operations prior to
that date) on December 16, 1996. The Investment Advisory Agreement provides
that it will continue in effect 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 p. 39.
Advisory Fee. The method of computing the investment advisory fee is fully
described in the Fund's prospectus. For the years ended December 31, 1999, 1998
and 1997, the Investment Adviser was paid fees for its services to each
portfolio in the following amounts:
ADVISORY FEES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------
PORTFOLIO 1999 1998 1997
- - --------------------------------- ------------- ------------- --------------------
<S> <C> <C> <C>
WRL Alger Aggressive Growth $ 5,873,932 $ 3,361,604 $ 2,249,801
WRL VKAM Emerging Growth 8,946,705 5,408,098 4,075,498
WRL GE International Equity(2) 329,326 275,279 111,702
WRL Janus Global 10,293,952 7,537,671 5,591,818
WRL Janus Growth 25,489,599 18,111,607 13,716,824
WRL Third Avenue Value 145,682 111,928 N/A
WRL C.A.S.E. Growth 669,877 515,902 334,892
WRL GE U.S. Equity 1,777,975 555,341 140,280
WRL NWQ Value Equity 1,214,963 1,458,166 900,818
WRL Dean Asset Allocation 2,623,575 2,710,626 2,079,540
WRL LKCM Strategic Total Return 4,766,336 4,485,018 3,703,670
WRL Federated Growth & Income 615,256 578,162 338,267
WRL AEGON Balanced 842,458 680,543 491,901
WRL AEGON Bond(1) 731,366 663,484 479,685
WRL J.P. Morgan Money Market 1,078,993 644,611 514,968
TOTAL $65,399,995 $47,098,040 $34,729,664
=========== =========== ===========
</TABLE>
- - ------------------------------
(1) 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 WRL AEGON Bond (formerly
Bond portfolio) and receives monthly compensation from the Investment
Adviser at the rate of 0.20% of average daily net assets of the portfolio.
(2) Portfolio was previously named WRL GE/Scottish Equitable International
Equity.
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.
37
<PAGE>
Each portfolio pays: all expenses incurred in connection with the formation and
organization of a portfolio, including the preparation (and filing, when
necessary) of the portfolio's contracts, plans, and documents, conducting
meetings of organizers, directors and shareholders; preparing and filing the
post-effective amendment to the Fund's registration statement effecting
registration of a portfolio and its shares under the 1940 Act and the 1933 Act
and all other matters relating to the information and organization of a
portfolio and the preparation for offering its shares; expenses in connection
with ongoing registration or qualification requirements under Federal and state
securities laws; investment advisory fees; pricing costs (including the daily
calculations of net asset value); brokerage commissions and all other expenses
in connection with execution of portfolio transactions, including interest; all
Federal, state and local taxes (including stamp, excise, income and franchise
taxes) and the preparation and filing of all returns and reports in connection
therewith; any compensation, fees, or reimbursements which the Fund pays to its
Directors who are not "interested persons," as that phrase is defined in the
1940 Act, of the Fund or WRL Management; compensation of the Fund's custodian,
administrative and transfer agent, registrar and dividend disbursing agent;
legal, accounting and printing expenses; other administrative, clerical,
recordkeeping and bookkeeping expenses; auditing fees; certain insurance
premiums; services for shareholders (including allocable telephone and
personnel expenses); costs of certificates and the expenses of delivering such
certificates to the purchaser of shares relating thereto; expenses of local
representation in Maryland; fees and/or expenses payable pursuant to any plan
of distribution adopted with respect to the Fund in accordance with Rule 12b-1
under the 1940 Act; expenses of shareholders' meetings and of preparing,
printing, and distributing notices, proxy statements and reports to
shareholders; expenses of preparing and filing reports with Federal and state
regulatory authorities; all costs and expenses, including fees and
disbursements, of counsel and auditors, filing and renewal fees and printing
costs in connection with the filing of any required amendments, supplements or
renewals of registration statement, qualifications or prospectuses under the
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,
2001, to pay expenses on behalf of the portfolios to the extent normal
operating expenses (including investment advisory fees but excluding interest,
taxes, brokerage fees, commissions and extraordinary charges) exceed, as a
percentage of each portfolio's average daily net assets, 1.00% (0.70% for the
WRL AEGON Bond and WRL J.P. Morgan Money Market, 1.20% for the WRL GE
International Equity). The following expenses were paid by the investment
adviser for the fiscal years ended December 31, 1999, 1998, and 1997 (WRL
served as investment adviser for 1996):
PORTFOLIO EXPENSES PAID BY INVESTMENT ADVISER
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
PORTFOLIO 1999 1998 1997
- - --------------------------------- ---------- ---------- ------------------
<S> <C> <C> <C>
WRL Alger Aggressive Growth -0- -0- -0-
WRL VKAM Emerging Growth -0- -0- -0-
WRL GE International Equity 112,088 127,763 179,163
WRL Janus Global -0- -0- -0-
WRL Janus Growth -0- -0- -0-
WRL Third Avenue Value 10,734 14,229 N/A
WRL C.A.S.E. Growth -0- -0- 49,784
WRL GE U.S. Equity -0- -0- 29,464
WRL NWQ Value Equity -0- -0- -0-
WRL Dean Asset Allocation -0- -0- -0-
WRL LKCM Strategic Total Return -0- -0- -0-
WRL Federated Growth & Income -0- -0- -0-
WRL AEGON Balanced -0- -0- -0-
WRL AEGON Bond(1) -0- -0- -0-
WRL J.P. Morgan Money Market -0- -0- -0-
</TABLE>
- - ------------------------------
(1) Prior to January 1, 1998, Janus Capital Corporation served as the
Sub-Adviser for the WRL AEGON Bond.
Effective May 1, 2000, the Investment Adviser has entered into an agreement
with the Fund on behalf of, and pursuant to which, the Investment Adviser will
be reimbursed for operating expenses paid on behalf of a portfolio during the
previous 36 months, but only if, after such reimbursement, the portfolio's
expense ratio does not exceed the expense cap. The agreement has an initial
term through April 30, 2001, and will automatically renew for one-year terms
unless terminated by a 30 day written notice to the Fund.
38
<PAGE>
Service Agreement. Effective January 1, 1997, the Fund entered into an
Administrative Services and Transfer Agency Agreement ("Services Agreement")
with WRL Investment Services, Inc. ("WRL Services"), an affiliate of WRL
Management and WRL, to furnish the Fund with administrative services to assist
the Fund in carrying out certain of its functions and operations. The Service
Agreement was approved by the Fund's Board of Directors, including a majority
of Directors who are not "interested persons" of the Fund (as defined in the
1940 Act) on October 3, 1996. Under this Agreement, WRL Services shall furnish
to each portfolio, subject to the overall supervision of the Fund's Board,
supervisory, administrative, and transfer agency services, including
recordkeeping and reporting. WRL Services is reimbursed by the Fund monthly on
a cost incurred basis. The following Administrative Services fees were paid by
the portfolios for the fiscal year ended December 31, 1999:
ADMINISTRATIVE SERVICES FEES
PORTFOLIO 1999 1998 1997
- - ------------------------------ ----------- ---------- ---------
WRL Alger Aggressive Growth $178,687 $73,408 $122,776
WRL VKAM Emerging Growth 214,882 95,721 166,269
WRL GE International Equity 8,983 3,731 3,901
WRL Janus Global 223,428 99,277 165,294
WRL Janus Growth 306,127 143,999 260,374
WRL Third Avenue Value 2,871 1,139 N/A
WRL C.A.S.E. Growth 30,645 14,345 15,798
WRL GE U.S. Equity 27,038 6,364 3,218
WRL NWQ Value Equity 35,693 18,893 23,307
WRL Dean Asset Allocation 50,791 25,722 41,445
WRL LKCM Strategic Total
Return 89,085 47,197 87,766
WRL Federated Growth &
Income 27,663 12,140 16,773
WRL AEGON Balanced 23,945 10,827 18,333
WRL AEGON Bond 32,651 16,871 31,011
WRL J.P. Morgan Money Market 13,674 6,378 12,092
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 AFSG Securities Corporation (AFSG) located at 4333
Edgewood Road NE, Cedar Rapids, Iowa 52494. The Distribution Plan and related
Agreement were approved by the Fund's Board of Directors, including a majority
of Directors who are not "interested persons" of the Fund (as defined in the
1940 Act) on October 3, 1996 as amended by the Board March 29, 1999, and the
Distribution Plan was approved by the shareholders of each portfolio of the
Fund on December 16, 1996 (by all portfolio's that had commenced operations on
that date). AFSG is an affiliate of the Investment Adviser.
Under the Distribution Plan and Distribution Agreement, the Fund, on behalf of
the portfolios, will reimburse AFSG after each calendar month for certain Fund
distribution expenses incurred or paid by AFSG, 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 AFSG 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.
AFSG submits to the Directors of the Fund for approval annual distribution
budgets and quarterly reports of distribution expenses with respect to each
portfolio. AFSG 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 AFSG deems fair and are approved by the Fund's Board
of Directors. AFSG has determined that it will not seek payment by the Fund of
distribution expenses incurred with respect to any portfolio before April 30,
2001. (ISI waived payment by the Fund for the fiscal year ended December 31,
1999.) Prior to AFSG 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
Each Sub-Adviser serves, pursuant to each Sub-Advisory Agreement dated January
1, 1997 (January 1, 1998 with respect to the WRL Third Avenue Value and WRL
AEGON Bond; 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
39
<PAGE>
December 16, 1996 (for all portfolios that had commenced operations on that
date)) (December 9, 1997 with respect to the WRL AEGON Bond). The Sub-Advisory
Agreements provide that they will continue in effect 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. The agreements may also be terminated under the
term of an Exemptive Order granted by the SEC under section 6(c) of the 1940
Act from section 15(a) and rule 18f-2 under the 1940 Act. (Release #23379).
Pursuant to the Sub-Advisory Agreements, each Sub-Adviser provides investment
advisory assistance and portfolio management advice to the Investment Adviser
for their respective portfolio(s). Subject to review by the Investment Adviser
and the Board of Directors of the Fund, the Sub-Advisers are responsible for
the actual management of their respective portfolio(s) and for making decisions
to buy, sell or hold a particular security. Each Sub-Adviser bears all of its
expenses in connection with the performance of its services under their Sub-
Advisory Agreement such as compensating and furnishing office space for their
officers and employees connected with investment and economic research, trading
and investment management of the respective portfolio(s).
Each Sub-Adviser is a registered investment adviser under the Investment
Advisers Act of 1940, as amended. The Sub-Advisers for the portfolios of the
Fund are:
/5 DIAMONDS/
FRED ALGER MANAGEMENT, INC.
Fred Alger Management, Inc. ("Alger") serves as sub-adviser to the WRL Alger
Aggressive Growth.
Alger, located at One World Trade Center, Suite 9333,, New York, New York
10048, 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 is generally engaged in the business
of rendering investment advisory services to institutions and, to a lesser
extent, individuals. Alger has been engaged in the business of rendering
investment advisory services since 1964 and, as of March 31, 2000, had
approximately $21.8 billion under management.
/DIAMOND/ PORTFOLIO MANAGER:
DAVID D. ALGER AND DAVID HYUN are primarily responsible for the day-to-day
management of WRL Alger Aggressive Growth. Mr. Alger has been employed by Alger
Management as Executive Vice President and Director of Research Since 1971 and
as President since 1995. Mr. Hyun has been employed by Alger Management as a
senior research analyst since 1991 as a portfolio manager since 1997, and as
senior vice president since 1998. Mr. Alger has served as portfolio Manager of
WRL Alger Aggressive Growth since its inception. Mr. Hyun has served as
co-portfolio manager of WRL Alger Aggressive Growth sinceFebruary 1998. Mr.
Alger and Mr. Hyun also serve as portfolio managers for other mutual funds and
investment accounts managed by Alger Management.
/5 DIAMONDS/
VAN KAMPEN ASSET
MANAGEMENT INC. ("VKAM")
Van Kampen Asset Management Inc. ("VKAM") serves as sub-adviser to WRL VKAM
Emerging Growth.
VKAM, located at 1 Parkview Plaza, P.O. Box 5555 Oakbrook Terrace, Illinois
60181, is a wholly-owned subsidiary of Van Kampen Investments Inc., which, in
turn, is an indirect wholly-owned subsidiary of Morgan Stanley Dean Witter &
Co., a financial services company.
/DIAMOND/ PORTFOLIO MANAGER:
GARY M. LEWIS leads an investment team and is primarily responsible for the
day-to-day management of WRL VKAM Emerging Growth. Mr. Lewis has been Senior
Vice President of Van Kampen since October 1995. Previously, he served as vice
president and portfolio manager of Van Kampen from 1989 to October 1995.
/5 DIAMONDS/
JANUS CAPITAL CORPORATION
Janus Capital Corporation ("Janus") serves as the sub-adviser to the WRL Janus
Growth and the WRL Janus Global.
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 $261 billion as of
February 1, 2000. Kansas City Southern Industries, Inc. ("KCSI") owns 82% of
Janus indirectly through Stilwell Financial, Inc.. KCSI, whose address is 114
West 11th Street, Kansas City, Missouri 64105-1804, is a publicly-traded
holding company with a 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.
40
<PAGE>
/DIAMOND/ PORTFOLIO MANAGERS:
EDWARD KEELY has served as manager of the WRL Janus Growth portfolio since
January 2000. He previously served as co-portfolio manager of the portfolio
since January 1999. Prior to joining Janus in 1998, Mr. Keely was a senior vice
president of investments at Founders.
HELEN YOUNG HAYES, CFA AND LAURENCE CHANG, CFA have served as co-portfolio
managers of the WRL Janus Global portfolio since January 2000. Ms. Hayes
previously served as manager of this portfolio since its inception. She has
been employed by Janus since 1987.
Mr. Chang has been employed by Janus since 1993. Before joining Janus, Mr.
Chang was a project director at the National Security Archive.
/5 DIAMONDS/
EQSF ADVISERS, INC.
EQSF Advisers, Inc. ("EQSF") serves as sub-adviser to WRL Third Avenue Value.
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.
/DIAMOND/ PORTFOLIO MANAGER:
MARTIN J. WHITMAN has served as portfolio manager of WRL Third Avenue Value
since inception. Mr. Whitman is chairman and chief executive 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 42 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, Nabors Industries, Inc. an international oil drilling contractor and
Tejon Ranch Company, an agricultural and land development company.
/5 DIAMONDS/
C.A.S.E. MANAGEMENT, INC.
C.A.S.E. Management, Inc. ("C.A.S.E.") serves as sub-adviser to WRL C.A.S.E.
Growth.
C.A.S.E., 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. 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.
/5 DIAMONDS/
NWQ INVESTMENT MANAGEMENT COMPANY, INC.
NWQ Investment Management Company, Inc. ("NWQ") serves as the sub-adviser to
the WRL NWQ Value Equity.
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 $8.1 billion in assets under management as
of December 31, 1999.
/DIAMOND/ PORTFOLIO MANAGER:
An investment policy committee is responsible for the day-to-day management of
WRL NWQ Vaue Equity investments. David A. Polak, CFA, Edward C. Friedel, CFA,
James H. Galbreath, CFA, Phyllis G. Thomas, CFA, Jon D. Bosse, CFA, and Justin
T. Clifford constitute the committee.
EDWARD C. FRIEDEL, CFA serves as senior portfolio manager for WRL NWQ Value
Equity. Mr. Friedel has been a managing director and investment
strategist/portfolio manager of NWQ Investment since 1983. Mr. Friedel is a
graduate of the University of California at Berkeley (BS) and Stanford
University (MBA).
/5 DIAMONDS/
DEAN INVESTMENT ASSOCIATES
Dean Investment Associates ("Dean") serves as sub-adviser to WRL Dean Asset
Allocation.
Dean, located at 2480 Kettering Tower, Dayton, Ohio 45423-2480, 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 currently has $ billion of assets under
management.
41
<PAGE>
/DIAMOND/ PORTFOLIO MANAGERS:
The WRL Dean Asset Allocation is managed by a team of 10 senior investment
professionals (Central Investment Committee), with over 137 years of total
investment experience.
JOHN C. RIAZZI, CFA, has served as the senior portfolio Manager of WRL Dean
Asset Allocation 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 five years. He received a B.A. in Economics from Kenyon College in
1985 and was awarded the Chartered Financial Analyst designation in 1993.
/5 DIAMONDS/
LUTHER KING CAPITAL
MANAGEMENT CORPORATION
Luther King Capital Management Corporation ("LKCM") serves as sub-adviser to
WRL LKCM Strategic Total Return.
LKCM 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 18 years; as of December 31, 1999, the
total assets managed by Luther King was approximately $ billion.
/DIAMOND/ PORTFOLIO MANAGERS:
LUTHER KING, JR., CFA, AND SCOT HOLLMANN, CFA, have served as portfolio
managers of the WRL LKCM Strategic Total Return 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.
/5 DIAMONDS/
FEDERATED INVESTMENT
MANAGEMENT COMPANY
Federated Investment Counseling ("Federated") serves as the sub-adviser to the
WRL Federated Growth & Income.
Federated, located at Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779, is a wholly-owned subsidiary of Federated Investors, Inc. All of
the voting securities of Federated Investors, Inc. are owned by a trust, the
trustees of which are John F. Donahue, his wife, Rhodora Donahue, and his son,
J. Christopher Donahue.
/DIAMOND/ PORTFOLIO MANAGERS:
STEVEN J. LEHMAN and LINDA A. DUESSEL serve as co-portfolio managers of the WRL
Federated Growth & Income. Ms. Duessel has been a portfolio manager of the WRL
Federated Growth & Income since July, 1996. 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.
Ms. Duessel, senior vice president, 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 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.
Federated's disciplined investment selection process is rooted in sound
methodologies backed by fundamental and technical research. At Federated,
success in investment management does not depend solely on the skill of a
single portfolio manager. It is a fusion of individual talents and
state-of-the-art industry tools and resources. Federated's investment process
involves teams of portfolio managers and analysts, and investment decisions are
executed by traders who are dedicated to specific market sectors and who handle
trillions of dollars in annual trading volume.
/5 DIAMONDS/
AEGON USA INVESTMENT MANAGEMENT, INC.
AEGON USA Investment Management, Inc. ("AIMI") serves as sub-adviser to the WRL
AEGON Bond and the WRL AEGON Balanced.
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
Mutual Funds. AIMI also manages the general account investment portfolios of
the life insurance subsidiaries of AEGON USA and had in excess of $45 billion
under management as of December 31, 1998 and as sole manager since the
inception of the portfolio.
/DIAMOND/ PORTFOLIO MANAGERS:
CLIFFORD A. SHEETS, CFA AND DAVID R. HALFPAP, CFA have served as co-portfolio
managers of this portfolio since January 2000. Mr. Sheets previously served as
co-portfolio manager of this portfolio since 1998 and as sole manager since the
inception of the portfolio. Mr. Sheets joined AIMI in 1990.
42
<PAGE>
Mr. Halfpap has been employed by AIMI since 1975 and is currently a senior vice
president.
MICHAEL VAN METER has served as the Senior portfolio Manager of the WRL AEGON
Balanced since its inception. Mr. Van Meter has been employed by VMF Capital,
LLC ("VMF") since July, 1998. Prior to joining VMF, Mr. Van Meter was employed
by AIMI.
/5 DIAMONDS/
J.P. MORGAN INVESTMENT MANAGEMENT INC.
J.P. Morgan Investment Management, Inc. ("J.P. Morgan") serves as sub-adviser
to WRL J.P. Morgan Money Market and WRL J.P. Morgan Real Estate Securities.
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.
/DIAMOND/ PORTFOLIO MANAGERS:
JOHN T. DONOHUE AND MARK SETTLES have served as co-portfolio managers of the
WRL J.P. Morgan Money Market Portfolio since January 2000. Mr. Donohue has been
employed by J.P. Morgan since 1997 and is a portfolio manager in the Fixed
Income Group. He previously served as senior money market trader. Mr. Donohue
was a portfolio manager at Goldman Sachs for 10 years prior to his employment
at J.P. Morgan.
MR. SETTLES is a product portfolio manager in the Short Term Fixed Income Group
at J.P. Morgan. Previously, he spent five years trading dollar and
euro-denominated fixed income products in J.P. Morgan's New York and London
trading desks.
/5 DIAMONDS/
GE ASSET MANAGEMENT INCORPORATED
GE Asset Management Incorporated ("GEAM") serves as a co-sub-adviser to the WRL
GE International Equity and as sub-adviser to the WRL GE U.S. Equity. Prior to
May 1, 2000, GEAM served as co-subadviser to WRL GE/Scottish Equitable
International Equity.
GEAM is located at 3003 Summer Street, P.O. Box 7900, Stamford, Connecticut
06904. GEAM is a wholly-owned subsidiary of General Electric Company and a
registered investment adviser. As of December 31, 1999, GEAM oversaw $115.8
billion and managed individual and institutional assets of $91.7 billion, of
which more than $18.2 billion was invested in mutual funds.
/DIAMOND/ PORTFOLIO MANAGERS:
RALPH R. LAYMAN is a Director and Executive Vice President of GEAM. Mr. Layman
manages the overall International Equity Investments for GEAM. He leads a team
of portfolio managers for WRL GE International. Mr. Layman joined GEAM in 1991
as Executive Vice President for International Investments.
EUGENE K. BOLTON is Director and Executive Vice President of GEAM. He manages
U.S. Equity investments for GEAM. He leads a team of portfolio managers for the
overall the WRL GE U.S. Equity and has served in that capacity since its
inception. Mr. Bolton joined GEAM in 1984 as Chief Financial Officer and has
been portfolio manager since 1986. Mr. Bolton is currently a director and
executive vice president of GE Investments.
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 management by the Sub-Adviser. The table below lists those
percentages by portfolio.
<TABLE>
<CAPTION>
PORTFOLIO PERCENTAGE OF AVERAGE DAILY NET ASSETS
- - ---------------------------------- -----------------------------------------------------------
<S> <C>
WRL Janus Growth 0.40%(1)
WRL AEGON Bond 0.20% (Prior to January 1, 1998, Janus Capital
Corporation, previous Sub-Adviser, received 0.25%)
WRL Janus Global 0.40%(2)
WRL J.P. Morgan Money Market 0.15%
WRL AEGON Balanced 0.40%, less 50% of amount of excess expenses(3)
WRL VKAM Emerging Growth 0.40%, less 50% of amount of excess expenses(3)
WRL LKCM Strategic Total Return 0.40%
WRL Alger Aggressive Growth 0.40%
WRL Dean Asset Allocation 0.40%, less 50% of amount of excess expenses(3)
WRL C.A.S.E. Growth 0.40%
WRL Federated 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
WRL NWQ Value Equity 0.40%, less 50% of amount of excess expenses(3)
WRL GE International Equity 50% of the fees received by the investment adviser(4)
WRL GE U.S. Equity 0.40%
WRL Third Avenue Value 0.40%, less 50% of amount of excess expenses(3)
</TABLE>
- - -------------
43
<PAGE>
(1) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the first $3 billion of the portfolio's average daily net assets
(resulting in a net fee of 0.3875%) and 0.25% of assets above $3 billion
(resulting in a net fee of 0.375%). This waiver will terminate on June 25,
2000.
(2) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the portfolio's average daily net assets above $2 billion (resulting in a
net fee of 0.3875%). This waiver will terminate on June 25, 2000.
(3) Excess expenses are those expenses paid by the Investment Adviser on behalf
of a portfolio pursuant to any expense limitation.
(4) Prior to May 1, 2000, Scottish Equitable served as co-manager of this
portfolio and the portfolio was know as WRL GE/Scottish Equitable
International Equity.
The method of computing each Sub-Adviser's fees is set forth above. For the
years ended December 31, 1999, 1998 and 1997 each Sub-Adviser was paid fees for
their services in the following amounts:
SUB-ADVISORY FEES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------
SUB-ADVISER PORTFOLIO 1999 1998 1997
- - ------------- ----------------------------------- ---------------------------- -------------------------- --------------------
<S> <C> <C> <C> <C>
Alger WRL Alger Aggressive Growth $2,936,966 $1,680,802 $1,124,900
VKAM WRL VKAM Emerging Growth 4,473,352 2,704,049 2,037,749
Janus WRL Janus Growth(5) 12,744,800 9,055,804 6,858,412
WRL Janus Global(6) 5,146,976 3,768,835 2,795,909
WRL J.P. Morgan Money Market N/A N/A N/A
WRL AEGON Bond(1) 325,052 N/A 239,843
EQSF WRL Third Avenue Value 72,841 55,964 N/A
C.A.S.E. WRL C.A.S.E. Growth 334,939 257,951 167,446
NWQ WRL NWQ Value Equity 607,482 729,083 450,409
Dean WRL Dean Asset Allocation 1,311,787 1,355,313 1,039,770
LKCM WRL LKCM Strategic Total Return 2,383,168 2,242,509 1,851,835
Federated WRL Federated Growth & Income 300,086 287,959 202,218
AIMI WRL AEGON Balanced 421,229 340,271 245,951
WRL AEGON Bond(1) 325,052 294,882 N/A
J.P. Morgan WRL J.P. Morgan Real Estate 12,266
Securities(4) 4,669 N/A
WRL J.P. Morgan Money Market 404,622 241,729 193,113
GEIM WRL GE U.S. Equity(2) 588,987 277,671 70,140
WRL GE International Equity(2)(3) 86,818 69,749 27,889
SEIM WRL GE International Equity(2)(3) 77,845 67,890 27,962
</TABLE>
- - ------------------------------
(1) Prior to January 1, 1998, Janus served as sub-adviser to Bond 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 Sub-Adviser to the WRL AEGON Bond (formerly Bond),
and will receive monthly compensation from the Investment Adviser at the
annual rate of 0.20% of average daily net assets of the portfolio.
(2) Prior to May 1, 2000 this portfolio was known as WRL GE/Scottish Equitable
International Equity.
(3) GEIM and SEIM served as Co-sub-advisers for the WRL GE International Equity
until May 1, 2000.
(4) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the first $3 billion of the portfolio's average daily net assets
(resulting in a net fee of 0.3875%) and 0.25% of assets above $3 billion
(resulting in a net fee of 0.375%). This waiver will terminate on June 25,
2000.
(5) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the portfolio's average daily net assets above $2 billion (resulting in a
net fee of 0.3875%). This waiver will terminate on June 25, 2000.
Through June 25, 2000, provided that it continues to serve as sub-adviser for
the portfolios, Janus Capital will compensate WRL for its services in
connection with promotion, marketing and distribution in an amount equal to
0.0375% of the average daily net assets of WRL Janus Growth on the first $3
billion of assets and 0.075% on assets in excess of $3 billion. With respect to
WRL Janus Global, the amount will be equal to 0.0375% of the portfolio's
average daily net assets above $2 billion.
/DIAMOND/
JOINT TRADING ACCOUNTS
Subject to approval by the Fund's Board, the WRL Janus Growth and WRL Janus
Global 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 WRL Janus Growth and WRL Janus Global 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.
44
<PAGE>
/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.
The Board is required to review and approve the Code of Ethics for each
Sub-Adviser. Each Sub-Adviser is also 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/
ADMINISTRATIVE AND TRANSFER
AGENCY SERVICES
Effective January 1, 1997, the Fund entered into an Administrative Services and
Transfer Agency Agreement with WRL Services located at 570 Carillon Parkway,
St. Petersburg, Florida 33716, 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
servicesin connection with its serving as the Fund's investment adviser.
PORTFOLIO TRANSACTIONS AND BROKERAGE
/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 held during the year. The WRL Third Avenue
Value investment policies and objective, which emphasizes long-term holdings,
should tend to keep the number of portfolio transactions relatively low.
Because of this, the WRL Third Avenue Value does not expect its annual
portfolio turnover rate to exceed 50%.
Changes in security holdings are made by a portfolio's Sub-Adviser when it is
deemed necessary. Such changes may result from: liquidity needs; securities
having reached a price or yield objective; anticipated changes in interest
rates or the credit standing of an issuer; or developments not foreseen at the
time of the investment decision.
A Sub-Adviser may engage in a significant number of short-term transactions if
such investing serves a portfolio's objective. The rate of portfolio turnover
will not be a limiting factor when such short-term investing is considered
appropriate. Increased turnover results in higher brokerage costs or mark-up
charges for a portfolio; these charges are ultimately borne by the
policyowners.
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, 1999, 1998 and 1997:
45
<PAGE>
PORTFOLIO TURNOVER RATES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------------
PORTFOLIO 1999 1998 1997
- - ---------------------------------------------------- ------------------- --------------------- ------------
<S> <C> <C> <C>
WRL Alger Aggressive Growth 101.71% 117.44% 136.18%
WRL VKAM Emerging Growth 117.72% 99.50% 99.78%
WRL GE/Scottish Equitable International Equity(2) 99.77% 71.74% 54.33%
WRL Janus Global 68.10% 87.36% 97.54%
WRL Janus Growth 70.95% 35.29% 85.88%
WRL Third Avenue Value(3) 9.56% 4.35% N/A
WRL C.A.S.E. Growth 143.52% 205.28% 196.50%
WRL GE U.S. Equity(2) 44.01% 63.08% 92.35%
WRL NWQ Value Equity 34.19% 43.60% 17.28%
WRL Dean Asset Allocation 88.78% 76.62% 63.76%
WRL LKCM Strategic Total Return 45.42% 49.20% 48.20%
WRL Federated Growth & Income 117.14% 97.17% 155.77%
WRL AEGON Balanced 74.88% 83.94% 77.06%
WRL AEGON Bond 26.40% 51.60% 213.03%
WRL J.P. Morgan Money Market(1) N/A N/A N/A
</TABLE>
- - ------------------------------
(1) WRL J.P. Morgan 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.
(2) This portfolio was previously known as WRL GE/Scottish Equitable
International Equity.
(3) Portfolio commenced operations on January 2, 1998.
For the year ended December 31, 1997, the Bond portfolio's increase in turnover
rate was the result of portfolio management strategies in trying to maintain
benchmark treasury issues. There was also a significant increase in the
turnover rate for the WRL Federated Growth & Income for the year ended December
31, 1997 because the portfolio changed its investment objective from a utility
based portfolio to a defensive equity portfolio and the portfolio managers
implemented a proprietary defensive equity model in selecting new stocks.
The future annual turnover rates cannot be precisely predicted, although an
annual turnover rate in excess of 100% is not presently anticipated for the WRL
Alger Aggressive Growth, WRL Dean Asset Allocation, WRL Federated Growth &
Income and WRL AEGON Balanced; 50% for the WRL NWQ Value Equity and WRL Third
Avenue Value; 150% for the WRL Janus Growth; and 200% for the WRL Janus Global.
There are no fixed limitations regarding the portfolio turnover rates of the
portfolios. Portfolio turnover rates are expected to fluctuate under constantly
changing economic conditions and market circumstances. Higher turnover rates
tend to result in higher brokerage fees. Securities initially satisfying the
basic policies and objective of each portfolio may be disposed of when they are
no longer deemed suitable.
/DIAMOND/
PLACEMENT OF PORTFOLIO
BROKERAGE
Subject to policies established by the Board of Directors of the Fund, each
portfolio's Sub-Adviser is primarily responsible for placement of a portfolio's
securities transactions. In placing orders, it is the policy of a portfolio to
obtain the most favorable net results, taking into account various factors,
including price, dealer spread or commissions, if any, size of the transaction
and difficulty of execution. While each Sub-Adviser generally will seek
reasonably competitive spreads or commissions, a portfolio will not necessarily
be paying the lowest spread or commission available. A portfolio does not have
any obligation to deal with any broker, dealer or group of brokers or dealers
in the execution of transactions in portfolio securities.
Decisions as to the assignment of portfolio brokerage business for a portfolio
and negotiation of its commission rates are made by the Sub-Adviser, whose
policy is to obtain "best execution" (prompt and reliable execution at the most
favorable security price) of all portfolio transactions. In placing portfolio
transactions, the Sub-Adviser may give consideration to brokers who provide
supplemental investment research, in addition to such research obtained for a
flat fee, to the Sub-Adviser, and pay spreads or commissions to such brokers or
dealers furnishing such 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
46
<PAGE>
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., One
World Trade Center, Suite 9333, New York, New York 10048; M. J. Whitman, Inc.;
M. J. Whitman Senior Debt Corp., 767 Third Avenue, New York, New York
10017-2023; Van Kampen Funds Inc., 1 Parkview Plaza, P.O. Box 5555, Oakbrook
Terrace, Illinois 60181, 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.
47
<PAGE>
COMMISSIONS PAID BY THE PORTFOLIOS
AGGREGATE COMMISSIONS
YEAR ENDED DECEMBER 31
---------------------------
PORTFOLIO 1999 1998
- - -------------------------------- ------------- -------------
WRL Alger Aggressive Growth(1) $ 907,331 $ 916,267
WRL VKAM Emerging Growth(4) 1,305,965 920,884
WRL Janus Global 2,219,248 2,373,255
WRL Janus Growth 2,717,764 1,023,925
WRL C.A.S.E. Growth 326,987 323,967
WRL Third Avenue Value(3) 7,817 20,572
WRL Dean Asset
Allocation 521,249 339,951
WRL LKCM Strategic
Total Return 513,667 469,460
WRL Federated Growth &
Income 281,782 262,012
WRL AEGON Balanced 179,262 153,672
WRL NWQ Value Equity 168,551 191,139
WRL GE International Equity(2) 136,293 121,485
WRL GE U.S. Equity(2)(5) 133,539 102,182
<TABLE>
<CAPTION>
AFFILIATED BROKERAGE COMMISSIONS
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------------------
PORTFOLIO 1997 1999 % 1998 % 1997
- - -------------------------------- ----------------- --------------- -------------- --------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
WRL Alger Aggressive Growth(1) $ 754,459 $903,540 99.58% 912,105 99.55 $749,587
WRL VKAM Emerging Growth(4) 627,400 9,346 < 1% 1,308 < 1% N/A
WRL Janus Global 2,305,145 N/A N/A N/A N/A N/A
WRL Janus Growth 1,367,104 N/A N/A N/A N/A
WRL C.A.S.E. Growth 335,147 N/A N/A N/A N/A N/A
WRL Third Avenue Value(3) N/A 7,452 95,337 20,568 99.98%
WRL Dean Asset
Allocation 352,964 N/A N/A N/A N/A N/A
WRL LKCM Strategic
Total Return 348,083 N/A N/A N/A N/A N/A
WRL Federated Growth &
Income 175,035 N/A N/A N/A N/A N/A
WRL AEGON Balanced 105,731 N/A N/A N/A N/A N/A
WRL NWQ Value Equity 157,512 N/A N/A N/A N/A N/A
WRL GE International Equity(2) 102,616 N/A N/A N/A N/A N/A
WRL GE U.S. Equity(2)(5) 39,301 241 < 1% 325 <1% N/A
</TABLE>
AFFILIAATED
BROKERAGE
COMMISSSIONS
YEAR ENDED
DECEMBER 31
-------------
PORTFOLIO %
- - -------------------------------- -------
WRL Alger Aggressive Growth(1) 99.35%
WRL VKAM Emerging Growth(4) N/A
WRL Janus Global N/A
WRL Janus Growth N/A
WRL C.A.S.E. Growth N/A
WRL Third Avenue Value(3)
WRL Dean Asset
Allocation N/A
WRL LKCM Strategic
Total Return N/A
WRL Federated Growth &
Income N/A
WRL AEGON Balanced N/A
WRL NWQ Value Equity N/A
WRL GE International Equity(2) N/A
WRL GE U.S. Equity(2)(5) N/A
- - ------------------------------
(1) The percentage of the portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through Fred Alger Company,
Incorporated for the fiscal year ended December 31, 1999, 1998 and 1997
was 98.90%, 99.27% and 98.37%, respectively.
(2) Prior to May 1, 2000, this portfolio was named WRL GE/Scottish Equitable
U.S. Equity.
(3) The percentage of the portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through M.J. Whitman, Inc.
for the fiscal year ended December 31, 1999, 1998 and 1997 was 88.40%,
97.91%, and N/A, respectively.
(4) The percentage of the portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through Morgan Stanley &
Co., Incorporated for the fiscal year ended December 31, 1999, 1998 and
1997 was 1.06%, < 1% and N/A, respectively.
(5) The percentage of the portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through Paine Webber, Inc.
for the fiscal year ended December 31, 1999, 1998 and 1997 was < 1%, < 1%
and N/A, respectively.
WRL Alger Aggressive Growth paid all its affiliated brokerage commissions to
Fred Alger & Company, Incorporated; WRL Third Avenue Value paid all affiliated
brokerage commissions to M.J. Whitman, Inc.; WRL VKAM Emerging Growth paid all
affiliated brokerage commissions to Morgan Stanley & Co., Incorporated; and WRL
GE U.S. Equity paid all affiliated brokerage commissions to Paine Webber, Inc.
The WRL AEGON Bond and the WRL J.P. Morgan Money Market did not pay any
brokerage commissions for the years ended December 31, 1999, 1998, and 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, Martin Luther King's Birthday, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.) The per share net asset value of a portfolio is determined by
dividing the total value of the securities and other assets, less liabilities,
by the total number of shares outstanding. In determining net asset value,
securities listed on the national securities exchanges and traded on the NASDAQ
National Market are valued at the closing prices on such markets, or if such a
price is lacking for the trading period immediately preceding the time of
determination, such securities are valued at their current bid price. Foreign
securities and currencies are converted to U.S. dollars using the exchange rate
in effect at the close of the Exchange. Other securities for which quotations
are not readily available are valued at fair values as determined in good faith
by a portfolio's Investment Adviser under the supervision of the Fund's Board
of Directors. Money market instruments maturing in 60 days or less are valued
on the amortized cost basis. Values of gold bullion held by a portfolio are
based upon daily quotes provided by banks or brokers dealing in such
commodities.
48
<PAGE>
CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief description of how performance is calculated.
The following sections describe how performance data is calculated in greater
detail.
/DIAMOND/
TOTAL RETURN
Total return quotations for each of the portfolios are computed by finding the
average annual compounded rates of return over the relevant periods that would
equate the initial amount invested to the ending redeemable value, according to
the following equation:
P (1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value (at the end
of the applicable period of a hypotheti-
cal $1,000 payment made at the begin-
ning of the applicable period)
The total return quotation calculations for a portfolio reflect the deduction
of a proportionate 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 WRL J.P. Morgan Money Market yield,
see "Yield Quotations - WRL J.P. Morgan Money Market ", below) are based on a
specific thirty-day period and are computed by dividing the net investment
income per share earned during the period by the maximum offering price per
share on the last date of the period, according to the following formula:
a-b
YIELD = 2 [ (--- + 1)6 - 1]
cd
Where: a = dividends and interest earned dur-
ing the period by the portfolio
b = expenses accrued for the period
(net of reimbursement)
c = the average daily number of shares
outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per
share on the last day of the period
The yield of the WRL AEGON Bond as computed above for the thirty day period
ended December 31, 1999 was %.
/DIAMOND/
YIELD QUOTATIONS - WRL J.P. MORGAN
MONEY MARKET
From time to time the WRL J.P. Morgan 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 WRL J.P. Morgan Money Market for the seven-day period ended
December 31, 1999, was % and was equivalent to a compound effective yield
of %. The current yield for the WRL J.P. Morgan Money Market 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 WRL J.P. Morgan Money Market 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
49
<PAGE>
1. The yield quotations for the WRL J.P. Morgan 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 WRL J.P. Morgan Money Market'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 WRL J.P. Morgan Money Market, 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 either qualified, and expects to continue to qualify, for
treatment as a regulated investment company ("RIC") under the Internal Revenue
Code of 1986, as amended (the "Code"). In order to qualify for that treatment,
a portfolio must distribute to its Policyowners for each taxable year at least
90% of its investment company taxable income ("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) 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 (3) 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. If each portfolio qualifies as a regulated investment
company and distributes to its shareholders substantially all of its net income
and net capital gains, then each portfolio should have little or no income
taxable to it under the Code.
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 generally includes all securities of the same issuer). For
purposes of section 817(h), all securities of the same issuer, all interests in
the same real property project, and all interest in the same commodity are
treated as a single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities and political
subdivisions all will be considered securities issued by the same issuer.
If a portfolio fails to qualify as a regulated investment company, the
portfolio will be subject to federal, and possibly state, corporate taxes on
its taxable income and gains (without any deduction for its distributions to
its shareholders) and distributions to its shareholders will constitute
ordinary income to the extent of such Fund's available earnings and profits.
Owners of variable life insurance and annuity contracts which have invested in
such a portfolio might be taxed currently on the investment earnings under
their contracts and thereby lose the benefit of tax deferral. In addition, if a
portfolio failed to comply with the diversification requirements of section
817(h) of the Code and the regulations thereunder, owners of variable life
insurance and annuity contracts which have invested in the portfolio could be
taxed on the investment earnings under their contracts and thereby lose the
benefit of tax deferral. For additional information concerning the consequences
of failure to meet the requirements of section 817(h), see the 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
50
<PAGE>
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, 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.
Foreign Investments - portfolios investing in foreign securities or currencies
(which may include [list portfolios so authorized] may be required to pay
withholding, income or other taxes to foreign governments or U.S. possession.
Foreign tax withholding from dividends and interest, if any, is generally at a
rate between 10% and 35%. The investment yield of any portfolio that invests in
foreign securities or currencies is reduced by these foreign taxes. Holders of
Policies and Annuity Contracts investing in such portfolios bear the cost of
any foreign taxes but will not be able to claim a foreign tax credit or
deduction for these foreign taxes. 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.
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.
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 the portfolio 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. A portfolio, however, may
qualify for, and may make, an election permitted under Section 853 of the Code
so that shareholders may be eligible to claim a credit or deduction on their
Federal income tax returns for, and will be required to treat as part of the
amounts distributed to them, their pro rata portion of qualified taxes paid or
incurred by the portfolio to foreign countries (which taxes relate primarily to
investment income). The portfolio may make an election under Section 853 of the
Code, provided that more than 50% of the value of the portfolio's total assets
at the close of the taxable year consists of securities in foreign
corporations, and the portfolio satisfies applicable distribution provisions of
the Code. The foreign tax credit available to shareholders is subject to
certain limitations imposed by the Code. In addition, another election is
available that would involve marking to market a portfolio's PFIC stock at the
end of each taxable year (and on certain other dates prescribed in the Code),
with the result that unrealized gains are treated as though they were realized
although any such gains recognized will be ordinary income rather than capital
gain. If this election were made, tax at the portfolio level under the PFIC
rules would be eliminated, but a portfolio could, in limited circumstances,
incur nondeductible interest charges. A portfolio's intention to qualify
annually as a regulated investment company may limit a portfolio's
election with respect to PFIC stock.
The foregoing is only a general summary of some of the important Federal income
tax considerations generally affecting the portfolios and their shareholders.
No attempt is made to present a complete explanation of the Federal tax
treatment of the portfolios' activities, and this discussion and the discussion
in the prospectuses and/or statements of additional information for the
Policies and Annuity Contracts are not intended as a substitute for careful tax
planning. Accordingly, potential investors are urged to consult their own tax
advisors for more detailed information and for information regarding any state,
local, or foreign taxes applicable to the policies, annuity contracts and the
holders thereof.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each portfolio. The Fund is currently comprised of the following
portfolios: WRL VKAM Emerging Growth, WRL Alger Aggressive Growth, WRL GE
International Equity, WRL Janus Global, WRL Janus Growth, WRL C.A.S.E. Growth,
WRL GE U.S. Equity, WRL NWQ Value Equity, WRL Dean Asset Allocation, WRL LKCM
Strategic Total Return, WRL Federated Growth & Income, WRL AEGON Balanced, WRL
AEGON Bond and WRL J.P. Morgan Money Market.
51
<PAGE>
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 of the Fund for the year
ended December 31, 1999 and the report of the Fund's independent certified
public accountants are included in the 1999 Annual Report, and are incorporated
herein by reference to such report.
OTHER INFORMATION
/DIAMOND/
CERTIFIED PUBLIC ACCOUNTANTS
PricewaterhouseCoopers LLP, located at 400 North Ashley Street, Suite 2800,
Tampa, Florida 33602, serves as the Fund's independent certified public
accountants. The Fund has engaged PricewaterhouseCoopers LLP to examine, in
accordance with generally accepted auditing standards, the financial statements
of each of the Fund's portfolios.
/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.
52
<PAGE>
APPENDIX A
DESCRIPTION OF PORTFOLIO SECURITIES
The following is intended only as a supplement to the information
contained in the Prospectus and should be read only in conjunction with the
Prospectus. Terms defined in the Prospectus and not defined herein have the
same meanings as those in the Prospectus.
1. CERTIFICATE OF DEPOSIT.* A certificate of deposit generally is a
short-term, interest bearing negotiable certificate issued by a commercial bank
or savings and loan association against funds deposited in the issuing
institution.
2. EURODOLLAR CERTIFICATE OF DEPOSIT.* A Eurodollar certificate of
deposit is a short-term obligation of a foreign subsidiary of a U.S. bank
payable in U.S. dollars.
3. FLOATING RATE NOTE.* A floating rate note is debt issued by a
corporation or commercial bank that is typically several years in term but
whose interest rate is reset every one to six months.
4. 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 and 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.
A-2
<PAGE>
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 SEC 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.
A-3
<PAGE>
APPENDIX B
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 capac-
ity to pay principal and interest then for higher rated bonds.
BB, B, and Predominantly speculative with respect to the issuer's capacity to
CC, CC, C meet required interest and principal payments. BB - lowest degree of
speculation; C- the highest degree of speculation. Quality and
protective characteristics outweighed by large uncertainties or major
risk exposure to adverse conditions.
D In default.
</TABLE>
PLUS (+) OR MINUS (-) - The ratings from "AA" to "BBB" may be modified by the
addition of a plus or minus to show relative standing within the major rating
categories.
UNRATED - Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
<TABLE>
<CAPTION>
<S> <C> <C>
MOODY'S INVESTORS SERVICE, INC. Aaa Highest qualty, 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 Medum-grade obligations; neither highly protected nor poorly
secured. Interest and principal appear adequate for the present but
certain protective elements may be lacking or may be unreliable over
any great length of time.
Ba More unceratin, 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 assur-
ance of timely interest and principal payments or maintenance of
other contract terms over time.
Caa Poor standing, may be in default; elements of danger with respect to
principal or interest payments.
Ca Speculative in a high degree; could be in default or have other
marked short-comings.
C Lowest-rated; extremely poor prospects of ever attaining investment
standing.
</TABLE>
UNRATED - Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is 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.
B-1
<PAGE>
WRL SERIES FUND, INC.
WRL T. ROWE PRICE SMALL CAP
WRL PILGRIM BAXTER MID CAP GROWTH
WRL ALGER AGGRESSIVE GROWTH
WRL JANUS GLOBAL
WRL GOLDMAN SACHS GROWTH
WRL SALOMON ALL CAP
WRL NWQ VALUE EQUITY
WRL T. ROWE PRICE DIVIDEND GROWTH
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 570 Carillon Parkway, St. Petersburg, FL 33716 or by calling the
Fund at (800) 851-9777.
Investment Adviser:
WRL INVESTMENT MANAGEMENT, INC.
Sub-Advisers:
T. ROWE PRICE ASSOCIATES, INC.
GOLDMAN SACHS ASSET MANAGEMENT INC.
PILGRIM BAXTER & ASSOCIATES, LTD.
FRED ALGER MANAGEMENT, INC.
JANUS CAPITAL CORPORATION
SALOMON BROTHERS ASSET MANAGEMENT INC.
NWQ INVESTMENT MANAGEMENT COMPANY, 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,
2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page in this Statement
of
Additional Information
-----------------------
<S> <C>
FUND HISTORY 1
INVESTMENT OBJECTIVES AND POLICIES 2
Investment Restrictions 2
WRL T. Rowe Price Small Cap 3
WRL Pilgrim Baxter Mid Cap Growth 4
WRL Alger Aggressive Growth 4
WRL Janus Global 5
WRL Goldman Sachs Growth 5
WRL Salomon All Cap 6
WRL NWQ Value Equity 7
WRL T. Rowe Price Dividend Growth 7
INVESTMENT POLICIES 8
Lending 8
Borrowing 8
Short Sales 8
Foreign Securities 9
Foreign Bank Obligations 9
Forward Foreign Currency Contracts 10
When-Issued, Delayed Settlement and Forward Delivery Securities 10
Investment Funds (WRL GE International Equity) 10
Repurchase and Reverse Repurchase Agreements 11
Temporary Defensive Position 11
U.S. Government Securities 11
Non-Investment Grade Debt Securities 11
Convertible Securities 12
Investments in Futures, Options and Other Derivative Instruments 12
Zero Coupon, Pay-In-Kind and Step Coupon Securities 22
Warrants and Rights 23
Mortgage-Backed Securities 23
Asset-Backed Securities 23
Pass-Through Securities 23
Other Income Producing Securities 24
Illiquid and Restricted/144A Securities 24
Money Market Reserves
(WRL T. Rowe Price Small Cap and
WRL T. Rowe Price Dividend Growth) 25
Other Investment Companies 25
Quality and Diversification Requirements
(WRL J.P. Morgan Money Market) 25
Bank and Thrift Obligations 25
Investments in the Real Estate Industry and Real Estate Investment Trusts
("REITs") 26
Variable Rate Master Demand Notes 26
Debt Securities and Fixed-Income Investing 27
High Yield/High-Risk Securities 27
Trade Claims 28
MANAGEMENT OF THE FUND 28
Directors and Officers 28
The Investment Adviser 30
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page in this Statement
of
Additional Information
-----------------------
<S> <C>
The Sub-Advisers 33
Joint Trading Accounts 36
Personal Securities Transactions 36
Administrative and Transfer Agency Services 36
PORTFOLIO TRANSACTIONS AND BROKERAGE 36
Portfolio Turnover 36
Placement of Portfolio Brokerage 37
PURCHASE AND REDEMPTION OF SHARES 39
Determination of Offering Price 39
Net Asset Valuation 39
CALCULATION OF PERFORMANCE
RELATED INFORMATION 39
Total Return 39
Yield Quotations 40
Yield Quotations - WRL J.P. Morgan Money Market 40
TAXES 40
CAPITAL STOCK OF THE FUND 42
REGISTRATION STATEMENT 42
FINANCIAL STATEMENTS 42
OTHER INFORMATION 42
Independent Certified Public Accountants 42
Custodian 42
Appendix A - Description of Portfolio Securities A-1
Appendix B - Brief Explanation of
Rating Categories B-1
</TABLE>
ii
<PAGE>
/diamond/ FUND HISTORY
The Fund was incorporated under the laws of the State of Maryland on August 21,
1985 and is registered with the Securities and Exchange Commission ("SEC") as
an open-end management investment company.
The Fund offers its shares only for purchase by the separate accounts of life
companies to fund benefits under variable life insurance policies or variable
annuity contracts issued by AUSA Life Insurance Company, Inc. ("AUSA"), PFL
Life Insurance Company ("PFL"), Western Reserve Life Assurance Co. of Ohio
("WRL"), Peoples Benefit Life Insurance Company ("Peoples") and Transamerica
Occidental Life Insurance Company (the "Life Companies"). Shares may be offered
to other life insurance companies in the future.
Because Fund shares are sold to separate accounts established to receive and
invest premiums received under variable life insurance policies and purchase
payments received under the variable annuity contracts, it is conceivable that,
in the future, it may become disadvantageous for variable life insurance
separate accounts and variable annuity separate accounts of the Life Companies
to invest in the Fund simultaneously. Neither the Life Companies nor the Fund
currently foresees any such disadvantages or conflicts, either to variable life
insurance policyholders or to variable annuity contract owners. Any Life
Company may notify the Fund's Board of a potential or existing conflict. The
Fund's Board will then determine if a material conflict exists and what action,
if any, should be taken in response. Such action could include the sale of Fund
shares by one or more of the separate accounts, which could have adverse
consequences. Material conflicts could result from, for example, (1) changes in
state insurance laws, (2) changes in Federal income tax laws, or (3)
differences in voting instructions between those given by variable life
insurance policyholders and those given by variable annuity contract owners.
The Fund's Board might conclude that separate funds should be established for
variable life and variable annuity separate accounts. If this happens, the
affected Life Companies will bear the attendant expenses of establishing
separate funds. As a result, variable life insurance policyholders and variable
annuity contract owners would no longer have the economies of scale typically
resulting from a larger combined fund.
The Fund offers a separate class of common stock for each portfolio. All shares
of a portfolio have equal voting rights, but only shares of a particular
portfolio are entitled to vote on matters concerning only that portfolio. Each
of the issued and outstanding shares of a portfolio is entitled to one vote and
to participate equally in dividends and distributions declared by the portfolio
and, upon liquidation or dissolution, to participate equally in the net assets
of the portfolio remaining after satisfaction of outstanding liabilities. The
shares of a portfolio, when issued, will be fully paid and nonassessable, have
no preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights. The holders
of more than 50% of the shares of the Fund voting for the election of directors
can elect all of the directors of the Fund if they so choose. In such event,
holders of the remaining shares would not be able to elect any directors.
Only the separate accounts of the Life Companies may hold shares of the Fund
and are entitled to exercise the rights directly as described above. To the
extent required by law, the Life Companies will vote the Fund's shares held in
the separate accounts, including Fund shares which are not attributable to
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 Investment Company Act of 1940, as
amended (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.
1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the WRL T. Rowe Price Small Cap, WRL Alger
Aggressive Growth, WRL Janus Global, WRL Salomon All Cap, WRL Pilgrim Baxter
Mid Cap Growth, WRL Goldman Sachs Growth, WRL NWQ Value Equity and WRL T. Rowe
Price Dividend Growth (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 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, its 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 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/ WRL T. ROWE PRICE SMALL CAP AND
WRL T. ROWE PRICE DIVIDEND 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. Borrow money except for temporary or emergency purposes (not for
leveraging or investment) in an amount exceeding 331/3% of the value of the
portfolio's total assets (including amount borrowed) less liabilities (other
than borrowings). Any borrowings that exceed 331/3% of the value of the
portfolio's total assets by reason of a decline in net assets will be reduced
within three business days to the extent necessary to comply with the 331/3%
limitation. This policy shall not prohibit reverse repurchase agreements or
deposits of assets to margin or guarantee positions in futures, options, swaps
or forward contracts, or the segregation of assets in connection with such
contracts.
3. Purchase or sell physical commodities (but this shall not prevent the
portfolio from entering into future contracts and options thereon).
4. Invest more than 25% of the portfolio's total 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' acceptance.
5. Lend any security although the portfolio may lend portfolio securities
provided that the aggregate of such loans do not exceed 331/3% of the value of
the portfolio's total assets. The portfolio may purchase money market
securities, enter into repurchase agreements and acquire publicly distributed
or privately placed debt securities, and purchase debt.
6. 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).
7. Issue senior securities, except as permitted by the 1940 Act.
8. Underwrite securities issued by other persons, except to the extent
that the portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of its
portfolio securities in the ordinary course of pursuing its investment
objective.
2
<PAGE>
Furthermore, the portfolios have adopted the following non-fundamental
restrictions which may be changed by the Board of Directors of the Fund without
shareholder approval:
(A) A portfolio may not purchase additional securities when money
borrowed exceeds 5% of its total assets. This restriction shall not apply to
temporary borrowings until the portfolio's net assets exceed $40,000,000.
(B) A portfolio may not purchase a futures contract or an option thereon,
if, with respect to positions in futures or options on futures which do not
represent bona fide hedging, the aggregate initial margin and premiums on such
options would exceed 5% of the portfolio's net asset value.
(C) 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 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.
(D) A portfolio may not invest in companies for the purpose of exercising
control or management.
(E) A portfolio may not purchase securities of open-end or closed-end
investment companies except (i) in compliance with the 1940 Act; or (ii)
securities of the Reserve Investment Funds.
(F) A portfolio may not purchase securities on margin, except (i) for use
of short-term credit necessary for clearance of purchases of portfolio
securities; and (ii) it may make margin deposits in connection with futures
contracts or other permissible investments.
(G) A portfolio may not mortgage, pledge, hypothecate or, in any manner,
transfer any security owned by the portfolio as security for indebtedness
except as may be necessary in connection with permissible borrowings or
investments and then such mortgaging, pledging or hypothecating may not exceed
331/3% of the portfolio's total assets at the time of borrowing or investment.
(H) A portfolio may not sell securities short, except short sales
"against the box."
/diamond/ WRL GOLDMAN SACHS GROWTH
Each 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. Borrow money except (a) the portfolio may borrow from banks (as
defined in the 1940 Act) or through reverse repurchase agreements in amounts up
to 331/3% of its total assets (including the amount borrowed), (b) the
portfolio may, to the extent permitted by applicable law, borrow up to an
additional 5% of its total assets for temporary purposes, (c) the portfolio may
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of portfolio securities, (d) the portfolio may purchase
securities on margin to the extent permitted by applicable law and (e) the
portfolio may engage in mortgage dollar rolls which are accounted for as
financings.
3. Purchase or sell physical commodities (but this shall not prevent the
portfolio from investing in currency and financial instruments and contracts
that are commodities or commodity contracts).
4. 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.
5. Make loans, except through (a) the purchase of debt obligations in
accordance with the portfolio's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other financial
institutions, and (c) loans of securities as permitted by applicable law.
6. 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).
7. Issue senior securities, except as permitted by the 1940 Act.
8. Underwrite securities issued by other persons, except to the extent
that the portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of its
portfolio securities in the ordinary course of pursuing its investment
objective.
Furthermore, the portfolios have adopted the following non-fundamental
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or policyowner approval:
(A) A portfolio may not invest in companies for the purpose of exercising
control or management.
(B) A portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include
3
<PAGE>
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.
(C) A portfolio may not purchase additional securities when money
borrowed exceeds 5% of its total assets. This restriction shall not apply to
temporary borrowings until the portfolio's net assets exceed $40,000,000.
(D) A portfolio may not make short sales of securities, except short
sales "against the box."
/diamond/ WRL PILGRIM BAXTER MID CAP 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. Borrow money except for temporary or emergency purposes (not for
leveraging or investment) in an amount exceeding 10% of the value of the
portfolio's total assets. This borrowing provision is included solely to
facilitate the orderly sale of portfolio securities to accommodate substantial
redemption requests if they should occur and is not for investment purposes.
All borrowings in excess of 5% of the portfolio's total assets will be repaid
before making investments.
3. Make loans, except that the portfolio, in accordance with its
investment objectives and policies, may purchase or hold debt securities, and
enter into repurchase agreements as described in the portfolio's prospectus and
this Statement of Additional Information.
4. Purchase or sell real estate, real estate limited partnership
interests, futures contracts, commodities or commodity contracts, except that
this shall not prevent the portfolio from (i) investing in readily marketable
securities of issuers which can invest in real estate or commodities,
institutions that issue mortgages, or real estate investment trusts which deal
in real estate or interests therein, pursuant to the portfolio's investment
objective and policies, and (ii) entering into futures contracts and options
thereon that are listed on a national securities or commodities exchange where,
as a result thereof, no more than 5% of the portfolio's total assets (taken at
market value at the time of entering into the futures contracts) would be
committed to margin deposits on such futures contracts and premiums paid for
unexpired options on such futures contracts; provided that, in the case of an
option that is "in-the-money" at the time of purchase, the "in-the-money"
amount, as defined under the Commodities Futures Trading Commission
regulations, may be excluded in computing the 5% limit. The portfolio (as a
matter of operating policy) will utilize only listed futures contracts and
options thereon.
5. Act as an underwriter of securities of other issuers except as it may
be deemed an underwriter in selling a portfolio security.
6. Issue senior securities, except as permitted by the 1940 Act.
7. 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.
Furthermore, the portfolio has adopted the following non-fundamental
restrictions which may be changed by the Board of Directors of the Fund without
shareholder or policyowner approval:
(A) The portfolio may not invest in companies for the purpose of
exercising control.
(B) The portfolio may not pledge, mortgage or hypothecate assets, except
(i) to secure temporary borrowings as permitted by the portfolio's limitation
on permitted borrowings, or (ii) in connection with permitted transactions
regarding options and futures contracts.
(C) 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 1933 Act, or any successor to such Rule,
Section 4(2) commercial paper or any other securities as to which the Board of
Directors has made a determination as to liquidity, as permitted under the 1940
Act.
(D) Purchase securities of other investment companies except as permitted
by the 1940 Act and the rules and regulations thereunder.
With respect to restriction 7 above, the portfolio may use (with the
consent of the Investment Adviser) industry classifications reflected by
Bloomberg Sub-Groups for the comunications equipment, electronic components and
accessories, and the computer and other data processing service sectors, if
applicable at the time of determination.
/diamond/ WRL ALGER AGGRESSIVE 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
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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.
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/ WRL JANUS GLOBAL
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).
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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/ WRL SALOMON ALL CAP
The portfolio may not, as a matter of fundamental policy:
1. Purchase or sell real estate, real estate mortgages, commodities or
commodity contracts; however, the portfolio may: (a) purchase interests in real
estate investment trusts or companies which invest in or own real estate if the
securities of such trusts or companies are registered under the Securities Act
of 1933 and are readily marketable or holding or selling real estate received
in connection with securities it holds; and (b) may enter into futures
contracts, including futures contracts on interest rates, stock indices and
currencies, and options thereon, and may engage in forward currency contracts
and buy, sell and write options on currencies and shall not be prohibited from
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.
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. Borrow money, except that the portfolio may borrow from banks for
investment purposes up to an aggregate of 15% of the value of its total assets
taken at the
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time of borrowing. The portfolio may borrow for temporary or emergency purposes
an aggregate amount not to exceed 5% of the value of its total assets at the
time of borrowing.
4. Issue senior securities, except as permitted by the 1940 Act.
5. Underwrite securities issued by other persons, except to the extent
that the portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of its
portfolio securities in the ordinary course of pursuing its investment
objective.
6. Make loans, except that the portfolio may purchase debt obligations in
which the portfolio may invest consistent with its investment objectives and
policies or enter into, and make loans of its portfolio securities, as
permitted under the 1940 Act.
Furthermore, the portfolio has adopted the following non-fundamental
restrictions that may be changed by the Board of Directors of the Fund without
shareholder or policyowner approval:
(A) 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.
(B) The portfolio may not invest in companies for the purpose of
exercising control or management.
(C) The portfolio may not sell securities short. This restriction shall
not apply to transactions involving selling securities "short against the box."
/diamond/ WRL NWQ VALUE EQUITY
The portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the portfolio in the securities of such issuer exceeds
5% of the value of the portfolio's total assets, or (b) the portfolio owns more
than 10% of the outstanding voting securities of such issuer.
2. Invest more than 25% of the portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services; for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction. In addition, there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Make loans except (i) by purchasing debt securities in accordance with
its investment objectives and policies or by entering into repurchase
agreements or (ii) by lending the portfolio securities to banks, brokers,
dealers and other financial institutions so long as such loans are not
inconsistent with the 1940 Act or the rules and regulations or interpretations
of the SEC thereunder.
4. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments.
5. Purchase or sell real estate or real estate limited partnerships (but
this shall not prevent the portfolio from investing in securities or other
instruments backed by real estate, including mortgage-backed securities, or
securities of companies engaged in the real estate business).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
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
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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.
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.
/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.
State laws and regulations may impose additional limitations on borrowings.
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 WRL T. Rowe Price Dividend Growth, WRL T. Rowe Price Small Cap, WRL Salomon
All Cap, WRL Goldman Sachs Growth, and WRL Pilgrim Baxter Mid Cap Growth 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.
/diamond/ BORROWING
Subject to its investment restrictions, 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 WRL T. Rowe Price
Small Cap, WRL T. Rowe Price Dividend Growth, and WRL Salomon All Cap; 10% of
total assets for the WRL NWQ Value Equity and WRL Pilgrim Baxter Mid Cap
Growth; and 25% of total assets for all other portfolios.
To secure borrowings, a portfolio may not mortgage or pledge its securities in
amounts that exceed 15% of its net assets (10% for the WRL NWQ Value Equity).
The portfolios with a common Sub-Adviser may also borrow (or lend) money to
other portfolios or funds that permit such transactions and are also advised by
that Sub-Adviser, provided each portfolio or fund seeks and obtains permission
from the SEC. There is no assurance that such permission would be granted.
The WRL Alger Aggressive Growth 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.
/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/ FOREIGN SECURITIES
Subject to a portfolio's investment restricitions and policies, 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:
o CURRENCY TRADING COSTS. A portfolio incurs costs in converting foreign
currencies into U.S. dollars, and vice versa.
o 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.
o LESS INFORMATION AVAILABLE. There is generally less public information
available about foreign companies.
o MORE DIFFICULT BUSINESS NEGOTIATIONS. A portfolio may find it
difficult to enforce obligations in foreign countries or to negotiate
favorable brokerage commission rates.
o REDUCED LIQUIDITY/INCREASED VOLATILITY. Some foreign securities are
less liquid and their prices more volatile, than securities of
comparable U.S. companies.
o SETTLEMENT DELAYS. Settling foreign securities may take longer than
settlements in the U.S.
o HIGHER CUSTODY CHARGES. Custodianship of shares may cost more for
foreign securities than it does for U.S. securities.
o 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.
o POLITICAL INSTABILITY. In some countries, political instability, war
or diplomatic developments could affect investments.
These risks may be greater in emerging countries or in countries with limited
or emerging markets, In particular, developing countries have relatively
unstable governments, economies based on only a few industries, and securities
markets that trade only a small number of securities. As a result, securities
of issuers located in developing countries may have limited marketability and
may be subject to abrupt or erratic price fluctuations.
At times, a portfolio's foreign securities may be listed on exchanges or traded
in markets which are open on days (such as Saturday) when the portfolio does
not compute a price or accept orders for purchase, sale or exchange of shares.
As a result, the net asset value of the portfolio may be significantly affected
by trading on days when policyholders cannot make transactions.
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.
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 ADS.
FOREIGN EXCHANGE TRANSACTIONS. To the extent a portfolio invests directly in
foreign securities, a portfolio will engage in foreign exchange transactions.
The foreign currency exchange market is subject to little government
regulation, and such transactions generally occur directly between parties
rather than on an exchange or in an organized market. This means that a
portfolio is subject to the full risk of default by a counterparty in such a
transaction. Because such transactions often take place between different time
zones, a portfolio may be required to complete a currency exchange transaction
at a time outside of normal business hours in the counterparty's location,
making prompt settlement of such transaction impossible. This exposes a
portfolio to an increased risk that the counterparty will be unable to settle
the transaction. Although the counterparty in such transactions is often a bank
or other financial institution, currency transactions are generally not covered
by insurance otherwise applicable to such institutions.
/diamond/ FOREIGN BANK OBLIGATIONS
A portfolio may invest in foreign bank obligations and obligations of foreign
branches of domestic banks. These investments present 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.
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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/ 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.
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 trasaction. 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 or purchase
commitments until payment is made. Such of the 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 a 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/ 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.
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.
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Reverse repurchase agreements may be used to provide cash to satisfy unusually
heavy redemption requests or for temporary or emergency purposes without
necessity of selling portfolio securities or to earn additional income on
portfolio securities such as U.S. Treasury bills and notes. While a reverse
repurchase agreement is outstanding, the portfolio will segregate with its
custodian cash and appropriate 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. A portfolio will enter into reverse
repurchase agreements only with parties that the portfolio's Sub-Adviser deems
creditworthy, and that have been reviewed by the Board of Directors of the
Fund. The WRL Goldman Sachs Small Cap and WRL Goldman Sachs Growth may,
together with other registered investment companies managed by GSAM or its
affiliates, transfer uninvested cash balances into a single joint account, the
daily aggregate balance of which will be invested in one or more repurchase
agreements.
/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/ TEMPORARY DEFENSIVE POSITION
For temporary defensive purposes, 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 decrease. Furthermore, when a
portfolio assumes a temporary defensive position it may not be able to achieve
its investment objective.
/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
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 B 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.
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.
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/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, converts 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
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 would be made 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.
Futures may also be used for managing a portfolio's exposure to change in
securities prices and foreign currencies; as an efficient means of adjusting
its overall exposure to certain markets, or in an effort to enhance income.
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
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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 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
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broad index of securities - which involves a risk that the futures position
will not correlate precisely with the performance of the portfolio's
investments.
Futures prices can also diverge from the prices of their underlying
instruments, even if the underlying instruments correlate with a portfolio's
investments. Futures prices are affected by such factors as current and
anticipated short-term interest rates, changes in volatility of the underlying
instruments, and the time remaining until expiration of the contract. Those
factors may affect securities prices differently from futures prices. Imperfect
correlations between a portfolio's investments and its futures positions may
also result from differing levels of demand in the futures markets and the
securities markets, from structural differences in how futures and securities
are traded, and from imposition of daily price fluctuation limits for futures
contracts. A portfolio may buy or sell futures contracts with a greater or
lesser value than the securities it wishes to hedge or is considering
purchasing in order to attempt to compensate for differences in historical
volatility between the futures contract and the securities, although this may
not be successful in all cases. If price changes in a portfolio's futures
positions are poorly correlated with its other investments, its futures
positions may fail to produce desired gains or result in losses that are not
offset by the gains in the portfolio's other investments.
Because futures contracts are generally settled within a day from the date they
are closed out, compared with longer settlement periods for some types of
securities, the futures markets can provide superior liquidity to the
securities markets. Nevertheless, there is no assurance a liquid secondary
market will exist for any particular futures contract at any particular time.
In addition, futures exchanges may establish daily price fluctuation limits for
futures contracts and may halt trading if a contract's price moves upward or
downward more than the limit in a given day. On volatile trading days when the
price fluctuation limit is reached, it may be impossible for a portfolio to
enter into new positions or close out existing positions. If the secondary
market for a futures contract is not liquid because of price fluctuation limits
or otherwise, a portfolio may not be able to promptly liquidate unfavorable
positions and potentially be required to continue to hold a futures position
until the delivery date, regardless of changes in its value. As a result, the
portfolio's access to other assets held to cover its futures positions also
could be impaired.
Although futures contracts by their terms call for the delivery or acquisition
of the underlying commodities or a cash payment based on the value of the
underlying commodities, in most cases the contractual obligation is offset
before the delivery date of the contract by buying, in the case of a
contractual obligation to sell, or selling, in the case of a contractual
obligation to buy, an identical futures contract on a commodities exchange.
Such a transaction cancels the obligation to make or take delivery of the
commodities.
Each portfolio intends to comply with guidelines of eligibility for exclusion
from the definition of the term "commodity pool operator" with the CFTC and the
National Futures Association, which regulate trading in the futures markets.
Such guidelines presently require that to the extent that a portfolio enters
into futures contracts or options on a futures position that are not for bona
fide hedging purposes (as defined by the CFTC), the aggregate initial margin
and premiums on these positions (excluding the amount by which options are
"in-the-money") may not exceed 5% of the portfolio's net assets.
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 28. 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
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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
increased by changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some respect
to the purchase of protective put options on portfolio securities. For example,
a portfolio may buy a put option on a futures contract to attempt to hedge the
portfolio's securities against the risk of falling prices.
The amount of risk a portfolio assumes when it buys an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the options bought.
FORWARD CONTRACTS. A portfolio may enter into forward foreign currency exchange
contracts ("forward currency contracts") to attempt to minimize the risk to the
portfolio from adverse changes in the relationship between the U.S. dollar and
other currencies. A forward currency contract is an obligation to buy or sell
an amount of a specified currency for an agreed price (which may be in U.S.
dollars or a foreign currency) at a future date which is individually
negotiated between currency traders and their customers. A portfolio may invest
in forward currency contracts with stated contract values of up to the value of
the portfolio's assets.
A portfolio may exchange foreign currencies for U.S. dollars and for other
foreign currencies in the normal course of business and may buy and sell
currencies through forward currency contracts in order to fix a price for
securities it has agreed to buy or sell. A portfolio may enter into a forward
currency contract, for example, when it enters into a contract to buy or sell a
security denominated in or exposed to fluctuations in a foreign currency in
order to "lock in" the U.S. dollar price of the security ("transaction hedge").
Additionally, when a portfolio's Sub-Adviser believes that a foreign currency
in which portfolio securities are denominated may suffer a substantial decline
against the U.S. dollar, a portfolio may enter into a forward currency contract
to sell an amount of that foreign currency (or a proxy currency whose
performance is expected to replicate the performance of that currency) for U.S.
dollars approximating the value of some or all of the portfolio securities
denominated in that currency (not exceeding the value of the portfolio's assets
denominated in that currency) or by participating in options or futures
contracts with respect to the currency, or, when the portfolio's Sub-Adviser
believes that the U.S. dollar may suffer a substantial decline against a
foreign currency for a fixed U.S. dollar amount ("position hedge"). This type
of hedge seeks to minimize the effect of currency appreciation as well as
depreciation, but does not protect against a decline in the security's value
relative to other securities denominated in the foreign currency.
A portfolio also may enter into a forward currency contract with respect to a
currency where the portfolio is considering the purchase of investments
denominated in that currency but has not yet done so ("anticipatory hedge").
In any of the above circumstances a portfolio may, alternatively, enter into a
forward currency contract with respect to a different foreign currency when a
portfolio's Sub-Adviser believes that the U.S. dollar value of that currency
will correlate with the U.S. dollar value of the currency in which portfolio
securities of, or being considered for purchase by, the portfolio are
denominated ("cross-hedge"). For example, if a portfolio's Sub-Adviser believes
that a particular foreign currency may decline relative to the U.S. dollar, a
portfolio could enter into a contract to sell that currency or a proxy currency
(up to the value of the portfolio's assets denominated in that currency) in
exchange for another currency that the Sub-Adviser expects to remain stable or
to appreciate relative to the U.S. dollar. Shifting a portfolio's currency
exposure from one foreign currency to another removes the portfolio's
opportunity to profit from increases in the value of the original currency and
involves a risk of increased losses to the portfolio if the portfolio's Sub-
Adviser's projection of future exchange rates is inaccurate.
A portfolio also may enter into forward contracts to buy or sell at a later
date instruments in which a portfolio may invest directly or on financial
indices based on those instruments. The market for those types of forward
contracts is developing and it is not currently possible to identify
instruments on which forward contracts might be created in the future.
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
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subject to the hedging transaction by a forward sale contract or the portfolio
may buy put options permitting the portfolio to sell the amount of foreign
currency subject to a forward buy contract.
While forward contracts are not currently regulated by the CFTC, the CFTC may
in the future assert authority to regulate forward contracts. In such event a
portfolio's ability to utilize forward contracts in the manner set forth in the
Prospectus may be restricted. Forward contracts will reduce the potential gain
from a positive change in the relationship between the U.S. dollar and foreign
currencies. Unforeseen changes in currency prices may result in poorer overall
performance for a portfolio than if it had not entered into such contracts. The
use of foreign currency forward contracts will not eliminate fluctuations in
the underlying U.S. dollar equivalent value of the proceeds of or rates of
return on a portfolio's foreign currency denominated portfolio securities.
The matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency denominated asset that
is the subject of the hedging transaction generally will not be precise. In
addition, a portfolio may not always be able to enter into forward contracts at
attractive prices and accordingly may be limited in its ability to use these
contracts in seeking to hedge the portfolio's assets.
Also, with regard to a portfolio's use of cross-hedging transactions, there can
be no assurance that historical correlations between the movement of certain
foreign currencies relative to the U.S. dollar will continue. Thus, at any time
poor correlation may exist between movements in the exchange rates of the
foreign currencies underlying a portfolio's cross-hedges and the movements in
the exchange rates of the foreign currencies in which the portfolio's assets
that are subject of the cross-hedging transactions are denominated.
OPTIONS ON FOREIGN CURRENCIES. A portfolio may buy put and call options and may
write covered put and call options on foreign currencies for hedging purposes
in a manner similar to that in which futures contracts or forward contracts on
foreign currencies may be utilized. For example, a decline in the U.S. dollar
value of a foreign currency in which portfolio securities are denominated will
reduce the U.S. dollar value of such securities, even if their value in the
foreign currency remains constant. In order to protect against such diminutions
in the value of portfolio securities, a portfolio may buy put options on the
foreign currency. If the value of the currency declines, the portfolio will
have the right to sell such currency for a fixed amount in U.S. dollars and
will thereby offset, in whole or in part, the adverse effect on its portfolio
which otherwise would have resulted.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a portfolio may buy call options thereon. The purchase
of such options could offset, at least partially, the effects of the adverse
movements in exchange rates. The purchase of an option on a foreign currency
may constitute an effective hedge against fluctuations in exchange rates,
although, in the event of exchange rate movements adverse to a portfolio's
option position, the portfolio could sustain losses on transactions in foreign
currency options which would require that the portfolio lose a portion or all
of the benefits of advantageous changes in those rates. In addition, in the
case of other types of options, the benefit to a portfolio from purchases of
foreign currency options will be reduced by the amount of the premium and
related transaction costs.
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
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difference is maintained by the portfolio in cash or high-grade liquid assets
in a segregated account with the Fund's custodian.
A portfolio may also write call options on foreign currencies for cross-hedging
purposes that may not be deemed to be covered. A call option on a foreign
currency is for cross-hedging purposes if it is not covered but is designed to
provide a hedge against a decline due to an adverse change in the exchange rate
in the U.S. dollar value of a security which the portfolio owns or has the
right to acquire and which is denominated in the currency underlying the
option. In such circumstances, the portfolio collateralizes the option by
maintaining segregated assets in an amount not less than the value of the
underlying foreign currency in U.S. dollars marked-to-market daily.
A portfolio may buy or write options in privately negotiated transactions on
the types of securities and indices based on the types of securities in which
the portfolio is permitted to invest directly. A portfolio will effect such
transactions only with investment dealers and other financial institutions
(such as commercial banks or savings and loan institutions) deemed
creditworthy, and only pursuant to procedures adopted by the portfolio's Sub-
Adviser for monitoring the creditworthiness of those entities. To the extent
that an option bought or written by a portfolio in a negotiated transaction is
illiquid, the value of an option bought or the amount of the portfolio's
obligations under an option written by the portfolio, as the case may be, will
be subject to the portfolio's limitation on illiquid investments. In the case
of illiquid options, it may not be possible for the portfolio to effect an
offsetting transaction at the time when the portfolio's Sub-Adviser believes it
would be advantageous for the portfolio to do so.
OPTIONS ON SECURITIES. In an effort to reduce fluctuations in net asset value,
a portfolio may write covered put and call options and may buy put and call
options and warrants on securities that are traded on United States and foreign
securities exchanges and over-the-counter ("OTC"). A portfolio also may write
call options that are not covered for cross-hedging purposes. A portfolio may
write and buy options on the same types of securities that the portfolio could
buy directly and may buy options on financial indices as described above with
respect to futures contracts. There are no specific limitations on a
portfolio's writing and buying options on securities.
A put option gives the holder the right, upon payment of a premium, to deliver
a specified amount of a security to the writer of the option on or before a
fixed date at a predetermined price. A call option gives the holder the right,
upon payment of a premium, to call upon the writer to deliver a specified
amount of a security on or before a fixed date at a predetermined price.
A put option written by a portfolio is "covered" if the portfolio (i) maintains
cash not available for investment or other liquid assets with a value equal to
the exercise price in a segregated account with its custodian or (ii) holds a
put on the same security and in the same principal amount as the put written
and the exercise price of the put held is equal to or greater than the exercise
price of the put written. The premium paid by the buyer of an option will
reflect, among other things, the relationship of the exercise price to the
market price and the volatility of the underlying security, the remaining term
of the option, supply and demand and interest rates. A call option written by a
portfolio is "covered" if the portfolio owns the underlying security covered by
the call or has an absolute and immediate right to acquire that security
without additional cash consideration (or has segregated additional cash
consideration with its custodian) upon conversion or exchange of other
securities 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
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option, or bought, in the case of a put option, since with regard to certain
options, the writer may be assigned an exercise notice at any time prior to the
termination of the obligation. Whether or not an option expires unexercised,
the writer retains the amount of the premium. This amount, of course, may, in
the case of a covered call option, be offset by a decline in the market value
of the underlying security during the option period. If a call option is
exercised, the writer experiences a profit or loss from the sale of the
underlying security. If a put option is exercised, the writer must fulfill the
obligation to buy the underlying security.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is
that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the holder
of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously bought. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit a portfolio to write another call option on the underlying security with
either a different exercise price or expiration date or both or, in the case of
a written put option, will permit a portfolio to write another put option to
the extent that the exercise price thereof is secured by deposited high-grade
liquid assets. Also, effecting a closing transaction will permit the cash or
proceeds from the concurrent sale of any securities subject to the option to be
used for other portfolio investments. If a portfolio desires to sell a
particular security on which the portfolio has written a call option, the
portfolio will effect a closing transaction prior to or concurrent with the
sale of the security.
A portfolio may realize a profit from a closing transaction if the price of the
purchase transaction is less than the premium received from writing the option
or the price received from a sale transaction is more than the premium paid to
buy the option; a portfolio may realize a loss from a closing transaction if
the price of the purchase transaction is less than the premium paid to buy the
option. Because increases in the market of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the repurchase of a call option is likely to be offset in whole or in 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
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or otherwise is above the exercise price, the put option will expire worthless
and a portfolio's gain will be limited to the premium received. If the market
price of the underlying security declines or otherwise is below the exercise
price, the portfolio may elect to close the position or take delivery of the
security at the exercise price and a portfolio's return will be the premium
received from the put options minus the amount by which the market price of the
security is below the exercise price.
A portfolio may buy put options to attempt to hedge against a decline in the
value of its securities. By using put options in this way, a portfolio will
reduce any profit it might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.
A portfolio may buy call options to attempt to hedge against an increase in the
price of securities that the portfolio may buy in the future. The premium paid
for the call option plus any transaction costs will reduce the benefit, if any,
realized by a portfolio upon exercise of the option, and, unless the price of
the underlying security rises sufficiently, the option may expire worthless to
the portfolio.
In purchasing an option, a portfolio would be in a position to realize a gain
if, during the option period, the price of the underlying security increased
(in the case of a call) or decreased (in the case of a put) by an amount in
excess of the premium paid and would realize a loss if the price of the
underlying security did not increase (in the case of a call) or decrease (in
the case of a put) during the period by more than the amount of the premium. If
a put or call option brought by a portfolio were permitted to expire without
being sold or exercised, the portfolio would lose the amount of the premium.
Although they entitle the holder to buy equity securities, warrants on and
options to purchase equity securities do not entitle the holder to dividends or
voting rights with respect to the underlying securities, nor do they represent
any rights in the assets of the issuer of those securities.
INTEREST RATE SWAPS AND SWAP-RELATED PRODUCTS. In order to attempt to protect
the value of a portfolio's investments from interest rate or currency exchange
rate fluctuations, a portfolio may enter into interest rate swaps, and may buy
or sell interest rate caps and floors. A portfolio expects to enter into these
transactions primarily to attempt to preserve a return or spread on a
particular investment or portion of its portfolio. A portfolio also may enter
into these transactions to attempt to protect against any increase in the price
of securities the portfolio may consider buying at a later date. A portfolio
does not intend to use these transactions as a speculative investment. Interest
rate swaps involve the exchange by a portfolio with another party of their
respective commitments to pay or receive interest, E.G., an exchange of
floating rate payments for fixed rate payments. The exchange commitments can
involve payments to be made in the same currency or in different currencies.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a contractually based principal amount from the party selling the
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a contractually based
principal amount from the party selling the interest rate floor.
Swap and swap-related products are specialized OTC instruments and their use
involves risks specific to the markets in which they are entered into. A
portfolio will usually enter into interest rate swaps on a net basis, I.E., the
two payment streams are netted out, with the portfolio receiving or paying, as
the case may be, only the net amount of the two payments. The net amount of the
excess, if any, of a portfolio's obligations over its entitlements with respect
to each interest rate swap will be calculated on a daily basis and an amount of
cash or other liquid assets having an aggregate net asset value of at least
equal to the accrued excess will be segregated with the Fund's custodian. If a
portfolio enters into an interest rate swap on other than a net basis, the
portfolio would segregate assets in the full amount accrued on a daily basis of
the portfolio's obligations with respect to the swap. A portfolio will not
enter into any interest rate swap, cap or floor transaction unless the
unsecured senior debt or the claims-paying ability of the other party thereto
is rated in one of the three highest rating categories of at least one
nationally recognized statistical rating organization at the time of entering
into such transaction. A portfolio's Sub-Adviser will monitor the
creditworthiness of all counterparties on an ongoing basis. If there is a
default by the other party to such a transaction, a portfolio will have
contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. The Sub-Advisers have determined
that, as a result, the swap market has become relatively liquid. Caps and
floors are more recent innovations for which standardized documentation has not
yet been developed and, accordingly, they are less liquid than swaps. To the
extent a portfolio sells (I.E., writes) caps and floors, it will segregate with
the custodian cash or other liquid assets having an aggregate net asset value
at least equal to the full amount, accrued on a daily basis, of the portfolio's
obligations with respect to any caps or floors.
Interest rate swap transactions are subject to limitations set forth in each
portfolio's policies. These transactions may in some instances involve the
delivery of securities or other underlying assets by a portfolio or its
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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.
SUPRANATIONAL AGENCIES. A portfolio may invest up to 10% of its assets in debt
obligations of supranational agencies such as: the International Bank for
Reconstruction and Development (commonly referred to as the World Bank), which
was chartered to finance development projects in developing member countries;
the European Community, which is a twelve-nation organization engaged in
cooperative economic activities; the European Coal and Steel Community, which
is an economic union of various European nations' steel and coal industries;
and the Asian Development Bank, which is an international development bank
established to lend funds, promote investment and provide technical assistance
to member nations in the Asian and Pacific regions. Debt obligations of
supranational agencies are not considered Government Securities and are not
supported, directly or indirectly, by the U.S. Government.
INDEX OPTIONS. In seeking to hedge all or a portion of its investments, a
portfolio may purchase and write put and call options on securities indices
listed on U.S. or foreign securities exchanges or traded in the
over-the-counter market, which indices include securities held in the
portfolios. The portfolios with such option writing authority may write only
covered options. A portfolio may also use securities index options as a means
of participating in a securities market without making direct purchases of
securities.
A securities index measures the movement of a certain group of securities by
assigning relative values to the securities included in the index. Options on
securities indexes are generally similar to options on specific securities.
Unlike options on securities, however, options on securities indices do not
involve the delivery of an underlying security; the option in the case of an
option on a securities index represents the holder's right to obtain from the
writer in cash a fixed multiple of the amount by which the exercise price
exceeds (in the case of a call) or is less than (in the case of a put) the
closing value of the underlying securities index on the exercise date. A
portfolio may purchase and write put and call options on securities indexes or
securities index futures contracts that are traded on a U.S. exchange or board
of trade or a foreign exchange, to the extent permitted under rules and
interpretations of the Commodity Futures Trading Commission ("CFTC"), as a
hedge against changes in market conditions and interest rates, and for duration
management, and may enter into closing transactions with respect to those
options to terminate existing positions. A securities index fluctuates with
changes in the market values of the securities included in the index.
Securities index options may be based on a broad or narrow market index or on
an industry or market segment.
The delivery requirements of options on securities indices differ from options
on securities. Unlike a securities option, which contemplates the right to take
or make delivery of securities at a specified price, an option on a securities
index gives the holder the right to receive a cash "exercise settlement amount"
equal to (i) the amount, if any, by which the fixed exercise price of the
option exceeds (in the case of a put) or is less than (in the case of a call)
the closing value of the underlying index on the date of exercise, multiplied
by (ii) a fixed "index multiplier." Receipt of this cash amount will depend
upon the closing level of the securities index upon which the option is based
being greater than, in the case of a call, or less than, in the case of a put,
the exercise price of the option. The amount of cash received will be equal to
the difference between the closing price of the index and the exercise price of
the option expressed in dollars times a specified multiple. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount. The writer may offset its position in securities index options
prior to expiration by entering into a closing transaction on an exchange or it
may allow the option to expire unexercised.
The effectiveness of purchasing or writing securities index options as a
hedging technique will depend upon the extent to which price movements in the
portion of a securities portfolio being hedged correlate with price movements
of the securities index selected. Because the value of an index option depends
upon movements in the level of the index rather than the price of a particular
security, whether a portfolio realizes a gain or loss from the purchase of
writing of options on an index depends upon movements in the level of prices in
the market generally or, in the case of certain indices, in an industry or
market segment, rather than movements in the price of a particular security. As
a result, successful
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use by a portfolio of options on securities indices is subject to the
sub-adviser's ability to predict correctly movements in the direction of the
market generally or of a particular industry. This ability contemplates
different skills and techniques from those used in predicting changes in the
price of individual securities.
Securities index options are subject to position and exercise limits and other
regulations imposed by the exchange on which they are traded. The ability of a
portfolio to engage in closing purchase transactions with respect to securities
index options depends on the existence of a liquid secondary market. Although a
portfolio will generally purchase or write securities index options only if a
liquid secondary market for the options purchased or sold appears to exist, no
such secondary market may exist, or the market may cease to exist at some
future date, for some options. No assurance can be given that a closing
purchase transaction can be effected when the sub-adviser desires that a
portfolio engage in such a transaction.
WEBS AND OTHER INDEX-RELATED SECURITIES. A portfolio may invest in shares in an
investment company whose shares are known as "World Equity Benchmark Shares" or
"WEBS." WEBS have been listed for trading on the American Stock Exchange, Inc.
The portfolios also may invest in the CountryBaskets Index Fund, Inc., or
another fund the shares of which are the substantial equivalent of WEBS. A
portfolio may invest in S&P Depositary Receipts, or "SPDRs." SPDRs are
securities that represent ownership in a long-term unit investment trust that
holds a portfolio of common stocks designed to track the performance of the S&P
500 Index. A portfolio investing in a SPDR would be entitled to the dividends
that accrue to the S&P 500 stocks in the underlying portfolio, less trust
expenses.
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 any premium received or
initial margin or collateral posted due to the potential additional margin and
collateral requirements associated with such positions.
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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 rates
to a greater degree than other types of debt securities having similar
maturities and credit quality.
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/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
Subject to a portfolio's investment restrictions and policies, 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 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 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 response to changes in interest rates.
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
Subject to a portfolio's investment restrictions and policies, asset-backed
securities represent interests in pools of consumer loans (generally unrelated
to mortgage loans) and most often are structured as pass-through securities.
Interest and principal payments ultimately depend on payment of the underlying
loans by individuals, although the securities may be supported by letters of
credit or other credit enhancements. The underlying assets (E.G., loans) are
subject to prepayments which shorten the securities' weighted average life and
may lower their returns. If the credit support or enhancement is exhausted,
losses or delays in payment may result if the required payments of principal
and interest are not made. The value of these securities also may change
because of changes in the market's perception of the creditworthiness of the
servicing agent for the pool, the originator of the pool, or the financial
institution providing the credit support or enhancement. A portfolio will
invest its assets in asset-backed securities subject to any limitations set
forth in its investment policies or restrictions.
/diamond/ PASS-THROUGH SECURITIES
Subject to a portfolio's investment restrictions and policies, a portfolio may
invest its net assets in various types of pass-through securities, such as
mortgage-backed securities, asset-backed securities and participation
interests. A pass-through security is a share or certificate of interest in a
pool of debt obligations that have been repackaged by an intermediary, such as
a bank or broker-dealer. The purchaser receives an undivided interest in the
underlying pool of securities. The issuers of the underlying securities make
interest and principal payments to the intermediary which are passed through to
purchasers, such as the portfolio. The most common type of pass-through
securities are mortgage-backed securities. GNMA Certificates are
mortgage-backed securities that evidence an undivided interest in a pool of
mortgage loans. GNMA Certificates differ from traditional
23
<PAGE>
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.
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 regarding income producing securities in
which a portfolio may invest.)
/diamond/ ILLIQUID AND RESTRICTED/144A SECURITIES
A portfolio may invest up to 15% of its net assets in illiquid securities
(I.E., securities that are not readily marketable).
In recent years, a large institutional market has developed for certain
securities that are not registered under the Securities Act of 1933 ("1933
Act"). Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend on an
efficient institutional market in which such unregistered securities can
readily be resold or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not dispositive of the
liquidity of such investments.
Rule 144A under the 1933 Act established a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. Institutional markets for restricted securities that
might develop as a result of Rule 144A could provide both readily ascertainable
values for restricted securities and the ability to liquidate an investment in
order to satisfy share redemption orders. An insufficient number of qualified
institutional buyers interested in purchasing a Rule 144A-eligible security
held by a portfolio could, however, adversely affect the marketability of such
portfolio security and the portfolio might be unable to dispose of such
security promptly or at reasonable prices.
The Fund's Board of Directors has authorized each portfolio's Sub-Adviser to
make liquidity determinations with respect to Rule 144A securities in
accordance with the guidelines established by the Board of Directors. Under the
guidelines, the portfolio's Sub-Adviser will consider the following factors in
determining whether a Rule 144A security is liquid: 1) the frequency of trades
and quoted prices for the security; 2) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers; 3)
the willingness of dealers to undertake to make a market in the security; and
4) the nature of the marketplace trades, including the time needed to dispose
of the security, the method of soliciting
24
<PAGE>
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/ MONEY MARKET RESERVES
(WRL T. ROWE PRICE SMALL CAP AND
WRL T. ROWE PRICE DIVIDEND GROWTH)
It is expected that WRL T. Rowe Price Dividend Growth and WRL T. Rowe Price
Small Cap portfolios will invest their cash reserves primarily in a money
market fund established for the exclusive use of the T. Rowe Price family of
mutual funds and other clients of T. Rowe Price and Price-Fleming. The Reserve
Investment Fund ("RIF") is a series of Reserve Investment Funds, Inc.
Additional series may be created in the future. This fund was created and
operates under an Exemptive Order issued by the Securities and Exchange
Commission (Investment Company Act Release No. IC-22770, July 29, 1997).
The fund must comply with the requirements of Rule 2a-7 under the 1940 Act
governing money market funds. The RIF invests at least 95% of its total assets
in prime money market instruments receiving the highest credit rating.
The RIF provides a very effecient means of managing the cash reserves of the
portfolios. While the RIF does not pay an advisory fee to the Investment
Manager, it will incur other expenses. However, the RIF is expected by T. Rowe
Price to operate at a very low expense ratio. The portfolios will only invest
in RIF to the extent it is consistent with their objectives and programs.
RIF is not insured or guaranteed by the U.S. government, and there is no
assurance it will maintain a stable net asset value of $1.00 per share.
/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
WRL Janus 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.
WRL Goldman Sachs Growth may also purchase Standard & Poors Depositary Receipts
("SPDRs"). SPDRs are American Stock Exchange-traded securities that represent
ownerhsip in the SPDR Trust, a trust which has been established to accumulate
and hold a portfolio of common stocks that is intended to track the price
performance and dividend yield of the S&P 500.
/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
25
<PAGE>
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.
/diamond/ INVESTMENTS IN THE REAL ESTATE INDUSTRY AND REAL ESTATE INVESTMENT
TRUSTS ("REITS")
REITs are pooled investment vehicles which invest primarily in income producing
real estate, or real estate related loans or interests. REITs are generally
classified as equity REITs, mortgage REITs, or hybrid REITs.
Equity REITs invest the majority of their assets directly in real property and
derive income primarily from the collection of rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs invest the majority of their assets in real estate mortgages and
derive income from the collection of interest payments. Hybrid REITs invest
their assets in both real property and mortgages. REITs are not taxed on income
distributed to 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, 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.")
/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
adjustment 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.
26
<PAGE>
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.
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/ DEBT SECURITIES AND FIXED-INCOME INVESTING
Debt securities include securities such as corporate bonds and debentures;
commercial paper; trust preferreds, 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 payment prospects and principal security for such bonds appear
adequate for the present, but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have speculative
characteristics. (See Appendix B 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/ 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 B for a description of debt securities rating.)
/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
investment.
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.
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<PAGE>
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/ 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 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 AND OFFICERS
The Fund is governed by a Board of Directors. Subject to the supervision of the
Board of Directors, the assets of each portfolio are managed by an investment
adviser and sub-advisers, and by portfolio managers. The Board of Directors is
responsible for managing the business and affairs of the Fund and oversees the
operation of the Fund by its officers. It also reviews the management of the
portfolios' assets by the investment adviser and sub-adviser. Information about
the Directors and officers of the Fund is as follows:
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
- - --------------------- -------------------------- -----------------------------------------------
<S> <C> <C>
PETER R. BROWN DIRECTOR Retired (January 2000 - present); Chairman of the Board,
(DOB 5/10/28), Peter Brown Construction Company (construction contrac-
11180 6th Street East tors and engineers), Largo, Florida (1963 - 2000); Trustee
Treasure Island, Florida 33706 of IDEX Mutual Funds, Rear Admiral (Ret.) U.S. Navy
Reserve, Civil Engineer Corps.
CHARLES C. HARRIS DIRECTOR Trustee of IDEX Mutual Funds, (March, 1994 - present)
(DOB 7/15/30), former Trustee of IDEX Fund, IDEX II Series Fund and
35 Winston Drive IDEX Fund 3.
Clearwater, Florida 34616
RUSSELL A. KIMBALL, JR. DIRECTOR General Manager, Sheraton Sand Key Resort (resort
(DOB 8/17/44), hotel), Clearwater, Florida (1975 - present)
1160 Gulf Boulevard
Clearwater Beach, Florida 34630
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
- - --------------------- -------------------------- -----------------------------------------------
<S> <C> <C>
JOHN R. KENNEY(1,2) CHAIRMAN OF THE BOARD Chairman of the Board, Director and Co-CEO of Great
(DOB 2/8/38) OF DIRECTORS AND Companies, L.L.C.; Chairman of the Board of Directors
PRESIDENT (1982 - present), Chief Executive Officer (1982 - present),
President (1978 - 1987 and December, 1992 - 1999),
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), St. Petersburg, Florida; Chairman of the Board of
Directors (September, 1996 - present), WRL Investment
Services, Inc., St. Petersburg, Florida; Chairman of the
Board of Directors (February, 1997 - present), AEGON
Asset Management Services, Inc., St.Petersburg, Florida;
Director (December, 1990 - present); IDEX Management,
Inc., (investment adviser), St. Petersburg, Florida; Trustee
and Chairman (September, 1996 - present) of IDEX
Mutual Funds (investment companies) St. Petersburg,
Florida.
PAT BAIRD DIRECTOR AND EXECUTIVE President and Trustee (November, 1999 - present), IDEX
(DOB 1/19/54) VICE PRESIDENT Mutual Funds; Executive Vice President, Chief Operating
433 Edgewood Road, NE, Officer (February, 1996 - present) Executive Vice
Cedar Rapids, Iowa 52499 President and CFO (February, 1995 - February, 1996),
Vice President, Chief Financial Officer (May, 1992 -
February, 1995), AEGON USA.
ALLAN HAMILTON(1,2) TREASURER, PRINCIPAL Vice President and Controller (1987 - present), Treasurer
(DOB 11/26/56) FINANCIAL OFFICER (February, 1997 - present).
JOHN K. CARTER(1,2) VICE PRESIDENT, Vice President, Secretary and Counsel (December, 1999 -
(DOB 04/24/61) SECRETARY AND COUNSEL present), IDEX Mutual Funds; Vice President, Counsel and
Assistant Secretary (April, 2000 - present) of Idex Investor
Services, Inc., AEGON Asset Management Services, Inc.
and WRL Investment Services, Inc.; Vice President,
Counsel, Compliance Officer and Assistant Secretary
(April, 2000 - present) of Idex Management, Inc. and WRL
Investment Management, Inc.; Vice President and Counsel
(March, 1997 - May 1999), Salomon Smith Barney;
Assistant Vice President, Associate Corporate Counsel
and Trust Officer (September, 1993 - March 1997),
Franklin Templeton Mutual Funds. .
THOMAS E. PIERPAN(1,2) ASSISTANT SECRETARY Vice President, Secretary and Counsel (December, 1997 -
(DOB 10/18/43) AND VICE PRESIDENT December, 1999); Assistant Secretary (March, 1995 -
December, 1997) of WRL Series Funds, Inc.; Vice
President and Assistant Secretary 1999 - present), Vice
President, Counsel and Secretary (December, 1997 -
1999) of IDEX Mutual Funds (mutual fund); Assistant Vice
President, Counsel and Assistant Secretary (November,
1997 - present) of Intersecurities, Inc. (broker-dealer);
Senior Vice President, General Counsel and Assistant
Secretary (April, 2000 - present) of AEGON Equity Group;
Senior Vice President and General Counsel (1999 -
present), Vice President (November, 1993 - present),
Associate General Counsel (February, 1995 - 1997),
Assistant Secretary, (February, 1995 - present) of Western
Reserve Life Assurance of Ohio.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
- - --------------------- -------------------------- -----------------------------------------------
<S> <C> <C>
ALAN M. YAEGER(1,2) EXECUTIVE VICE Executive Vice President (June, 1993 - present), Chief
(DOB 10/21/46) PRESIDENT Financial Officer (December, 1995 - present), Actuary
(1972 - present), Western Reserve Life Assurance
Company of Ohio; Director (September, 1996 - present),
WRL Investment Management, Inc. (investment adviser)
St. Petersburg, Florida; Director (September, 1996 -
present), WRL Investment Services, Inc., St. Petersburg,
Florida.
</TABLE>
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Bos 5068, Clearwater, Florida 33758-5068.
(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 $10,000 to each Director
who is not affiliated with the Investment Adviser or the Sub-Advisers
("disinterested Director"). Each disinterested Director also receives $1,500,
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, 1999. The compensation table provides
compensation amounts paid to disinterested Directors of the Fund for the fiscal
year ended December 31, 1999.
DIRECTOR'S FEES PAID - YEAR ENDED DECEMBER 31, 1999
PORTFOLIO AMOUNT PAID
- - --------- -----------
WRL T. Rowe Price Small Cap $ -0-
WRL Alger Aggressive Growth 6,000
WRL Janus Global 8,000
WRL Salomon All Cap -0-
WRL Pilgrim Baxter Mid Cap Growth -0-
WRL Goldman Sachs Growth -0-
WRL NWQ Value Equity 1,000
WRL T. Rowe Price Dividend Growth -0-
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS TOTAL COMPENSATION
AGGREGATE ACCRUED AS ESTIMATED PAID TO DIRECTORS FROM
COMPENSATION FROM PART OF ANNUAL BENEFITS WRL SERIES FUND, INC. AND
NAME OF PERSON, POSITION WRL SERIES FUND, INC. FUND EXPENSES* UPON RETIREMENT IDEX MUTUAL FUNDS
- - ------------------------ --------------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Peter R. Brown, Director $15,500 0 N/A $43,750
Charles C. Harris, Director 15,500 0 N/A 43,750
Russell A. Kimball, Jr., Director 15,500 0 N/A 15,500
</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 Mutual Funds to a disinterested Director or
Trustee on a current basis for services rendered as director. Deferred
compensation amounts will accumulate based on the value of Class A shares of a
portfolio of IDEX Mutual Funds (without imposition of sales charge), as elected
by the Director. As of April 1, 1999, 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") located at 570 Carillon
Parkway, St. Petersburg, FL 33716, 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.
30
<PAGE>
("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 N.V., 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 (that commenced operations prior to that date) (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 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 p. 33.
ADVISORY FEE. The method of computing the investment advisory fee is fully
described in the Fund's prospectus. For the years ended December 31, 1999, 1998
and 1997, the Investment Adviser was paid fees for its services to each
portfolio in the following amounts
ADVISORY FEES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------
PORTFOLIO 1999 1998 1997
- - --------- ----------- ----------- ----------
<S> <C> <C> <C>
WRL Alger Aggressive Growth $ 5,873,932 $ 3,361,604 $2,249,801
WRL Janus Global 10,293,952 7,537,671 5,591,818
WRL NWQ Value Equity 1,214,963 1,458,166 900,818
WRL Goldman Sachs Growth(1) 25,424 N/A N/A
WRL Salomon All Cap(1) 32,294 N/A N/A
WRL T. Rowe Price Dividend Growth(1) 76,560 N/A N/A
WRL T. Rowe Price Small Cap(1) N/A N/A
WRL Pilgrim Baxter Mid Cap Growth(1) N/A N/A
----------- ----------- ----------
TOTAL $17,517,125 $12,357,441 $8,742,437
=========== =========== ==========
</TABLE>
- - ------------------------------
(1) (1) Portfolio commenced operations May 1, 1999.
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
31
<PAGE>
reports with Federal and state regulatory authorities; all costs and expenses,
including fees and disbursements, of counsel and auditors, filing and renewal
fees and printing costs in connection with the filing of any required
amendments, supplements or renewals of registration statement, qualifications
or prospectuses under the 1933 Act and the securities laws of any states or
territories, subsequent to the effectiveness of the initial registration
statement under the 1933 Act; all costs involved in preparing and printing
prospectuses of the Fund; extraordinary expenses; and all other expenses
properly payable by the Fund or the portfolios.
The Investment Adviser has voluntarily undertaken, until at least April 30,
2001, to pay expenses on behalf of the portfolios to the extent normal
operating expenses (including investment advisory fees but excluding interest,
taxes, brokerage fees, commissions and extraordinary charges) exceed, as a
percentage of each portfolio's average daily net assets, 1.00%. The following
expenses were paid by the investment adviser for the fiscal years ended
December 31, 1999, 1998, and 1997
PORTFOLIO EXPENSES PAID BY INVESTMENT ADVISER
YEAR ENDED DECEMBER 31
------------------------------------
PORTFOLIO 1999 1998 1997
- - --------- ------ ------ ------
WRL Alger Aggressive Growth $ -0- -0- -0-
WRL Janus Global -0- -0- -0-
WRL NWQ Value Equity -0- -0- -0-
WRL Goldman Sachs Growth(1) 49,677 N/A N/A
WRL Salomon All Cap(1) 53,174 N/A N/A
WRL T. Rowe Price Dividend Growth(1) 46,989 N/A N/A
WRL T. Rowe Price Small Cap(1) 63,542 N/A N/A
WRL Pilgrim Baxter Mid Cap Growth(1) 34,986 N/A N/A
- - ------------------------------
(1) Portfolio commenced operations May 1, 1999.
Effective May 1, 2000, the Investment Adviser has entered into an agreement
with the Fund on behalf of, and pursuant to which, the Investment Adviser will
be reimbursed for operating expenses paid on behalf of a portfolio during the
previous 36 months, but only if, after such reimbursement, the portfolio's
expense ratio does not exceed the expense cap. The agreement has an initial
term through April 30, 2001, and will automatically renew for one-year terms
unless terminated by a 30 day written notice to the Fund.
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. The following Administrative Services fees were paid by
the portfolios for the fiscal year ended December 31, 1999
ADMINISTRATIVE SERVICES FEES
PORTFOLIO 1999 1998 1997
- - --------- -------- -------- --------
WRL Alger Aggressive Growth $73,408 $122,776
WRL Janus Global 99,277 165,294
WRL NWQ Value Equity 18,893 23,307
WRL Goldman Sachs Growth N/A N/A
WRL Salomon All Cap N/A N/A
WRL T. Rowe Price Dividend Growth N/A N/A
WRL T. Rowe Price Small Cap N/A N/A
WRL Pilgrim Baxter Mid Cap Growth N/A N/A
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 AFSG Securities Corporation (AFSG) located at 4333
Edgewood Road NE, Cedar Rapids, Iowa 52494. The Distribution Plan and related
Agreement were approved by the Fund's Board of Directors, including a majority
of Directors who are not "interested persons" of the Fund (as defined in the
1940 Act) on October 3, 1996 as amended by the Board March 29, 1999, and the
Distribution Plan was approved by the shareholders of each portfolio of the
Fund on December 16, 1996 (by all portfolio's that had commenced operatons on
that date). AFSG is an affiliate of the Investment Adviser.
Under the Distribution Plan and Distribution Agreement, the Fund, on behalf of
the portfolios, will reimburse
32
<PAGE>
AFSG after each calendar month for certain Fund distribution expenses incurred
or paid by AFSG, 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 AFSG 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.
AFSG submits to the Directors of the Fund for approval annual distribution
budgets and quarterly reports of distribution expenses with respect to each
portfolio. AFSG 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 AFSG deems fair and are approved by the Fund's Board
of Directors. AFSG has determined that it will not seek payment by the Fund of
distribution expenses incurred with respect to any portfolio before April 30,
2001. (ISI waived payment by the Fund for the fiscal year ended December 31,
1999.) Prior to AFSG 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
Each Sub-Adviser serves, pursuant to each Sub-Advisory Agreement, dated January
1, 1997 (January 1, 1998 on behalf of WRL NWQ Value Equity, May 1, 1999 with
respect to the WRL T. Rowe Price Small Cap, WRL T. Rowe Price Dividend Growth,
WRL Pilgrim Baxter Mid Cap Growth, WRL Salomon All Cap and WRL Goldman Sachs
Growth) 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
for all agreements prior to January 1, 1997. The Sub-Advisory Agreements
provide that they will continue in effect 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. WRL Goldman Sachs Growth, WRL T. Rowe Price Small Cap, WRL T. Rowe Price
Dividend Growth, WRL Salomon All Cap, and the WRL Pilgrim Baxter Mid Cap Growth
will continue in effect for an initial term ending April 30, 2001, and from
year to year thereafter, if approved annually. 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. The agreements may
also be terminated under the term of an Exemptive Order granted by the SEC
under section 6(c) of the 1940 Act from section 15(a) and rule 18f-2 under the
1940 Act. (Release #23379).
Pursuant to the Sub-Advisory Agreements, each Sub-Adviser provides investment
advisory assistance and portfolio management advice to the Investment Adviser
for their respective portfolio(s). Subject to review by the Investment Adviser
and the Board of Directors of the Fund, the Sub-Advisers are responsible for
the actual management of their respective portfolio(s) and for making decisions
to buy, sell or hold a particular security. Each Sub-Adviser bears all of its
expenses in connection with the performance of its services under their Sub-
Advisory Agreement such as compensating and furnishing office space for their
officers and employees connected with investment and economic research, trading
and investment management of the respective portfolio(s).
Each Sub-Adviser is a registered investment adviser under the Investment
Advisers Act of 1940, as amended. The Sub-Advisers for the portfolios of the
Fund are:
/five diamonds/
FRED ALGER MANAGEMENT, INC.
Fred Alger Management, Inc. ("Alger") serves as Sub-Adviser to the WRL Alger
Aggressive Growth.
Alger, located at One World Trade Center, Suite 9333, New York, New York 10048,
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 is generally engaged in the business of
rendering investment advisory services to institutions and, to a lesser extent,
individuals. Alger has been engaged in the business of rendering investment
advisory services since 1964 and,
33
<PAGE>
as of March 31, 2000, had approximately $21.8 billion under management.
/diamond/ PORTFOLIO MANAGER:
DAVID D. ALGER AND DAVID HYUN are primarily responsible for the day-to-day
management of WRL Alger Aggressive Growth. Mr. Alger has been employed by Alger
Management as Executive Vice President and Director of Research since 1971 and
as President since 1995. Mr. Hyun has been employed by Alger Management as a
senior research analyst since 1991, and as a portfolio manager since 1997 and
senior vice president since 1998. Mr. Alger has served as portfolio manager of
WRL Alger Aggressive Growth since its inception. Mr. Hyun has served as
co-portfolio manager of WRL Alger Aggressive Growth sinceFebruary 1998. Mr.
Alger and Mr. Hyun also serve as portfolio managers for other mutual funds and
investment accounts managed by Alger Management.
/five diamonds/
JANUS CAPITAL CORPORATION
Janus Capital Corporation ("Janus") serves as the Sub-Adviser to the WRL Janus
Growth and the WRL Janus Global.
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 $261 billion as of
February 1, 2000. Kansas City Southern Industries, Inc. ("KCSI") owns 82% of
Janus indirectly through Stilwell Financial, Inc. 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.
/diamond/ PORTFOLIO MANAGERS:
HELEN YOUNG HAYES, CFA AND LAURENCE CHANG, CFA have served as co-portfolio
managers of the WRL Janus Global portfolio since January 2000. Ms. Hayes
previously served as manager of this portfolio since its inception. She has
been employed by Janus since 1987.
Mr. Chang has been employed by Janus since 1993. Before joining Janus, Mr.
Chang was a project director at the National Security Archive.
/five diamonds/
NWQ INVESTMENT MANAGEMENT COMPANY, INC.
NWQ Investment Management Company, Inc. ("NWQ") serves as the Sub-Adviser to
the WRL NWQ Value Equity.
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 $8.1 billion in assets under management as
of December 31, 1999.
/diamond/ PORTFOLIO MANAGER:
An investment policy committee is responsible for the day-to-day management of
WRL NWQ Vaue Equity investments. David A. Polak, CFA, Edward C. Friedel, CFA,
James H. Galbreath, CFA, Phyllis G. Thomas, CFA, Jon D. Bosse, CFA, and Justin
T. Clifford constitute the committee.
EDWARD C. FRIEDEL, CFA serves as senior portfolio manager for WRL NWQ Value
Equity. Mr. Friedel has been a managing director and investment
strategist/portfolio manager of NWQ Investment since 1983. Mr. Friedel is a
graduate of the University of California at Berkeley (BS) and Stanford
University (MBA).
/five diamonds/
GOLDMAN SACHS ASSET MANAGEMENT, INC.
As of September 1, 1999, the Investment Management Division ("IMD") was
established as a new operating division of Goldman, Sachs & Co. and this newly
created entity includes Goldman Sachs Asset Management ("GSAM"). Goldman, Sachs
& Co. registered as an investment adviser in 1981. GSAM serves as the sub-
adviser to WRL Goldman Sachs Growth. GSAM is located at 32 Old Slip, New York,
New York, 10005. The Goldman Sachs Group, L.P. which controlled GSAM, merged
into the Goldman Sachs Group, Inc. as a result of an initial public offering.
/diamond/ PORTFOLIO MANAGER:
HERBERT E. EHLERS has served as head of a thirteen person investment team that
has managed the WRL Goldman Sachs Growth since inception. Prior to joining GSAM
in 1997, he was chief investment officer at Liberty Investment Management, Inc.
from 1994-1997.
/diamond/
SALOMON BROTHERS ASSET
MANAGEMENT INC
Salomon Brothers Asset Management Inc ("SBAM") serves as the sub-adviser to the
WRL Salomon All Cap.
SBAM, located at 7 World Trade Center, New York, NY 10048, is a wholly-owned
subsidiary of Salomon Brothers Holding Company, Inc., which is wholly-owned by
Salomon Smith Barney Holdings Inc., which is, in turn, wholly-owned by
Citigroup.
/diamond/ PORTFOLIO MANAGERS:
ROSS S. MARGOLIES, has managed this portfolio since inception. Mr. Margolies
joined Salomon in 1992.
34
<PAGE>
ROBERT M. DONAHUE, Jr. assists in the day-to-day management of the portfolio.
Prior to joining SBAM in 1997, Mr. Donahue worked as an equity analyst at
Gabelli & Company.
/five diamonds/
T. ROWE PRICE ASSOCIATES, INC.
T. Rowe Price Associates, Inc. ("T. Rowe Price") serves as the Sub-Adviser to
the WRL T. Rowe Price Small Cap and the WRL T. Rowe Price Dividend Growth.
T. Rowe Price is located at 100 E. Pratt Street, Baltimore, MD 21202.
/diamond/ PORTFOLIO MANAGERS:
TOM HUBER has managed the WRL T. Rowe Price Dividend Growth portfolio since
March, 2000 and heads an Investment Team for this portfolio. He joined T. Rowe
Price in 1994.
RICHARD T. WHITNEY, CFA, has managed the WRL T. Rowe Price Small Cap portfolio
since inception and heads the Investment Team for this portfolio. He joined T.
Rowe Price in 1985.
/five diamonds/
PILGRIM BAXTER AND ASSOCIATES, LTD.
Pilgrim Baxter and Associates, Ltd. ("Pilgrim Baxter") serves as the
sub-adviser to the WRL Pilgrim Baxter Mid Cap Growth.
Pilgrim Baxter, located at 825 Duportail Road, Wayne PA 19087, is a
professional investment management firm which, along with its predecessors, has
been in business since 1982. The controlling shareholder of Pilgrim Baxter is a
wholly-owned subsidiary of United Asset Management.
/diamond/ PORTFOLIO MANAGER:
JEFF A. WRONA, CFA, has managed this portfolio since inception. Prior to
joining Pilgrim Baxter, he was a senior portfolio manager at Munder Capital
Management. 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 management by the Sub-Adviser. The table below lists those
percentages by portfolio.
<TABLE>
<CAPTION>
PORTFOLIO PERCENTAGE OF AVERAGE DAILY NET ASSETS
- - --------- --------------------------------------
<S> <C>
WRL Janus Global 0.40%(1)
WRL NWQ Value Equity 0.40%, less 50% of amount of excess expenses(2)
WRL T. Rowe Price Small Cap 0.35%
WRL Pilgrim Baxter Mid Cap 0.50% of the first $100 million of portfolio's average
daily net assets; 0.40% of assets in excess of
$100 million (from first dollar)(3)
WRL Salomon All Cap 0.30% of the first $20 million of portfolio's average daily
net assets; 0.50% of the next $20-100 million of
average daily net assets; and 0.40% of average
daily net assets over $100 million(3)
WRL Goldman Sachs Growth 0.50% of the first $50 million of portfolio's average
daily net assets; 0.45% of the next $50-100 million
in assets; and 0.40% of assets in excess of $100 million
after the first year of the contract, the minimum fees will be
$150,000 (in aggregate)(3)
WRL T. Rowe Price Dividend Growth 0.50% of first $100 million of average daily net assets
and 0.40% of assets over $100 million (from first dollar)(3)
</TABLE>
- - --------------
(1) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the portfolio's average daily net assets above $2 billion (resulting in a
net fee of 0.3875%). This waiver will terminate on June 25, 2000.
(2) Excess expenses are those expenses paid by the Investment Adviser on behalf
of a portfolio pursuant to any expense limitation.
(3) The average daily net assets will be determined on a combined basis with
the same name fund managed by the sub-adviser for IDEX Mutual Funds.
The method of computing each Sub-Adviser's fees is set forth above. For the
years ended December 31, 1999, 1998 and 1997 each Sub-Adviser was paid fees for
their services in the following amounts:
35
<PAGE>
SUB-ADVISORY FEES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------
SUB-ADVISER PORTFOLIO 1999 1998 1997
- - ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Alger WRL Alger Aggressive Growth $2,936,966 $1,680,802 $1,124,900
Janus WRL Janus Global(1) 5,146,976 3,768,835 2,795,909
NWQ WRL NWQ Value Equity 607,482 729,083 450,409
GSAM WRL Goldman Sachs Growth 14,672 N/A N/A
Salomon WRL Salomon All Cap 17,211 N/A N/A
T. Rowe Price WRL T. Rowe Price Dividend Growth 15,071 N/A N/A
WRL T. Rowe Price Small Cap 42,533 N/A N/A
Pilgrim Baxter WRL Pilgrim Baxter Mid Cap Growth N/A N/A
</TABLE>
- - ------------------------------
(1) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the portfolio's average daily net assets above $2 billion (resulting in a
net fee of 0.3875%). This waiver will terminate on June 25, 2000.
Through June 25, 2000, provided that it continues to serve as sub-adviser for
the portfolios, Janus Capital will compensate WRL for its services in
connection with promotion, marketing and distribution in an amount equal to
0.375% of the portfolio's average daily net assets above $2 billion with
respect to WRL Janus Global.
/diamond/ JOINT TRADING ACCOUNTS
Subject to approval by the Fund's Board, the WRL Janus Global 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 WRL Janus Global 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.
/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.
The Board is required to review and approve the Code of Ethics for each
Sub-Adviser. Each Sub-Adviser is also 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/ ADMINISTRATIVE AND TRANSFER AGENCY SERVICES
Effective January 1, 1997, the Fund entered into an Administrative Services and
Transfer Agency Agreement with WRL Services located at 570 Carillon Parkway,
St. Petersburg, Florida 33716, 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
servicesin connection with its serving as the Fund's investment adviser.
36
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
/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 held during the year.
Changes in security holdings are made by a portfolio's Sub-Adviser when it is
deemed necessary. Such changes may result from: liquidity needs; securities
having reached a price or yield objective; anticipated changes in interest
rates or the credit standing of an issuer; or developments not foreseen at the
time of the investment decision.
A Sub-Adviser may engage in a significant number of short-term transactions if
such investing serves a portfolio's objective. The rate of portfolio turnover
will not be a limiting factor when such short-term investing is considered
appropriate. Increased turnover results in higher brokerage costs or mark-up
charges for a portfolio; these charges are ultimately borne by the
policyowners.
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, 1999, 1998 and 1997:
PORTFOLIO TURNOVER RATES
YEAR ENDED DECEMBER 31
------------------------------
PORTFOLIO 1999 1998 1997
- - --------- ------ ------ ------
WRL Alger Aggressive Growth 101.71% 117.44% 136.18%
WRL Janus Global 68.10% 87.36% 97.54%
WRL NWQ Value Equity 34.19% 43.60% 17.28%
WRL Goldman Sachs Growth(1) 40.46% N/A N/A
WRL Salomon All Cap(1) 216.29% N/A N/A
WRL T. Rowe Price Dividend Growth(1) 159.02% N/A N/A
WRL T. Rowe Price Small Cap(1) 155.71% N/A N/A
WRL Pilgrim Baxter Mid Cap Growth(1) N/A N/A
- - ------------------------------
(1) Portfolio commenced operations May 1, 1999.
The future annual turnover rates cannot be precisely predicted, although an
annual turnover rate in excess of 100% is not presently anticipated for the WRL
Alger Aggressive Growth; 50% for the WRL NWQ Value Equity and 200% for the WRL
Janus Global.
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
37
<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 and Fred Alger & Company, Inc.,
One World Trade Center, Suite 9333, New York, New York 10048; M. J. Whitman,
Inc. 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.
38
<PAGE>
COMMISSIONS PAID BY THE PORTFOLIOS
<TABLE>
<CAPTION>
AGGREGATE COMMISSIONS AFFILIATED BROKERAGE COMMISSIONS
YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31
--------------------------------- -------------------------------------------------------
PORTFOLIO 1999 1998 1997 1999 % 1998 % 1997 %
- - --------- --------- --------- --------- -------- ----- ------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
WRL Alger Aggressive Growth(1) $ 907,331 $ 916,267 $ 754,459 $903,540 94.58% 912,105 99.55 $749,587 99.35%
WRL Janus Global 2,219,248 2,373,255 2,305,145 9,346 < 1% N/A N/A N/A N/A
WRL NWQ Value Equity 168,551 191,139 157,512 N/A N/A N/A N/A N/A N/A
WRL Goldman Sachs Growth(2)(3) 10,724 N/A N/A 198 1.85% N/A N/A N/A N/A
WRL Salomon All Cap(2) 32,734 N/A N/A N/A N/A N/A N/A N/A N/A
WRL T. Rowe Price Dividend
Growth(2) 9,115 N/A N/A N/A N/A N/A N/A N/A N/A
WRL T. Rowe Price Small Cap(2) 15,525 N/A N/A N/A N/A N/A N/A N/A N/A
WRL Pilgrim Baxter Mid Cap
Growth(2) 26,811 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- - ------------------------------
(1) The percentage of the portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through Fred Alger Company,
Incorporated for the fiscal year ended December 31, 1999, 1998 and 1997
was 98.90%, 99.27% and 98.37%, respectively.
(2) Portfolio commenced operations May 1, 1999.
(3) The percentage of the portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through Goldman Sachs & Co.
for fiscal year ended December 31, 1999, 1998 and 1997 was 2.44%, N/A and
N/A, respectively.
WRL Alger Aggressive Growth paid all its affiliated brokerage commissions to
Fred Alger & Company, Incorporated and WRL Goldman Sachs Growth paid all its
affiliated commissions to Goldman Sachs & Co.
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, Martin Luther King's Birthday, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.) The per share net asset value of a portfolio is determined by
dividing the total value of the securities and other assets, less liabilities,
by the total number of shares outstanding. In determining net asset value,
securities listed on the national securities exchanges and traded on the NASDAQ
National Market are valued at the closing prices on such markets, or if such a
price is lacking for the trading period immediately preceding the time of
determination, such securities are valued at their current bid price. Foreign
securities and currencies are converted to U.S. dollars using the exchange rate
in effect at the close of the Exchange. Other securities for which quotations
are not readily available are valued at fair values as determined in good faith
by a portfolio's Investment Adviser under the supervision of the Fund's Board
of Directors. Money market instruments maturing in 60 days or less are valued
on the amortized cost basis. Values of gold bullion held by a portfolio are
based upon daily quotes provided by banks or brokers dealing in such
commodities.
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.
39
<PAGE>
/diamond/ TOTAL RETURN
Total return quotations for each of the portfolios are computed by finding the
average annual compounded rates of return over the relevant periods that would
equate the initial amount invested to the ending redeemable value, according to
the following equation:
P (1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value (at the end
of the applicable period of a hypotheti-
cal $1,000 payment made at the begin-
ning of the applicable period)
The total return quotation calculations for a portfolio reflect the deduction
of a proportionate 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 are based on a specific thirty-day period
and are computed by dividing the net investment income per share earned during
the period by the maximum offering price per share on the last date of the
period, according to the following formula:
a-b
YIELD = 2 [ ( --- + 1)6 - 1]
cd
Where: a = dividends and interest earned during
the period by the portfolio
b = expenses accrued for the period
(net of reimbursement)
c = the average daily number of shares
outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per
share on the last day of the period
TAXES
Shares of the portfolios are offered only to the Separate 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 either qualified, and expects to continue to qualify, for
treatment as a regulated investment company ("RIC") under the Internal Revenue
Code of 1986, as amended (the "Code"). In order to qualify for that treatment,
a portfolio must distribute to its Policyowners for each taxable year at least
90% of its investment company taxable income ("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) 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 (3) 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. If each portfolio qualifies as a regulated investment
company and distributes to its shareholders substantially all of its net income
and net capital gains, then each portfolio should have little or no income
taxable to it under the Code.
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
40
<PAGE>
investment (which generally includes all securities of the same issuer). For
purposes of section 817(h), all securities of the same issuer, all interests in
the same real property project, and all interest in the same commodity are
treated as a single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities and political
subdivisions all will be considered securities issued by the same issuer.
If a portfolio fails to qualify as a regulated investment company, the
portfolio will be subject to federal, and possibly state, corporate taxes on
its taxable income and gains (without any deduction for its distributions to
its shareholders) and distributions to its shareholders will constitute
ordinary income to the extent of such Fund's available earnings and profits.
Owners of variable life insurance and annuity contracts which have invested in
such a portfolio might be taxed currently on the investment earnings under
their contracts and thereby lose the benefit of tax deferral. In addition, if a
portfolio failed to comply with the diversification requirements of section
817(h) of the Code and the regulations thereunder, owners of variable life
insurance and annuity contracts which have invested in the portfolio could be
taxed on the investment earnings under their contracts and thereby lose the
benefit of tax deferral. For additional information concerning the consequences
of failure to meet the requirements of section 817(h), see the 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, 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.
Foreign Investments - portfolios investing in foreign securities or currencies
(which may include [list portfolios so authorized] may be required to pay
withholding, income or other taxes to foreign governments or U.S. possession.
Foreign tax withholding from dividends and interest, if any, is generally at a
rate between 10% and 35%. The investment yield of any portfolio that invests in
foreign securities or currencies is reduced by these foreign taxes. Holders of
Policies and Annuity Contracts investing in such portfolios bear the cost of
any foreign taxes but will not be able to claim a foreign tax credit or
deduction for these foreign taxes. 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.
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.
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 the portfolio 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. A portfolio, however, may
qualify for, and may make, an election permitted under Section 853 of the Code
so that shareholders may be eligible to claim a credit or deduction on their
Federal income tax returns for, and will be required to treat as part of the
amounts distributed to them, their pro rata portion of qualified taxes paid or
incurred by the portfolio to foreign countries (which taxes relate primarily to
investment income). The portfolio may make an election under Section 853 of the
Code, provided that more than 50% of the value of the portfolio's total assets
at the close of the taxable year consists of securities in foreign
corporations, and the portfolio satisfies applicable distribution provisions of
the Code. The foreign tax credit available to shareholders is subject to
certain limitations imposed by the Code. In addition, another election is
available that would involve marking to market a portfolio's PFIC stock at the
end of each taxable year (and on certain other dates prescribed in the Code),
with the result that unrealized gains are treated as though they were realized
although any such gains recognized will be ordinary income rather than capital
gain. If this election were made, tax at the portfolio level under the PFIC
rules would be eliminated, but a portfolio could, in limited circumstances,
incur nondeductible interest charges. A portfolio's intention to qualify
annually as a
41
<PAGE>
regulated investment company may limit a portfolio's election with respect to
PFIC stock.
The foregoing is only a general summary of some of the important Federal income
tax considerations generally affecting the portfolios and their shareholders.
No attempt is made to present a complete explanation of the Federal tax
treatment of the portfolios' activities, and this discussion and the discussion
in the prospectuses and/or statements of additional information for the
Policies and Annuity Contracts are not intended as a substitute for careful tax
planning. Accordingly, potential investors are urged to consult their own tax
advisors for more detailed information and for information regarding any state,
local, or foreign taxes applicable to the policies, annuity contracts and the
holders thereof.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each portfolio. The Fund is currently comprised of the following
portfolios: WRL T. Rowe Price Small Cap, WRL Alger Aggressive Growth, WRL Janus
Global, WRL Salomon All Cap, WRL Pilgrim Baxter Mid Cap Growth, WRL Goldman
Sachs Growth, WRL NWQ Value Equity, and WRL T. Rowe Price Dividend Growth.
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 of the Fund for the year
ended December 31, 1999 and the report of the Fund's independent certified
public accountants are included in the 1999 Annual Report, and are incorporated
herein by reference to such report.
OTHER INFORMATION
/diamond/ INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
PricewaterhouseCoopers LLP, located at 400 North Ashley Street, Suite 2800,
Tampa, Florida 33603, serves as the Fund's independent certified public
accountants. The Fund has engaged PricewaterhouseCoopers LLP to examine, in
accordance with generally accepted auditing standards, the financial statements
of each of the Fund's portfolios.
/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.
42
<PAGE>
APPENDIX A
DESCRIPTION OF PORTFOLIO SECURITIES
The following is intended only as a supplement to the information
contained in the Prospectus and should be read only in conjunction with the
Prospectus. Terms defined in the Prospectus and not defined herein have the
same meanings as those in the Prospectus.
1. CERTIFICATE OF DEPOSIT.* A certificate of deposit generally is a
short-term, interest bearing negotiable certificate issued by a commercial bank
or savings and loan association against funds deposited in the issuing
institution.
2. EURODOLLAR CERTIFICATE OF DEPOSIT.* A Eurodollar certificate of
deposit is a short-term obligation of a foreign subsidiary of a U.S. bank
payable in U.S. dollars.
3. FLOATING RATE NOTE.* A floating rate note is debt issued by a
corporation or commercial bank that is typically several years in term but
whose interest rate is reset every one to six months.
4. 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 and 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.
A-2
<PAGE>
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 SEC 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.
A-3
<PAGE>
APPENDIX B
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 capac-
ity to pay principal and interest then for higher rated bonds.
BB, B, and Predominantly speculative with respect to the issuer's capacity to
CC, CC, C meet required interest and principal payments. BB - lowest degree of
speculation; C- the highest degree of speculation. Quality and
protective characteristics outweighed by large uncertainties or major
risk exposure to adverse conditions.
D In default.
</TABLE>
PLUS (+) OR MINUS (-) - The ratings from "AA" to "BBB" may be modified by the
addition of a plus or minus to show relative standing within the major rating
categories.
UNRATED - Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
<TABLE>
<S> <C> <C>
MOODY'S INVESTORS SERVICE, INC. Aaa Highest qualty, 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 Medum-grade obligations; neither highly protected nor poorly
secured. Interest and principal appear adequate for the present but
certain protective elements may be lacking or may be unreliable over
any great length of time.
Ba More unceratin, 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 assur-
ance of timely interest and principal payments or maintenance of
other contract terms over time.
Caa Poor standing, may be in default; elements of danger with respect to
principal or interest payments.
Ca Speculative in a high degree; could be in default or have other
marked short-comings.
C Lowest-rated; extremely poor prospects of ever attaining investment
standing.
</TABLE>
UNRATED - Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is 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.
B-1
<PAGE>
WRL SERIES FUND, INC.
WRL ALGER AGGRESSIVE GROWTH
WRL JANUS GLOBAL
WRL JANUS GROWTH
WRL LKCM STRATEGIC TOTAL RETURN
WRL J.P. MORGAN REAL ESTATE SECURITIES
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 570 Carillon Parkway, St. Petersburg, FL 33716 or by calling the
Fund at (800) 851-9777.
Investment Adviser:
WRL INVESTMENT MANAGEMENT, INC.
Sub-Advisers:
FRED ALGER MANAGEMENT, INC.
JANUS CAPITAL CORPORATION
LUTHER KING CAPITAL MANAGEMENT CORPORATION
J.P. MORGAN INVESTMENT MANAGEMENT INC.
The date of the Prospectus to which this Statement of Additional Information
relates and the date of this Statement of Additional Information is May 1,
2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page in this Statement
of
Additional Information
-----------------------
<S> <C>
FUND HISTORY 1
INVESTMENT OBJECTIVES AND POLICIES 2
Investment Restrictions 2
WRL Alger Aggressive Growth 2
WRL Janus Global 3
WRL Janus Growth 4
WRL LKCM Strategic Total Return 5
WRL J.P. Morgan Real Estate Securities 6
INVESTMENT POLICIES 7
Lending 7
Borrowing 7
Short Sales 7
Foreign Securities 8
Foreign Bank Obligations 8
Forward Foreign Currency Contracts 9
When-Issued, Delayed Settlement and Forward Delivery Securities 9
Repurchase and Reverse Repurchase Agreements 9
Temporary Defensive Position 10
U.S. Government Securities 10
Non-Investment Grade Debt Securities 10
Convertible Securities 10
Investments in Futures, Options and Other Derivative Instruments 11
Zero Coupon, Pay-In-Kind and Step Coupon Securities 21
Warrants and Rights 22
Mortgage-Backed Securities 22
Asset-Backed Securities 22
Pass-Through Securities 22
Other Income Producing Securities 23
Illiquid and Restricted/144A Securities 23
Other Investment Companies 24
Bank and Thrift Obligations 24
Investments in the Real Estate Industry and Real Estate Investment Trusts
("REITs") 25
Variable Rate Master Demand Notes 25
Debt Securities and Fixed-Income Investing 25
High Yield/High-Risk Securities 26
Trade Claims 26
MANAGEMENT OF THE FUND 27
Directors and Officers 27
The Investment Adviser 29
The Sub-Advisers 31
Joint Trading Accounts 34
Personal Securities Transactions 34
Administrative and Transfer Agency Services 34
PORTFOLIO TRANSACTIONS AND BROKERAGE 34
Portfolio Turnover 34
Placement of Portfolio Brokerage 35
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page in this Statement
of
Additional Information
-----------------------
<S> <C>
PURCHASE AND REDEMPTION OF SHARES 36
Determination of Offering Price 36
Net Asset Valuation 36
CALCULATION OF PERFORMANCE
RELATED INFORMATION 37
Total Return 37
Yield Quotations 37
TAXES 38
CAPITAL STOCK OF THE FUND 40
REGISTRATION STATEMENT 40
FINANCIAL STATEMENTS 40
OTHER INFORMATION 40
Independent Certified Public Accountants 40
Custodian 40
Appendix A - Description of Portfolio Securities A-1
Appendix B - Brief Explanation of
Rating Categories B-1
</TABLE>
ii
<PAGE>
/diamond/ FUND HISTORY
The Fund was incorporated under the laws of the State of Maryland on August 21,
1985 and is registered with the Securities and Exchange Commission ("SEC") as
an open-end management investment company.
The Fund offers its shares only for purchase by the separate accounts of life
companies to fund benefits under variable life insurance policies or variable
annuity contracts issued by AUSA Life Insurance Company, Inc. ("AUSA"), PFL
Life Insurance Company ("PFL"), Western Reserve Life Assurance Co. of Ohio
("WRL"), Peoples Benefit Life Insurance Company ("Peoples") (the "Life
Companies") and Transamerica Occidental Life Insurance Company (Transamerica).
Shares may be offered to other life insurance companies in the future.
Because Fund shares are sold to separate accounts established to receive and
invest premiums received under variable life insurance policies and purchase
payments received under the variable annuity contracts, it is conceivable that,
in the future, it may become disadvantageous for variable life insurance
separate accounts and variable annuity separate accounts of the Life Companies
to invest in the Fund simultaneously. Neither the Life Companies nor the Fund
currently foresees any such disadvantages or conflicts, either to variable life
insurance policyholders or to variable annuity contract owners. Any Life
Company may notify the Fund's Board of a potential or existing conflict. The
Fund's Board will then determine if a material conflict exists and what action,
if any, should be taken in response. Such action could include the sale of Fund
shares by one or more of the separate accounts, which could have adverse
consequences. Material conflicts could result from, for example, (1) changes in
state insurance laws, (2) changes in Federal income tax laws, or (3)
differences in voting instructions between those given by variable life
insurance policyholders and those given by variable annuity contract owners.
The Fund's Board might conclude that separate funds should be established for
variable life and variable annuity separate accounts. If this happens, the
affected Life Companies will bear the attendant expenses of establishing
separate funds. As a result, variable life insurance policyholders and variable
annuity contract owners would no longer have the economies of scale typically
resulting from a larger combined fund.
The Fund offers a separate class of common stock for each portfolio. All shares
of a portfolio have equal voting rights, but only shares of a particular
portfolio are entitled to vote on matters concerning only that portfolio. Each
of the issued and outstanding shares of a portfolio is entitled to one vote and
to participate equally in dividends and distributions declared by the portfolio
and, upon liquidation or dissolution, to participate equally in the net assets
of the portfolio remaining after satisfaction of outstanding liabilities. The
shares of a portfolio, when issued, will be fully paid and nonassessable, have
no preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights. The holders
of more than 50% of the shares of the Fund voting for the election of directors
can elect all of the directors of the Fund if they so choose. In such event,
holders of the remaining shares would not be able to elect any directors.
Only the separate accounts of the Life Companies may hold shares of the Fund
and are entitled to exercise the rights directly as described above. To the
extent required by law, the Life Companies will vote the Fund's shares held in
the separate accounts, including Fund shares which are not attributable to
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 Investment Company Act of 1940, as
amended (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.
1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of WRL Alger Aggressive Growth, WRL Janus Global, WRL
Janus Growth, WRL LKCM Strategic Total Return, and WRL J.P. Morgan Real Estate
Securities, (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 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, its 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 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/ WRL ALGER AGGRESSIVE 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. 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.
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
2
<PAGE>
(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/ WRL JANUS GLOBAL
The portfolio may not, as a matter of fundamental policy:
1. (a) With respect to 75% of the portfolio's assets, invest in the
securities (other than Government securities as defined in the 1940 Act) of any
one issuer if immediately thereafter, more than 5% of the portfolio's total
assets would be invested in securities of that issuer; or (b) with respect to
100% of the portfolio's assets, own more than either (i) 10% in principal
amount of the outstanding debt securities of an issuer, or (ii) 10% of the
outstanding voting securities of an issuer, except that such restrictions shall
not apply to Government securities, bank money market instruments or bank
repurchase agreements.
2. Invest more than 25% of the portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services; for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction, provided that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this shall not
prevent the portfolio from purchasing or selling options, futures, swaps and
forward contracts or from investing in securities or other instruments backed
by physical commodities).
4. Invest directly in real estate or interests in real estate; however,
the portfolio may own debt or equity securities issued by companies engaged in
those businesses.
5. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
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.
3
<PAGE>
Limitations (i) and (ii) do not apply to money market funds or to securities
received as dividends, through offers of exchange, or as a result of a
consolidation, merger or other reorganization.
(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/ WRL JANUS 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 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 policyowner approval:
(A) The portfolio may not, as a matter of non-fundamental policy: (i) enter
into any futures contracts or options on futures contracts for purposes other
than bona fide hedging transactions within the meaning of Commodity Futures
Trading Commission regulations if the aggregate initial margin deposits and
premiums required to establish positions in futures contracts and related
options that do not fall within the definition of bona fide hedging
transactions would exceed 5% of the fair market value of the portfolio's net
assets, after taking into account unrealized profits and losses on such
contracts it has entered into and (ii) enter into any futures contracts or
options on futures contracts if the aggregate amount of the portfolio's
commitments under outstanding futures contracts positions and options on
futures contracts would exceed the market value of its total assets.
(B) The portfolio may not mortgage or pledge any securities owned or held
by the portfolio in amounts that exceed, in the aggregate, 15% of the
portfolio's net assets, provided that this limitation does not apply to reverse
repurchase agreements or in the case of assets deposited to provide margin or
guarantee positions in options, futures contracts, swaps, forward contracts or
other derivative instruments or the segregation of assets in connection with
such transactions.
(C) The portfolio may not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount to the securities
sold short, and provided that transactions in options, futures contracts,
swaps, forward contracts and other derivative instruments are not deemed to
constitute selling securities short.
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(D) The 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) The portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 or any securities for
which the Board of Directors or the Sub-Adviser has made a determination of
liquidity, as permitted under the 1940 Act.
(F) The portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Restrictions (i) and (ii) do not apply to
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) The portfolio may not invest more than 25% of its net assets at the
time of purchase in the securities of foreign issuers and obligors.
(H) The portfolio may not invest in companies for the purpose of
exercising control or management.
/diamond/ WRL LKCM STRATEGIC TOTAL RETURN
The portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the portfolio in the securities of such issuer exceeds
5% of the value of the portfolio's total assets, or (b) the portfolio owns more
than 10% of the outstanding voting securities of such issuer.
2. Invest more than 25% of the portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services, for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction. In addition, there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
portfolio from investing in securities or other instruments backed by physical
commodities).
4. Purchase or sell real estate (but this shall not prevent the portfolio
from investing in securities or other instruments backed by real estate,
including mortgage-backed securities, or securities of companies engaged in the
real estate business).
5. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper or debt securities).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
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.
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(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/ WRL J.P. MORGAN REAL ESTATE SECURITIES
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 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 331/3% of the value of the
portfolio's total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that exceed 331/3% of the value of the
portfolio's total assets by reason of the decline in net assets will be reduced
within three business days to the extent necessary to comply with the 331/3%
limitation. This policy shall not prohibit reverse repurchase agreements or
deposits of assets to margin or guarantee positions in futures, options, swaps
or forward contracts, or the segregation of assets in connection with such
contracts.
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 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.
(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
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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.
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.
/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.
State laws and regulations may impose additional limitations on borrowings.
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 WRL LKCM Strategic Total Return 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.
/diamond/ BORROWING
Subject to its investment restrictions, 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 WRL J. P. Morgan Real
Estate Securities; and 25% of total assets for all other portfolios.
To secure borrowings, a portfolio may not mortgage or pledge its securities in
amounts that exceed 15% of its net assets.
The portfolios with a common Sub-Adviser may also borrow (or lend) money to
other portfolios or funds that permit such transactions and are also advised by
that Sub-Adviser, provided each portfolio or fund seeks and obtains permission
from the SEC. There is no assurance that such permission would be granted.
The WRL Alger Aggressive Growth 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.
/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
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securities convertible into, or exchangeable without further consideration for,
securities of the same issue as the securities sold short.
/diamond/ FOREIGN SECURITIES
Subject to a portfolio's investment restricitions and policies, 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:
o CURRENCY TRADING COSTS. A portfolio incurs costs in converting foreign
currencies into U.S. dollars, and vice versa.
o 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.
o LESS INFORMATION AVAILABLE. There is generally less public information
available about foreign companies.
o MORE DIFFICULT BUSINESS NEGOTIATIONS. A portfolio may find it
difficult to enforce obligations in foreign countries or to negotiate
favorable brokerage commission rates.
o REDUCED LIQUIDITY/INCREASED VOLATILITY. Some foreign securities are
less liquid and their prices more volatile, than securities of
comparable U.S. companies.
o SETTLEMENT DELAYS. Settling foreign securities may take longer than
settlements in the U.S.
o HIGHER CUSTODY CHARGES. Custodianship of shares may cost more for
foreign securities than it does for U.S. securities.
o 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.
o POLITICAL INSTABILITY. In some countries, political instability, war
or diplomatic developments could affect investments.
These risks may be greater in emerging countries or in countries with limited
or emerging markets, In particular, developing countries have relatively
unstable governments, economies based on only a few industries, and securities
markets that trade only a small number of securities. As a result, securities
of issuers located in developing countries may have limited marketability and
may be subject to abrupt or erratic price fluctuations.
At times, a portfolio's foreign securities may be listed on exchanges or traded
in markets which are open on days (such as Saturday) when the portfolio does
not compute a price or accept orders for purchase, sale or exchange of shares.
As a result, the net asset value of the portfolio may be significantly affected
by trading on days when policyholders cannot make transactions.
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.
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 ADS.
FOREIGN EXCHANGE TRANSACTIONS. To the extent a portfolio invests directly in
foreign securities, a portfolio will engage in foreign exchange transactions.
The foreign currency exchange market is subject to little government
regulation, and such transactions generally occur directly between parties
rather than on an exchange or in an organized market. This means that a
portfolio is subject to the full risk of default by a counterparty in such a
transaction. Because such transactions often take place between different time
zones, a portfolio may be required to complete a currency exchange transaction
at a time outside of normal business hours in the counterparty's location,
making prompt settlement of such transaction impossible. This exposes a
portfolio to an increased risk that the counterparty will be unable to settle
the transaction. Although the counterparty in such transactions is often a bank
or other financial institution, currency transactions are generally not covered
by insurance otherwise applicable to such institutions.
/diamond/ FOREIGN BANK OBLIGATIONS
A portfolio may invest in foreign bank obligations and obligations of foreign
branches of domestic banks. These investments present 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
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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/ 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.
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 trasaction. 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 or purchase
commitments until payment is made. Such of the 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 a 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/ 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.
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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. Reverse repurchase
agreements may be used to provide cash to satisfy unusually heavy redemption
requests or for temporary or emergency purposes without necessity of selling
portfolio securities or to earn additional income on portfolio securities such
as U.S. Treasury bills and notes. While a reverse repurchase agreement is
outstanding, the portfolio will segregate with its custodian cash and
appropriate 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. A portfolio will enter into reverse repurchase
agreements only with parties that the portfolio's Sub-Adviser deems
creditworthy, and that have been reviewed by the Board of Directors of the
Fund.
/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/ TEMPORARY DEFENSIVE POSITION
For temporary defensive purposes, 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 decrease. Furthermore, when a
portfolio assumes a temporary defensive position it may not be able to achieve
its investment objective.
/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
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 B 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.
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.
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/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, converts 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
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 would be made 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.
Futures may also be used for managing a portfolio's exposure to change in
securities prices and foreign currencies; as an efficient means of adjusting
its overall exposure to certain markets, or in an effort to enhance income.
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
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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 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
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broad index of securities - which involves a risk that the futures position
will not correlate precisely with the performance of the portfolio's
investments.
Futures prices can also diverge from the prices of their underlying instruments,
even if the underlying instruments correlate with a portfolio's investments.
Futures prices are affected by such factors as current and anticipated
short-term interest rates, changes in volatility of the underlying instruments,
and the time remaining until expiration of the contract. Those factors may
affect securities prices differently from futures prices. Imperfect correlations
between a portfolio's investments and its futures positions may also result from
differing levels of demand in the futures markets and the securities markets,
from structural differences in how futures and securities are traded, and from
imposition of daily price fluctuation limits for futures contracts. A portfolio
may buy or sell futures contracts with a greater or lesser value than the
securities it wishes to hedge or is considering purchasing in order to attempt
to compensate for differences in historical volatility between the futures
contract and the securities, although this may not be successful in all cases.
If price changes in a portfolio's futures positions are poorly correlated with
its other investments, its futures positions may fail to produce desired gains
or result in losses that are not offset by the gains in the portfolio's other
investments.
Because futures contracts are generally settled within a day from the date they
are closed out, compared with longer settlement periods for some types of
securities, the futures markets can provide superior liquidity to the
securities markets. Nevertheless, there is no assurance a liquid secondary
market will exist for any particular futures contract at any particular time.
In addition, futures exchanges may establish daily price fluctuation limits for
futures contracts and may halt trading if a contract's price moves upward or
downward more than the limit in a given day. On volatile trading days when the
price fluctuation limit is reached, it may be impossible for a portfolio to
enter into new positions or close out existing positions. If the secondary
market for a futures contract is not liquid because of price fluctuation limits
or otherwise, a portfolio may not be able to promptly liquidate unfavorable
positions and potentially be required to continue to hold a futures position
until the delivery date, regardless of changes in its value. As a result, the
portfolio's access to other assets held to cover its futures positions also
could be impaired.
Although futures contracts by their terms call for the delivery or acquisition
of the underlying commodities or a cash payment based on the value of the
underlying commodities, in most cases the contractual obligation is offset
before the delivery date of the contract by buying, in the case of a
contractual obligation to sell, or selling, in the case of a contractual
obligation to buy, an identical futures contract on a commodities exchange.
Such a transaction cancels the obligation to make or take delivery of the
commodities.
Each portfolio intends to comply with guidelines of eligibility for exclusion
from the definition of the term "commodity pool operator" with the CFTC and the
National Futures Association, which regulate trading in the futures markets.
Such guidelines presently require that to the extent that a portfolio enters
into futures contracts or options on a futures position that are not for bona
fide hedging purposes (as defined by the CFTC), the aggregate initial margin
and premiums on these positions (excluding the amount by which options are
"in-the-money") may not exceed 5% of the portfolio's net assets.
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 28. 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
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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
increased by changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some respect
to the purchase of protective put options on portfolio securities. For example,
a portfolio may buy a put option on a futures contract to attempt to hedge the
portfolio's securities against the risk of falling prices.
The amount of risk a portfolio assumes when it buys an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the options bought.
FORWARD CONTRACTS. A portfolio may enter into forward foreign currency exchange
contracts ("forward currency contracts") to attempt to minimize the risk to the
portfolio from adverse changes in the relationship between the U.S. dollar and
other currencies. A forward currency contract is an obligation to buy or sell
an amount of a specified currency for an agreed price (which may be in U.S.
dollars or a foreign currency) at a future date which is individually
negotiated between currency traders and their customers. A portfolio may invest
in forward currency contracts with stated contract values of up to the value of
the portfolio's assets.
A portfolio may exchange foreign currencies for U.S. dollars and for other
foreign currencies in the normal course of business and may buy and sell
currencies through forward currency contracts in order to fix a price for
securities it has agreed to buy or sell. A portfolio may enter into a forward
currency contract, for example, when it enters into a contract to buy or sell a
security denominated in or exposed to fluctuations in a foreign currency in
order to "lock in" the U.S. dollar price of the security ("transaction hedge").
Additionally, when a portfolio's Sub-Adviser believes that a foreign currency
in which portfolio securities are denominated may suffer a substantial decline
against the U.S. dollar, a portfolio may enter into a forward currency contract
to sell an amount of that foreign currency (or a proxy currency whose
performance is expected to replicate the performance of that currency) for U.S.
dollars approximating the value of some or all of the portfolio securities
denominated in that currency (not exceeding the value of the portfolio's assets
denominated in that currency) or by participating in options or futures
contracts with respect to the currency, or, when the portfolio's Sub-Adviser
believes that the U.S. dollar may suffer a substantial decline against a
foreign currency for a fixed U.S. dollar amount ("position hedge"). This type
of hedge seeks to minimize the effect of currency appreciation as well as
depreciation, but does not protect against a decline in the security's value
relative to other securities denominated in the foreign currency.
A portfolio also may enter into a forward currency contract with respect to a
currency where the portfolio is considering the purchase of investments
denominated in that currency but has not yet done so ("anticipatory hedge").
In any of the above circumstances a portfolio may, alternatively, enter into a
forward currency contract with respect to a different foreign currency when a
portfolio's Sub-Adviser believes that the U.S. dollar value of that currency
will correlate with the U.S. dollar value of the currency in which portfolio
securities of, or being considered for purchase by, the portfolio are
denominated ("cross-hedge"). For example, if a portfolio's Sub-Adviser believes
that a particular foreign currency may decline relative to the U.S. dollar, a
portfolio could enter into a contract to sell that currency or a proxy currency
(up to the value of the portfolio's assets denominated in that currency) in
exchange for another currency that the Sub-Adviser expects to remain stable or
to appreciate relative to the U.S. dollar. Shifting a portfolio's currency
exposure from one foreign currency to another removes the portfolio's
opportunity to profit from increases in the value of the original currency and
involves a risk of increased losses to the portfolio if the portfolio's Sub-
Adviser's projection of future exchange rates is inaccurate.
A portfolio also may enter into forward contracts to buy or sell at a later
date instruments in which a portfolio may invest directly or on financial
indices based on those instruments. The market for those types of forward
contracts is developing and it is not currently possible to identify
instruments on which forward contracts might be created in the future.
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
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subject to the hedging transaction by a forward sale contract or the portfolio
may buy put options permitting the portfolio to sell the amount of foreign
currency subject to a forward buy contract.
While forward contracts are not currently regulated by the CFTC, the CFTC may
in the future assert authority to regulate forward contracts. In such event a
portfolio's ability to utilize forward contracts in the manner set forth in the
Prospectus may be restricted. Forward contracts will reduce the potential gain
from a positive change in the relationship between the U.S. dollar and foreign
currencies. Unforeseen changes in currency prices may result in poorer overall
performance for a portfolio than if it had not entered into such contracts. The
use of foreign currency forward contracts will not eliminate fluctuations in
the underlying U.S. dollar equivalent value of the proceeds of or rates of
return on a portfolio's foreign currency denominated portfolio securities.
The matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency denominated asset that
is the subject of the hedging transaction generally will not be precise. In
addition, a portfolio may not always be able to enter into forward contracts at
attractive prices and accordingly may be limited in its ability to use these
contracts in seeking to hedge the portfolio's assets.
Also, with regard to a portfolio's use of cross-hedging transactions, there can
be no assurance that historical correlations between the movement of certain
foreign currencies relative to the U.S. dollar will continue. Thus, at any time
poor correlation may exist between movements in the exchange rates of the
foreign currencies underlying a portfolio's cross-hedges and the movements in
the exchange rates of the foreign currencies in which the portfolio's assets
that are subject of the cross-hedging transactions are denominated.
OPTIONS ON FOREIGN CURRENCIES. A portfolio may buy put and call options and may
write covered put and call options on foreign currencies for hedging purposes
in a manner similar to that in which futures contracts or forward contracts on
foreign currencies may be utilized. For example, a decline in the U.S. dollar
value of a foreign currency in which portfolio securities are denominated will
reduce the U.S. dollar value of such securities, even if their value in the
foreign currency remains constant. In order to protect against such diminutions
in the value of portfolio securities, a portfolio may buy put options on the
foreign currency. If the value of the currency declines, the portfolio will
have the right to sell such currency for a fixed amount in U.S. dollars and
will thereby offset, in whole or in part, the adverse effect on its portfolio
which otherwise would have resulted.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a portfolio may buy call options thereon. The purchase
of such options could offset, at least partially, the effects of the adverse
movements in exchange rates. The purchase of an option on a foreign currency
may constitute an effective hedge against fluctuations in exchange rates,
although, in the event of exchange rate movements adverse to a portfolio's
option position, the portfolio could sustain losses on transactions in foreign
currency options which would require that the portfolio lose a portion or all
of the benefits of advantageous changes in those rates. In addition, in the
case of other types of options, the benefit to a portfolio from purchases of
foreign currency options will be reduced by the amount of the premium and
related transaction costs.
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
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difference is maintained by the portfolio in cash or high-grade liquid assets
in a segregated account with the Fund's custodian.
A portfolio may also write call options on foreign currencies for cross-hedging
purposes that may not be deemed to be covered. A call option on a foreign
currency is for cross-hedging purposes if it is not covered but is designed to
provide a hedge against a decline due to an adverse change in the exchange rate
in the U.S. dollar value of a security which the portfolio owns or has the
right to acquire and which is denominated in the currency underlying the
option. In such circumstances, the portfolio collateralizes the option by
maintaining segregated assets in an amount not less than the value of the
underlying foreign currency in U.S. dollars marked-to-market daily.
A portfolio may buy or write options in privately negotiated transactions on
the types of securities and indices based on the types of securities in which
the portfolio is permitted to invest directly. A portfolio will effect such
transactions only with investment dealers and other financial institutions
(such as commercial banks or savings and loan institutions) deemed
creditworthy, and only pursuant to procedures adopted by the portfolio's Sub-
Adviser for monitoring the creditworthiness of those entities. To the extent
that an option bought or written by a portfolio in a negotiated transaction is
illiquid, the value of an option bought or the amount of the portfolio's
obligations under an option written by the portfolio, as the case may be, will
be subject to the portfolio's limitation on illiquid investments. In the case
of illiquid options, it may not be possible for the portfolio to effect an
offsetting transaction at the time when the portfolio's Sub-Adviser believes it
would be advantageous for the portfolio to do so.
OPTIONS ON SECURITIES. In an effort to reduce fluctuations in net asset value,
a portfolio may write covered put and call options and may buy put and call
options and warrants on securities that are traded on United States and foreign
securities exchanges and over-the-counter ("OTC"). A portfolio also may write
call options that are not covered for cross-hedging purposes. A portfolio may
write and buy options on the same types of securities that the portfolio could
buy directly and may buy options on financial indices as described above with
respect to futures contracts. There are no specific limitations on a
portfolio's writing and buying options on securities.
A put option gives the holder the right, upon payment of a premium, to deliver
a specified amount of a security to the writer of the option on or before a
fixed date at a predetermined price. A call option gives the holder the right,
upon payment of a premium, to call upon the writer to deliver a specified
amount of a security on or before a fixed date at a predetermined price.
A put option written by a portfolio is "covered" if the portfolio (i) maintains
cash not available for investment or other liquid assets with a value equal to
the exercise price in a segregated account with its custodian or (ii) holds a
put on the same security and in the same principal amount as the put written
and the exercise price of the put held is equal to or greater than the exercise
price of the put written. The premium paid by the buyer of an option will
reflect, among other things, the relationship of the exercise price to the
market price and the volatility of the underlying security, the remaining term
of the option, supply and demand and interest rates. A call option written by a
portfolio is "covered" if the portfolio owns the underlying security covered by
the call or has an absolute and immediate right to acquire that security
without additional cash consideration (or has segregated additional cash
consideration with its custodian) upon conversion or exchange of other
securities 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
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option, or bought, in the case of a put option, since with regard to certain
options, the writer may be assigned an exercise notice at any time prior to the
termination of the obligation. Whether or not an option expires unexercised,
the writer retains the amount of the premium. This amount, of course, may, in
the case of a covered call option, be offset by a decline in the market value
of the underlying security during the option period. If a call option is
exercised, the writer experiences a profit or loss from the sale of the
underlying security. If a put option is exercised, the writer must fulfill the
obligation to buy the underlying security.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is
that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the holder
of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously bought. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit a portfolio to write another call option on the underlying security with
either a different exercise price or expiration date or both or, in the case of
a written put option, will permit a portfolio to write another put option to
the extent that the exercise price thereof is secured by deposited high-grade
liquid assets. Also, effecting a closing transaction will permit the cash or
proceeds from the concurrent sale of any securities subject to the option to be
used for other portfolio investments. If a portfolio desires to sell a
particular security on which the portfolio has written a call option, the
portfolio will effect a closing transaction prior to or concurrent with the
sale of the security.
A portfolio may realize a profit from a closing transaction if the price of the
purchase transaction is less than the premium received from writing the option
or the price received from a sale transaction is more than the premium paid to
buy the option; a portfolio may realize a loss from a closing transaction if
the price of the purchase transaction is less than the premium paid to buy the
option. Because increases in the market of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the repurchase of a call option is likely to be offset in whole or in 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
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or otherwise is above the exercise price, the put option will expire worthless
and a portfolio's gain will be limited to the premium received. If the market
price of the underlying security declines or otherwise is below the exercise
price, the portfolio may elect to close the position or take delivery of the
security at the exercise price and a portfolio's return will be the premium
received from the put options minus the amount by which the market price of the
security is below the exercise price.
A portfolio may buy put options to attempt to hedge against a decline in the
value of its securities. By using put options in this way, a portfolio will
reduce any profit it might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.
A portfolio may buy call options to attempt to hedge against an increase in the
price of securities that the portfolio may buy in the future. The premium paid
for the call option plus any transaction costs will reduce the benefit, if any,
realized by a portfolio upon exercise of the option, and, unless the price of
the underlying security rises sufficiently, the option may expire worthless to
the portfolio.
In purchasing an option, a portfolio would be in a position to realize a gain
if, during the option period, the price of the underlying security increased
(in the case of a call) or decreased (in the case of a put) by an amount in
excess of the premium paid and would realize a loss if the price of the
underlying security did not increase (in the case of a call) or decrease (in
the case of a put) during the period by more than the amount of the premium. If
a put or call option brought by a portfolio were permitted to expire without
being sold or exercised, the portfolio would lose the amount of the premium.
Although they entitle the holder to buy equity securities, warrants on and
options to purchase equity securities do not entitle the holder to dividends or
voting rights with respect to the underlying securities, nor do they represent
any rights in the assets of the issuer of those securities.
INTEREST RATE SWAPS AND SWAP-RELATED PRODUCTS. In order to attempt to protect
the value of a portfolio's investments from interest rate or currency exchange
rate fluctuations, a portfolio may enter into interest rate swaps, and may buy
or sell interest rate caps and floors. A portfolio expects to enter into these
transactions primarily to attempt to preserve a return or spread on a
particular investment or portion of its portfolio. A portfolio also may enter
into these transactions to attempt to protect against any increase in the price
of securities the portfolio may consider buying at a later date. A portfolio
does not intend to use these transactions as a speculative investment. Interest
rate swaps involve the exchange by a portfolio with another party of their
respective commitments to pay or receive interest, E.G., an exchange of
floating rate payments for fixed rate payments. The exchange commitments can
involve payments to be made in the same currency or in different currencies.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a contractually based principal amount from the party selling the
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a contractually based
principal amount from the party selling the interest rate floor.
Swap and swap-related products are specialized OTC instruments and their use
involves risks specific to the markets in which they are entered into. A
portfolio will usually enter into interest rate swaps on a net basis, I.E., the
two payment streams are netted out, with the portfolio receiving or paying, as
the case may be, only the net amount of the two payments. The net amount of the
excess, if any, of a portfolio's obligations over its entitlements with respect
to each interest rate swap will be calculated on a daily basis and an amount of
cash or other liquid assets having an aggregate net asset value of at least
equal to the accrued excess will be segregated with the Fund's custodian. If a
portfolio enters into an interest rate swap on other than a net basis, the
portfolio would segregate assets in the full amount accrued on a daily basis of
the portfolio's obligations with respect to the swap. A portfolio will not
enter into any interest rate swap, cap or floor transaction unless the
unsecured senior debt or the claims-paying ability of the other party thereto
is rated in one of the three highest rating categories of at least one
nationally recognized statistical rating organization at the time of entering
into such transaction. A portfolio's Sub-Adviser will monitor the
creditworthiness of all counterparties on an ongoing basis. If there is a
default by the other party to such a transaction, a portfolio will have
contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. The Sub-Advisers have determined
that, as a result, the swap market has become relatively liquid. Caps and
floors are more recent innovations for which standardized documentation has not
yet been developed and, accordingly, they are less liquid than swaps. To the
extent a portfolio sells (I.E., writes) caps and floors, it will segregate with
the custodian cash or other liquid assets having an aggregate net asset value
at least equal to the full amount, accrued on a daily basis, of the portfolio's
obligations with respect to any caps or floors.
Interest rate swap transactions are subject to limitations set forth in each
portfolio's policies. These transactions may in some instances involve the
delivery of securities or other underlying assets by a portfolio or its
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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.
SUPRANATIONAL AGENCIES. A portfolio may invest up to 10% of its assets in debt
obligations of supranational agencies such as: the International Bank for
Reconstruction and Development (commonly referred to as the World Bank), which
was chartered to finance development projects in developing member countries;
the European Community, which is a twelve-nation organization engaged in
cooperative economic activities; the European Coal and Steel Community, which is
an economic union of various European nations' steel and coal industries; and
the Asian Development Bank, which is an international development bank
established to lend funds, promote investment and provide technical assistance
to member nations in the Asian and Pacific regions. Debt obligations of
supranational agencies are not considered Government Securities and are not
supported, directly or indirectly, by the U.S. Government.
INDEX OPTIONS. In seeking to hedge all or a portion of its investments, a
portfolio may purchase and write put and call options on securities indices
listed on U.S. or foreign securities exchanges or traded in the over-the-counter
market, which indices include securities held in the portfolios. The portfolios
with such option writing authority may write only covered options. A portfolio
may also use securities index options as a means of participating in a
securities market without making direct purchases of securities.
A securities index measures the movement of a certain group of securities by
assigning relative values to the securities included in the index. Options on
securities indexes are generally similar to options on specific securities.
Unlike options on securities, however, options on securities indices do not
involve the delivery of an underlying security; the option in the case of an
option on a securities index represents the holder's right to obtain from the
writer in cash a fixed multiple of the amount by which the exercise price
exceeds (in the case of a call) or is less than (in the case of a put) the
closing value of the underlying securities index on the exercise date. A
portfolio may purchase and write put and call options on securities indexes or
securities index futures contracts that are traded on a U.S. exchange or board
of trade or a foreign exchange, to the extent permitted under rules and
interpretations of the Commodity Futures Trading Commission ("CFTC"), as a hedge
against changes in market conditions and interest rates, and for duration
management, and may enter into closing transactions with respect to those
options to terminate existing positions. A securities index fluctuates with
changes in the market values of the securities included in the index. Securities
index options may be based on a broad or narrow market index or on an industry
or market segment.
The delivery requirements of options on securities indices differ from options
on securities. Unlike a securities option, which contemplates the right to take
or make delivery of securities at a specified price, an option on a securities
index gives the holder the right to receive a cash "exercise settlement amount"
equal to (i) the amount, if any, by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of exercise, multiplied by
(ii) a fixed "index multiplier." Receipt of this cash amount will depend upon
the closing level of the securities index upon which the option is based being
greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. The amount of cash received will be equal to the
difference between the closing price of the index and the exercise price of the
option expressed in dollars times a specified multiple. The writer of the option
is obligated, in return for the premium received, to make delivery of this
amount. The writer may offset its position in securities index options prior to
expiration by entering into a closing transaction on an exchange or it may allow
the option to expire unexercised.
The effectiveness of purchasing or writing securities index options as a hedging
technique will depend upon the extent to which price movements in the portion of
a securities portfolio being hedged correlate with price movements of the
securities index selected. Because the value of an index option depends upon
movements in the level of the index rather than the price of a particular
security, whether a portfolio realizes a gain or loss from the purchase of
writing of options on an index depends upon movements in the level of prices in
the market generally or, in the case of certain indices, in an industry or
market segment, rather than movements in the price of a particular security. As
a result, successful
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use by a portfolio of options on securities indices is subject to the
sub-adviser's ability to predict correctly movements in the direction of the
market generally or of a particular industry. This ability contemplates
different skills and techniques from those used in predicting changes in the
price of individual securities.
Securities index options are subject to position and exercise limits and other
regulations imposed by the exchange on which they are traded. The ability of a
portfolio to engage in closing purchase transactions with respect to securities
index options depends on the existence of a liquid secondary market. Although a
portfolio will generally purchase or write securities index options only if a
liquid secondary market for the options purchased or sold appears to exist, no
such secondary market may exist, or the market may cease to exist at some future
date, for some options. No assurance can be given that a closing purchase
transaction can be effected when the sub-adviser desires that a portfolio engage
in such a transaction.
WEBS AND OTHER INDEX-RELATED SECURITIES. A portfolio may invest in shares in an
investment company whose shares are known as "World Equity Benchmark Shares" or
"WEBS." WEBS have been listed for trading on the American Stock Exchange, Inc.
The portfolios also may invest in the CountryBaskets Index Fund, Inc., or
another fund the shares of which are the substantial equivalent of WEBS. A
portfolio may invest in S&P Depositary Receipts, or "SPDRs." SPDRs are
securities that represent ownership in a long-term unit investment trust that
holds a portfolio of common stocks designed to track the performance of the S&P
500 Index. A portfolio investing in a SPDR would be entitled to the dividends
that accrue to the S&P 500 stocks in the underlying portfolio, less trust
expenses.
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 any premium received or initial margin or
collateral posted due to the potential additional margin and collateral
requirements associated with such positions.
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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 rates
to a greater degree than other types of debt securities having similar
maturities and credit quality.
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/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
Subject to a portfolio's investment restrictions and policies, 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 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 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 response to changes in interest rates.
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
Subject to a portfolio's investment restrictions and policies, asset-backed
securities represent interests in pools of consumer loans (generally unrelated
to mortgage loans) and most often are structured as pass-through securities.
Interest and principal payments ultimately depend on payment of the underlying
loans by individuals, although the securities may be supported by letters of
credit or other credit enhancements. The underlying assets (E.G., loans) are
subject to prepayments which shorten the securities' weighted average life and
may lower their returns. If the credit support or enhancement is exhausted,
losses or delays in payment may result if the required payments of principal
and interest are not made. The value of these securities also may change
because of changes in the market's perception of the creditworthiness of the
servicing agent for the pool, the originator of the pool, or the financial
institution providing the credit support or enhancement. A portfolio will
invest its assets in asset-backed securities subject to any limitations set
forth in its investment policies or restrictions.
/diamond/ PASS-THROUGH SECURITIES
Subject to a portfolio's investment restrictions and policies, a portfolio may
invest its net assets in various types of pass-through securities, such as
mortgage-backed securities, asset-backed securities and participation
interests. A pass-through security is a share or certificate of interest in a
pool of debt obligations that have been repackaged by an intermediary, such as
a bank or broker-dealer. The purchaser receives an undivided interest in the
underlying pool of securities. The issuers of the underlying securities make
interest and principal payments to the intermediary which are passed through to
purchasers, such as the portfolio. The most common type of pass-through
securities are mortgage-backed securities. GNMA Certificates are
mortgage-backed securities that evidence an undivided interest in a pool of
mortgage loans. GNMA Certificates differ from traditional
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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.
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 regarding income producing securities in
which a portfolio may invest.)
/diamond/ ILLIQUID AND RESTRICTED/144A SECURITIES
A portfolio may invest up to 15% of its net assets in illiquid securities
(I.E., securities that are not readily marketable).
In recent years, a large institutional market has developed for certain
securities that are not registered under the Securities Act of 1933 ("1933
Act"). Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend on an
efficient institutional market in which such unregistered securities can
readily be resold or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not dispositive of the
liquidity of such investments.
Rule 144A under the 1933 Act established a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. Institutional markets for restricted securities that
might develop as a result of Rule 144A could provide both readily ascertainable
values for restricted securities and the ability to liquidate an investment in
order to satisfy share redemption orders. An insufficient number of qualified
institutional buyers interested in purchasing a Rule 144A-eligible security
held by a portfolio could, however, adversely affect the marketability of such
portfolio security and the portfolio might be unable to dispose of such
security promptly or at reasonable prices.
The Fund's Board of Directors has authorized each portfolio's Sub-Adviser to
make liquidity determinations with respect to Rule 144A securities in
accordance with the guidelines established by the Board of Directors. Under the
guidelines, the portfolio's Sub-Adviser will consider the following factors in
determining whether a Rule 144A security is liquid: 1) the frequency of trades
and quoted prices for the security; 2) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers; 3)
the willingness of dealers to undertake to make a market in the security; and
4) the nature of the marketplace trades, including the time needed to dispose
of the security, the method of soliciting
23
<PAGE>
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 WRL Janus Growth, or WRL Janus 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/ 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.
24
<PAGE>
/diamond/ INVESTMENTS IN THE REAL ESTATE INDUSTRY AND REAL ESTATE INVESTMENT
TRUSTS ("REITS")
REITs are pooled investment vehicles which invest primarily in income producing
real estate, or real estate related loans or interests. REITs are generally
classified as equity REITs, mortgage REITs, or hybrid REITs.
Equity REITs invest the majority of their assets directly in real property and
derive income primarily from the collection of rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs invest the majority of their assets in real estate mortgages and
derive income from the collection of interest payments. Hybrid REITs invest
their assets in both real property and mortgages. REITs are not taxed on income
distributed to 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, 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.")
/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
adjustment 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.
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/ DEBT SECURITIES AND FIXED-INCOME INVESTING
Debt securities include securities such as corporate bonds and debentures;
commercial paper; trust preferreds, 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
25
<PAGE>
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 payment prospects and principal security for such bonds appear
adequate for the present, but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have speculative
characteristics. (See Appendix B 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/ 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 B for a description of debt securities rating.)
/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
investment.
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/ 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 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.
26
<PAGE>
MANAGEMENT OF THE FUND
/diamond/ DIRECTORS AND OFFICERS
The Fund is governed by a Board of Directors. Subject to the supervision of the
Board of Directors, the assets of each portfolio are managed by an investment
adviser and sub-advisers, and by portfolio managers. The Board of Directors is
responsible for managing the business and affairs of the Fund and oversees the
operation of the Fund by its officers. If also reviews the management of the
portfolios' assets by the investment adviser and sub-adviser. Information about
the Directors and officers of the Fund is as follows:
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
- - --------------------- -------------------------- -----------------------------------------------
<S> <C> <C>
PETER R. BROWN DIRECTOR Retired (January 200 - present) Chairman of the Board,
(DOB 5/10/28), Peter Brown Construction Company (construction contrac-
11180 6th Street East tors and engineers), Largo, Florida (1963 - 2000); Trustee
Treasure Island, Florida 33706 of IDEX Mutual Funds, Rear Admiral (Ret.) U.S. Navy
Reserve, Civil Engineer Corps.
CHARLES C. HARRIS DIRECTOR Trustee of IDEX Mutual Funds, (March, 1994 - present)
(DOB 7/15/30), former Trustee of IDEX Fund, IDEX II Series Fund and
35 Winston Drive IDEX Fund 3.
Clearwater, Florida 34616
RUSSELL A. KIMBALL, JR. DIRECTOR General Manager, Sheraton Sand Key Resort (resort
(DOB 8/17/44), hotel), Clearwater, Florida (1975 - present)
1160 Gulf Boulevard
Clearwater Beach, Florida 34630
JOHN R. KENNEY(1,2) CHAIRMAN OF THE BOARD Chairman of the Board, Director and Co-CEO of Great
(DOB 2/8/38) OF DIRECTORS AND Companies, L.L.C.; Chairman of the Board of Directors
PRESIDENT (1982 - present), Chief Executive Officer (1982 - present),
President (1978 - 1987 and December, 1992 - 1999),
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), St. Petersburg, Florida; Chairman of the Board of
Directors (September, 1996 - present), WRL Investment
Services, Inc., St. Petersburg, Florida; Chairman of the
Board of Directors (February, 1997 - present), AEGON
Asset Management Services, Inc., St.Petersburg, Florida;
Director (December, 1990 - present); IDEX Management,
Inc., (investment adviser), St. Petersburg, Florida; Trustee
and Chairman (September, 1996 - present) of IDEX
Mutual Funds (investment companies) St. Petersburg,
Florida.
PAT BAIRD DIRECTOR AND EXECUTIVE President and Trustee (November, 1999 - present), IDEX
(DOB 1/19/54) VICE PRESIDENT Mutual Funds; Executive Vice President, Chief Operating
433 Edgewood Road, NE, Officer (February, 1996 - present) Executive Vice
Cedar Rapids, Iowa 52499 President and CFO (February, 1995 - February, 1996),
Vice President, Chief Financial Officer (May, 1992 -
February, 1995), AEGON USA.
ALLAN HAMILTON(1,2) TREASURER, PRINCIPAL Vice President and Controller (1987 - present), Treasurer
(DOB 11/26/56) FINANCIAL OFFICER (February, 1997 - present).
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
- - --------------------- -------------------------- -----------------------------------------------
<S> <C> <C>
JOHN K. CARTER(1,2) VICE PRESIDENT, Vice President, Secretary and Counsel (December, 1999 -
(DOB 04/24/61) SECRETARY AND COUNSEL present), IDEX Mutual Funds; Vice President, Counsel and
Assistant Secretary (April, 2000 - present) of Idex Investor
Services, Inc., AEGON Asset Management Services, Inc.
and WRL Investment Services, Inc.; Vice President,
Counsel, Compliance Officer and Assistant Secretary
(April, 2000 - present) of Idex Management, Inc. and WRL
Investment Management, Inc.; Vice President and Counsel
(March, 1997 - May 1999), Salomon Smith Barney;
Assistant Vice President, Associate Corporate Counsel
and Trust Officer (September, 1993 - March 1997),
Franklin Templeton Mutual Funds.
THOMAS E. PIERPAN(1,2) ASSISTANT SECRETARY Vice President, Secretary and Counsel (December, 1997 -
(DOB 10/18/43) AND VICE PRESIDENT December 1999); Assistant Secretary (March, 1995 -
December, 1997) of WRL Series Funds, Inc.; Vice
President and Assistant Secretary 1999 - present), Vice
President, Counsel and Secretary (December, 1997 -
1999) of IDEX Mutual Funds (mutual fund); Assistant Vice
President, Counsel and Assistant Secretary (November,
1997 - present) of Intersecurities, Inc. (broker-dealer);
Senior Vice President General Counsel and Assistant
Secretary (April 2000 - present) of AEGON Equity Group;
Senior Vice President and General Counsel (1999 -
present), Vice President (November, 1993 - present),
Associate General Counsel (February, 1995 - 1997),
Assistant Secretary, (February, 1995 - present) of Western
Reserve Life Assurance of Ohio.
ALAN M. YAEGER(1,2) EXECUTIVE VICE Executive Vice President (June, 1993 - present), Chief
(DOB 10/21/46) PRESIDENT Financial Officer (December, 1995 - present), Actuary
(1972 - present), Western Reserve Life Assurance
Company of Ohio; Director (September, 1996 - present),
WRL Investment Management, Inc. (investment adviser)
St. Petersburg, Florida; Director (September, 1996 -
present), WRL Investment Services, Inc., St. Petersburg,
Florida.
</TABLE>
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Bos 5068, Clearwater, Florida 33758-5068.
(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 $10,000 to each Director
who is not affiliated with the Investment Adviser or the Sub-Advisers
("disinterested Director"). Each disinterested Director also receives $1,500,
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, 1999. The compensation table provides
compensation amounts paid to disinterested Directors of the Fund for the fiscal
year ended December 31, 1999.
DIRECTOR'S FEES PAID - YEAR ENDED DECEMBER 31, 1999
PORTFOLIO AMOUNT PAID
- - --------- -----------
WRL Alger Aggressive Growth $ 6,000
WRL Janus Global 8,000
WRL Janus Growth 11,000
WRL LKCM Strategic Total Return 3,000
WRL J.P. Morgan Real Estate Securities -0-
28
<PAGE>
Compensation Table
------------------
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS TOTAL COMPENSATION
AGGREGATE ACCRUED AS ESTIMATED PAID TO DIRECTORS FROM
COMPENSATION FROM PART OF ANNUAL BENEFITS WRL SERIES FUND, INC. AND
NAME OF PERSON, POSITION WRL SERIES FUND, INC. FUND EXPENSES* UPON RETIREMENT IDEX MUTUAL FUNDS
- - ------------------------ --------------------- -------------- --------------- -------------------------
<S> <C> <C> <C> <C>
Peter R. Brown, Director $15,000 0 N/A $43,750
Charles C. Harris, Director 15,500 0 N/A 43,750
Russell A. Kimball, Jr., Director 15,500 0 N/A 15,500
</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 Mutual Funds to a disinterested Director or
Trustee on a current basis for services rendered as director. Deferred
compensation amounts will accumulate based on the value of Class A shares of a
portfolio of IDEX Mutual Funds (without imposition of sales charge), as elected
by the Director. As of April 1, 1999, 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") located at 570 Carillon
Parkway, St. Petersburg, FL 33716, 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 N.V., 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 (that commenced operations prior to that date) on
December 16, 1996. The Investment Advisory Agreement provides that it will
continue in effect 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 p. 31.
29
<PAGE>
ADVISORY FEE. The method of computing the investment advisory fee is fully
described in the Fund's prospectus. For the years ended December 31, 1999, 1998
and 1997, the Investment Adviser was paid fees for its services to each
portfolio in the following amounts:
ADVISORY FEES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
PORTFOLIO 1999 1998 1997
- - --------- ----------- ----------- -----------
<S> <C> <C> <C>
WRL Alger Aggressive Growth $ 5,873,932 $ 3,361,604 $ 2,249,801
WRL Janus Global 10,293,952 7,537,671 5,591,818
WRL Janus Growth 25,489,599 18,111,607 13,716,824
WRL LKCM Strategic Total Return 4,766,336 4,485,018 3,703,670
WRL J.P. Morgan Real Estate Securities(1) 24,531 9,338 N/A
----------- ----------- -----------
TOTAL $46,448,350 $33,505,238 $25,262,113
=========== =========== ===========
</TABLE>
- - --------------
(1) Portfolio commenced operations May 1, 1998.
PAYMENT OF EXPENSES. Under the terms of the Investment Advisory Agreement, the
Investment Adviser is responsible for providing investment advisory services
and furnishing office space for officers and employees of the Investment
Adviser connected with investment management of the portfolios.
Each portfolio pays: all expenses incurred in connection with the formation and
organization of a portfolio, including the preparation (and filing, when
necessary) of the portfolio's contracts, plans, and documents, conducting
meetings of organizers, directors and shareholders; preparing and filing the
post-effective amendment to the Fund's registration statement effecting
registration of a portfolio and its shares under the 1940 Act and the 1933 Act
and all other matters relating to the information and organization of a
portfolio and the preparation for offering its shares; expenses in connection
with ongoing registration or qualification requirements under Federal and state
securities laws; investment advisory fees; pricing costs (including the daily
calculations of net asset value); brokerage commissions and all other expenses
in connection with execution of portfolio transactions, including interest; all
Federal, state and local taxes (including stamp, excise, income and franchise
taxes) and the preparation and filing of all returns and reports in connection
therewith; any compensation, fees, or reimbursements which the Fund pays to its
Directors who are not "interested persons," as that phrase is defined in the
1940 Act, of the Fund or WRL Management; compensation of the Fund's custodian,
administrative and transfer agent, registrar and dividend disbursing agent;
legal, accounting and printing expenses; other administrative, clerical,
recordkeeping and bookkeeping expenses; auditing fees; certain insurance
premiums; services for shareholders (including allocable telephone and personnel
expenses); costs of certificates and the expenses of delivering such
certificates to the purchaser of shares relating thereto; expenses of local
representation in Maryland; fees and/or expenses payable pursuant to any plan of
distribution adopted with respect to the Fund in accordance with Rule 12b-1
under the 1940 Act; expenses of shareholders' meetings and of preparing,
printing, and distributing notices, proxy statements and reports to
shareholders; expenses of preparing and filing reports with Federal and state
regulatory authorities; all costs and expenses, including fees and
disbursements, of counsel and auditors, filing and renewal fees and printing
costs in connection with the filing of any required amendments, supplements or
renewals of registration statement, qualifications or prospectuses under the
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,
2001, to pay expenses on behalf of the portfolios to the extent normal
operating expenses (including investment advisory fees but excluding interest,
taxes, brokerage fees, commissions and extraordinary charges) exceed, as a
percentage of each portfolio's average daily net assets, 1.00%. The following
expenses were paid by the investment adviser for the fiscal years ended
December 31, 1999, 1998, and 1997 (WRL served as investment adviser for 1996):
Portfolio Expenses Paid by Investment Adviser
YEAR ENDED DECEMBER 31
-------------------------------
PORTFOLIO 1999 1998 1997
- - --------- ------- ------- -------
WRL Alger Aggressive Growth $ -0- $ -0- $ -0-
WRL Janus Global -0- -0- -0-
WRL Janus Growth -0- -0- -0-
WRL LKCM Strategic Total Return -0- -0- -0-
WRL J.P. Morgan Real Estate Securities(1) 51,924 28,275 N/A
- - --------------
(1) Portfolio commenced operations on May 1, 1998.
30
<PAGE>
Effective May 1, 2000, the Investment Adviser has entered into an agreement
with the Fund on behalf of, and pursuant to which, the Investment Adviser will
be reimbursed for operating expenses paid on behalf of a portfolio during the
previous 36 months, but only if, after such reimbursement, the portfolio's
expense ratio does not exceed the expense cap. The agreement has an initial
term through April 30, 2001, and will automatically renew for one-year terms
unless terminated by a 30 day written notice to the Fund.
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. The following Administrative Services fees were paid by
the portfolios for the fiscal year ended December 31, 1999:
ADMINISTRATIVE SERVICES FEES
PORTFOLIO 1999 1998 1997
- - --------- -------- -------- --------
WRL Alger Aggressive Growth $178,687 $ 73,408 $122,776
WRL Janus Global 223,428 99,277 165,294
WRL Janus Growth 306,127 143,999 260,374
WRL LKCM Strategic Total Return 89,085 47,197 87,766
WRL J.P. Morgan Real Estate
Securities 384 -0- N/A
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 AFSG Securities Corporation (AFSG) located at 4333
Edgewood Road NE, Cedar Rapids, Iowa 52494. The Distribution Plan and related
Agreement were approved by the Fund's Board of Directors, including a majority
of Directors who are not "interested persons" of the Fund (as defined in the
1940 Act) on October 3, 1996 as amended by the Board March 29, 1999, and the
Distribution Plan was approved by the shareholders of each portfolio of the
Fund on December 16, 1996 (by all portfolio's that had commenced operations on
that date). AFSG is an affiliate of the Investment Adviser.
Under the Distribution Plan and Distribution Agreement, the Fund, on behalf of
the portfolios, will reimburse AFSG after each calendar month for certain Fund
distribution expenses incurred or paid by AFSG, 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 AFSG 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.
AFSG submits to the Directors of the Fund for approval annual distribution
budgets and quarterly reports of distribution expenses with respect to each
portfolio. AFSG 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 AFSG deems fair and are approved by the Fund's Board
of Directors. AFSG has determined that it will not seek payment by the Fund of
distribution expenses incurred with respect to any portfolio before April 30,
2001. (ISI waived payment by the Fund for the fiscal year ended December 31,
1999.) Prior to AFSG 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
Each Sub-Adviser serves, pursuant to each Sub-Advisory Agreement dated January
1, 1997 WRL May 1, 1998 with respect to WRL J.P. Morgan Real Estate Securities)
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 as amended
May 1, 1999, and by the shareholders of each portfolio of the Fund on December
16, 1996 (by all portfolio's that had commenced operations on that date). The
Sub-Advisory
31
<PAGE>
Agreements provide that they will continue in effect 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. The agreements may also be terminated under the
term of an Exemptive Order granted by the SEC under section 69(c) of the 1940
Act from section 15(a) and rule 18f-2 under the 1940 Act. (Release #23379).
Pursuant to the Sub-Advisory Agreements, each Sub-Adviser provides investment
advisory assistance and portfolio management advice to the Investment Adviser
for their respective portfolio(s). Subject to review by the Investment Adviser
and the Board of Directors of the Fund, the Sub-Advisers are responsible for
the actual management of their respective portfolio(s) and for making decisions
to buy, sell or hold a particular security. Each Sub-Adviser bears all of its
expenses in connection with the performance of its services under their Sub-
Advisory Agreement such as compensating and furnishing office space for their
officers and employees connected with investment and economic research, trading
and investment management of the respective portfolio(s).
Each Sub-Adviser is a registered investment adviser under the Investment
Advisers Act of 1940, as amended. The Sub-Advisers for the portfolios of the
Fund are:
/five diamonds/
FRED ALGER MANAGEMENT, INC.
Fred Alger Management, Inc. ("Alger") serves as Sub-Adviser to the WRL Alger
Aggressive Growth.
Alger, located at One World Trade Center, Suite 9333, New York, New York 10048,
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 is generally engaged in the business of
rendering investment advisory services to institutions and, to a lesser extent,
individuals. Alger has been engaged in the business of rendering investment
advisory services since 1964 and, as of March 31, 2000, had approximately $21.8
billion under management.
/diamond/ PORTFOLIO MANAGER:
DAVID D. ALGER AND DAVID HYUN are primarily responsible for the day-to-day
management of WRL Alger Aggressive Growth. Mr. Alger has been employed by Alger
Management as Executive Vice President and Director of Research Since 1971 and
as President since 1995. Mr. Hyun has been employed by Alger Management as a
senior research analyst since 1991, as a portfolio manager since 1997, and
senior vice president since 1998. Mr. Alger has served as portfolio Manager of
WRL Alger Aggressive Growth since its inception. Mr. Hyun has served as
Co-portfolio Manager of WRL Alger Aggressive Growth since February 1998. Mr.
Alger and Mr. Hyun also serve as portfolio managers for other mutual funds and
investment accounts managed by Alger Management.
/five diamonds/
JANUS CAPITAL CORPORATION
Janus Capital Corporation ("Janus") serves as the sub-adviser to the WRL Janus
Growth and the WRL Janus Global.
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 $261 billion as of February 1, 2000. Kansas City
Southern Industries, Inc. ("KCSI") owns 82% of Janus indirectly through Stilwell
Financial, Inc.. KCSI, whose address is 114 West 11th Street, Kansas City,
Missouri 64105-1804, is a publicly-traded holding company with a 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.
/diamond/ PORTFOLIO MANAGERS:
EDWARD KEELY has served as manager of the WRL Janus Growth since January 2000.
He previously served as co-portfolio manager of this portfolio since January
1999. Prior to joining Janus in 1998, Mr. Keely was a senior vice president of
investments at Founders.
HELEN YOUNG HAYES, CFA AND LAURENCE CHANG, CFA have served as co-portfolio
managers of the WRL Janus Global since January 2000. Ms. Hayes previously
served as manager of this portfolio since its inception. She has been employed
by Janus since 1987.
Mr. Chang has been employed by Janus since 1993. Before joining Janus, Mr.
Chang was a project director at the National Security Archive.
/five diamonds/
LUTHER KING CAPITAL
MANAGEMENT CORPORATION
Luther King Capital Management Corporation ("LKCM" serves as sub-adviser to WRL
LKCM Strategic Total Return.
LKCM 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
32
<PAGE>
investment management services to accounts of individual investors, mutual
funds, and other institutional investors. Luther King has served as an
investment adviser for approximately 18 years; as of December 31, 1999, the
total assets managed by Luther King was approximately $ billion.
/diamond/ PORTFOLIO MANAGERS:
LUTHER KING, JR., CFA, AND SCOT HOLLMANN, CFA, have served as portfolio
managers of the WRL LKCM Strategic Total Return 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.
/five diamonds/
J.P. MORGAN INVESTMENT MANAGEMENT INC.
J.P. Morgan Investment Management, Inc. ("J.P. Morgan") serves as sub-adviser
to WRL J.P. Morgan Money Market and WRL J.P. Morgan Real Estate Securities.
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.
/diamond/ PORTFOLIO MANAGER:
DANIEL P. O'CONNOR has served as the portfolio manager of the WRL J.P. Morgan
Real Estate Securities portfolio since its inception. 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 of Real Estate Securities at INVESCO, an
investment management firm. In that position, Mr. O'Connor was responsible for
developing the firm's REIT investment management process. 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.
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 management by the Sub-Adviser. The table below lists those
percentages by portfolio.
PORTFOLIO PERCENTAGE OF AVERAGE DAILY NET ASSETS
- - --------- --------------------------------------
WRL Janus Growth 0.40%(1)
WRL Janus Global 0.40%(2)
WRL LKCM Strategic Total Return 0.40%
WRL Alger Aggressive Growth 0.40%
WRL J.P. Morgan Real Estate Securities 0.40%
- - --------------
(1) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the first $3 billion of the portfolio's average daily net assets
(resulting in a net fee of 0.3875%) and 0.25% of assets above $3 billion
(resulting in a net fee of 0.375%). This waiver will terminate on June 25,
2000.
(2) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the portfolio's average daily net assets above $2 billion (resulting in a
net fee of 0.3875%). This waiver will terminate on June 25, 2000.
The method of computing each Sub-Adviser's fees is set forth above. For the
years ended December 31, 1999, 1998 and 1997 each Sub-Adviser was paid fees for
their services in the following amounts:
SUB-ADVISORY FEES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
SUB-ADVISER PORTFOLIO 1999 1998 1997
- - ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Alger WRL Alger Aggressive Growth $ 2,936,966 $ 1,680,802 $ 1,124,900
Janus WRL Janus Growth(2) 12,744,800 9,055,804 6,858,412
WRL Janus Global(3) 5,146,976 3,768,835 2,795,909
LKCM WRL LKCM Strategic Total Return 2,383,168 2,242,509 1,851,835
J.P. Morgan WRL J.P. Morgan Real Estate Securities(1) 12,266 4,669 N/A
</TABLE>
- - --------------
(1) Portfolio commenced operations May 1, 1998.
(2) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the first $3 billion of the portfolio's average daily net assets (resulting
in a net fee of 0.3875%) and 0.25% of assets above $3 billion (resulting in
a net fee of 0.375%). This waiver will terminate on June 25, 2000.
(3) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the portfolio's average daily net assets above $2 billion (resulting in a
net fee of 0.3875%). This waiver will terminate on June 25, 2000.
33
<PAGE>
Through June 25, 2000, provided that it continues to serve as sub-adviser for
the portfolios, Janus Capital will compensate WRL for its services in
connection with promotion, marketing and distribution in an amount equal to
0.0375% of the average daily net assets of WRL Janus Growth on the first $3
billion of assets and 0.075% on assets in excess of $3 billion. With respect to
WRL Janus Global, the amount will be equal to 0.0375% of the portfolio's
average daily net assets above $2 billion.
/diamond/ JOINT TRADING ACCOUNTS
Subject to approval by the Fund's Board, the WRL Janus Growth and WRL Janus
Global 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 WRL Janus Growth and WRL Janus Global 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.
/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.
The Board is required to review and approve the Code of Ethics for each
Sub-Adviser. Each Sub-Adviser is also 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/ ADMINISTRATIVE AND TRANSFER AGENCY SERVICES
Effective January 1, 1997, the Fund entered into an Administrative Services and
Transfer Agency Agreement with WRL Services located at 570 Carillon Parkway,
St. Petersburg, Florida 33716, 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
servicesin connection with its serving as the Fund's investment adviser.
PORTFOLIO TRANSACTIONS AND BROKERAGE
/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 held during the year. The WRL J.P. Morgan Real
Estate Securities 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. Increased turnover results in higher brokerage costs or mark-up
charges for a portfolio; these charges are ultimately borne by the
policyowners.
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.
34
<PAGE>
The following table provides the portfolios' turnover rates for the fiscal years
ended December 31, 1999, 1998 and 1997:
Portfolio Turnover Rates
YEAR ENDED DECEMBER 31
--------------------------------
PORTFOLIO 1999 1998 1997
- - --------- ------ ------ ------
WRL Alger Aggressive Growth 101.71% 117.44% 136.18%
WRL Janus Global 68.10% 87.36% 97.54%
WRL Janus Growth 70.95% 35.29% 85.88%
WRL LKCM Strategic Total Return 45.42% 49.20% 48.20%
WRL J.P. Morgan Real Estate Securities(1) 189.80% 100.80% N/A
- - ------------------------------
(1) Portfolio commenced operations on May 1, 1998.
The future annual turnover rates cannot be precisely predicted, although an
annual turnover rate in excess of 100% is not presently anticipated for WRL
Alger Aggressive Growth; 150% for the WRL Janus Growth; and 200% for the WRL
Janus Global.
There are no fixed limitations regarding the portfolio turnover rates of the
portfolios. Portfolio turnover rates are expected to fluctuate under constantly
changing economic conditions and market circumstances. Higher turnover rates
tend to result in higher brokerage fees. Securities initially satisfying the
basic policies and objective of each portfolio may be disposed of when they are
no longer deemed suitable.
/diamond/ PLACEMENT OF PORTFOLIO BROKERAGE
Subject to policies established by the Board of Directors of the Fund, each
portfolio's Sub-Adviser is primarily responsible for placement of a portfolio's
securities transactions. In placing orders, it is the policy of a portfolio to
obtain the most favorable net results, taking into account various factors,
including price, dealer spread or commissions, if any, size of the transaction
and difficulty of execution. While each Sub-Adviser generally will seek
reasonably competitive spreads or commissions, a portfolio will not necessarily
be paying the lowest spread or commission available. A portfolio does not have
any obligation to deal with any broker, dealer or group of brokers or dealers
in the execution of transactions in portfolio securities.
Decisions as to the assignment of portfolio brokerage business for a portfolio
and negotiation of its commission rates are made by the Sub-Adviser, whose
policy is to obtain "best execution" (prompt and reliable execution at the most
favorable security price) of all portfolio transactions. In placing portfolio
transactions, the Sub-Adviser may give consideration to brokers who provide
supplemental investment research, in addition to such research obtained for a
flat fee, to the Sub-Adviser, and pay spreads or commissions to such brokers or
dealers furnishing such 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.
35
<PAGE>
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., One
World Trade Center, Suite 9333, New York, New York 10048. As stated above, any
such placement of portfolio business will be subject to the ability of the
broker-dealer to provide best execution and to the Conduct Rules of the
National Association of Securities Dealers, Inc.
COMMISSIONS PAID BY THE PORTFOLIOS
<TABLE>
<CAPTION>
AGGREGATE COMMISSIONS AFFILIATED BROKERAGE COMMISSIONS
YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31
------------------------------------ -----------------------------------------------------------
PORTFOLIO 1999 1998 1997 1999 % 1998 % 1997 %
- - --------- ---------- ---------- ---------- -------- ----- ------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
WRL Alger Aggressive Growth(1) $ 907,331 $ 916,267 $ 754,459 $903,540 99.58 912,105 99.55 $749,587 99.35%
WRL Janus Global 2,219,248 2,373,255 2,305,145 N/A N/A N/A N/A N/A N/A
WRL Janus Growth 2,717,764 1,023,925 1,367,104 N/A N/A N/A N/A N/A N/A
WRL LKCM Strategic
Total Return 513,667 469,460 348,083 N/A N/A N/A N/A N/A N/A
WRL J.P. Morgan Real
Estate Securities 17,545 8,206 N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- - ------------------------------
(1) The percentage of the portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through Fred Alger Company,
Incorporated for the fiscal year ended December 31, 1999, 1998 and 1997
was 98.90%, 99.27% and 98.37%, respectively. WRL Alger Aggressive Growth
paid all its affiliated brokerage commissions to Fred Alger & Company,
Incorporated.
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
36
<PAGE>
p.m., Eastern Time) on each day the Exchange is open. (Currently the Exchange
is closed on New Year's Day, Martin Luther King's Birthday, President's Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.) The per share net asset value of a portfolio is determined by
dividing the total value of the securities and other assets, less liabilities,
by the total number of shares outstanding. In determining net asset value,
securities listed on the national securities exchanges and traded on the NASDAQ
National Market are valued at the closing prices on such markets, or if such a
price is lacking for the trading period immediately preceding the time of
determination, such securities are valued at their current bid price. Foreign
securities and currencies are converted to U.S. dollars using the exchange rate
in effect at the close of the Exchange. Other securities for which quotations
are not readily available are valued at fair values as determined in good faith
by a portfolio's Investment Adviser under the supervision of the Fund's Board
of Directors. Money market instruments maturing in 60 days or less are valued
on the amortized cost basis. Values of gold bullion held by a portfolio are
based upon daily quotes provided by banks or brokers dealing in such
commodities.
CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief description of how performance is calculated.
The following sections describe how performance data is calculated in greater
detail.
/diamond/ TOTAL RETURN
Total return quotations for each of the portfolios are computed by finding the
average annual compounded rates of return over the relevant periods that would
equate the initial amount invested to the ending redeemable value, according to
the following equation:
P (1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value (at the end
of the applicable period of a hypotheti-
cal $1,000 payment made at the begin-
ning of the applicable period)
The total return quotation calculations for a portfolio reflect the deduction
of a proportionate 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 are based on a specific thirty-day period
and are computed by dividing the net investment income per share earned during
the period by the maximum offering price per share on the last date of the
period, according to the following formula:
a-b
YIELD = 2 [ (--- + 1)6 - 1]
cd
Where: a = dividends and interest earned dur-
ing the period by the portfolio
b = expenses accrued for the period
(net of reimbursement)
c = the average daily number of shares
outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per
share on the last day of the period
37
<PAGE>
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 either qualified, and expects to continue to qualify, for
treatment as a regulated investment company ("RIC") under the Internal Revenue
Code of 1986, as amended (the "Code"). In order to qualify for that treatment,
a portfolio must distribute to its Policyowners for each taxable year at least
90% of its investment company taxable income ("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) 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 (3) 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. If each portfolio qualifies as a regulated investment
company and distributes to its shareholders substantially all of its net income
and net capital gains, then each portfolio should have little or no income
taxable to it under the Code.
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 generally includes all securities of the same issuer). For
purposes of section 817(h), all securities of the same issuer, all interests in
the same real property project, and all interest in the same commodity are
treated as a single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities and political
subdivisions all will be considered securities issued by the same issuer.
If a portfolio fails to qualify as a regulated investment company, the
portfolio will be subject to federal, and possibly state, corporate taxes on
its taxable income and gains (without any deduction for its distributions to
its shareholders) and distributions to its shareholders will constitute
ordinary income to the extent of such Fund's available earnings and profits.
Owners of variable life insurance and annuity contracts which have invested in
such a portfolio might be taxed currently on the investment earnings under
their contracts and thereby lose the benefit of tax deferral. In addition, if a
portfolio failed to comply with the diversification requirements of section
817(h) of the Code and the regulations thereunder, owners of variable life
insurance and annuity contracts which have invested in the portfolio could be
taxed on the investment earnings under their contracts and thereby lose the
benefit of tax deferral. For additional information concerning the consequences
of failure to meet the requirements of section 817(h), see the 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, 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.
Foreign Investments - portfolios investing in foreign securities or currencies
(which may include [list portfolios so authorized] may be required to pay
withholding, income or other taxes to foreign governments or U.S. possession.
Foreign tax withholding from dividends and interest, if any, is generally at a
rate between 10% and 35%. The investment yield of any portfolio that invests in
foreign securities or currencies is reduced by these foreign taxes. Holders of
Policies and Annuity Contracts investing in such portfolios bear the cost of
any foreign taxes but will not be able to claim a foreign tax credit or
deduction for these foreign taxes. Tax conventions between certain countries
and the United States may reduce or eliminate these foreign taxes, however, and
38
<PAGE>
foreign countries generally do not impose taxes on capital gains in respect of
investments by foreign investors.
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.
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 the portfolio 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. A portfolio, however, may qualify for, and may make, an
election permitted under Section 853 of the Code so that shareholders may be
eligible to claim a credit or deduction on their Federal income tax returns for,
and will be required to treat as part of the amounts distributed to them, their
pro rata portion of qualified taxes paid or incurred by the portfolio to foreign
countries (which taxes relate primarily to investment income). The portfolio may
make an election under Section 853 of the Code, provided that more than 50% of
the value of the portfolio's total assets at the close of the taxable year
consists of securities in foreign corporations, and the portfolio satisfies
applicable distribution provisions of the Code. The foreign tax credit available
to shareholders is subject to certain limitations imposed by the Code. In
addition, another election is available that would involve marking to market a
portfolio's PFIC stock at the end of each taxable year (and on certain other
dates prescribed in the Code), with the result that unrealized gains are treated
as though they were realized although any such gains recognized will be ordinary
income rather than capital gain. If this election were made, tax at the
portfolio level under the PFIC rules would be eliminated, but a portfolio could,
in limited circumstances, incur nondeductible interest charges. A portfolio's
intention to qualify annually as a regulated investment company may limit a
portfolio's election with respect to PFIC stock.
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.
39
<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: WRL Alger Aggressive Growth, WRL Janus Global, WRL Janus Growth,
WRL LKCM Strategic Total Return, and WRL J.P. Morgan Real Estate Securities.
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 of the Fund for the year
ended December 31, 1999 and the report of the Fund's independent certified
public accountants are included in the 1999 Annual Report, and are incorporated
herein by reference to such report.
OTHER INFORMATION
/diamond/ CERTIFIED PUBLIC ACCOUNTANTS
PricewaterhouseCoopers LLP, located at 400 North Ashley Street, Suite 2800,
Tampa, Florida 33602, serves as the Fund's indpendent certified public
accountants. The Fund has engaged PricewaterhouseCoopers LLP to examine, in
accordance with generally accepted auditing standards, the financial statements
of each of the Fund's portfolios.
/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.
40
<PAGE>
APPENDIX A
DESCRIPTION OF PORTFOLIO SECURITIES
The following is intended only as a supplement to the information
contained in the Prospectus and should be read only in conjunction with the
Prospectus. Terms defined in the Prospectus and not defined herein have the
same meanings as those in the Prospectus.
1. CERTIFICATE OF DEPOSIT.* A certificate of deposit generally is a
short-term, interest bearing negotiable certificate issued by a commercial bank
or savings and loan association against funds deposited in the issuing
institution.
2. EURODOLLAR CERTIFICATE OF DEPOSIT.* A Eurodollar certificate of
deposit is a short-term obligation of a foreign subsidiary of a U.S. bank
payable in U.S. dollars.
3. FLOATING RATE NOTE.* A floating rate note is debt issued by a
corporation or commercial bank that is typically several years in term but
whose interest rate is reset every one to six months.
4. 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 and 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.
A-2
<PAGE>
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 SEC 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.
A-3
<PAGE>
APPENDIX B
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 capac-
ity to pay principal and interest then for higher rated bonds.
BB, B, and Predominantly speculative with respect to the issuer's capacity to
CC, CC, C meet required interest and principal payments. BB - lowest degree of
speculation; C- the highest degree of speculation. Quality and
protective characteristics outweighed by large uncertainties or major
risk exposure to adverse conditions.
D In default.
</TABLE>
PLUS (+) OR MINUS (-) - The ratings from "AA" to "BBB" may be modified by the
addition of a plus or minus to show relative standing within the major rating
categories.
UNRATED - Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
<TABLE>
<S> <C> <C>
MOODY'S INVESTORS SERVICE, INC. Aaa Highest qualty, 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 Medum-grade obligations; neither highly protected nor poorly
secured. Interest and principal appear adequate for the present but
certain protective elements may be lacking or may be unreliable over
any great length of time.
Ba More unceratin, 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 assur-
ance of timely interest and principal payments or maintenance of
other contract terms over time.
Caa Poor standing, may be in default; elements of danger with respect to
principal or interest payments.
Ca Speculative in a high degree; could be in default or have other
marked short-comings.
C Lowest-rated; extremely poor prospects of ever attaining investment
standing.
</TABLE>
UNRATED - Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is 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.
B-1
<PAGE>
WRL SERIES FUND, INC.
WRL VKAM EMERGING GROWTH
WRL ALGER AGGRESSIVE GROWTH
WRL JANUS GLOBAL
WRL JANUS GROWTH
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 570 Carillon Parkway, St. Petersburg, FL 33716 or by calling the
Fund at (800) 851-9777.
Investment Adviser:
WRL INVESTMENT MANAGEMENT, INC.
Sub-Advisers:
VAN KAMPEN ASSET MANAGEMENT INC.
FRED ALGER MANAGEMENT, INC.
JANUS CAPITAL CORPORATION
The date of the Prospectus to which this Statement of Additional Information
relates and the date of this Statement of Additional Information is May 1,
2000.
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TABLE OF CONTENTS
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FUND HISTORY 1
INVESTMENT OBJECTIVES AND POLICIES 2
Investment Restrictions 2
WRL VKAM Emerging Growth 2
WRL Alger Aggressive Growth 3
WRL Janus Global 4
WRL Janus Growth 5
INVESTMENT POLICIES 6
Lending 6
Borrowing 6
Short Sales 7
Foreign Securities 7
Foreign Bank Obligations 8
Forward Foreign Currency Contracts 8
When-Issued, Delayed Settlement and Forward Delivery Securities 8
Repurchase and Reverse Repurchase Agreements 8
Temporary Defensive Position 9
U.S. Government Securities 9
Non-Investment Grade Debt Securities 9
Convertible Securities 10
Investments in Futures, Options and Other Derivative Instruments 10
Zero Coupon, Pay-In-Kind and Step Coupon Securities 20
Warrants and Rights 20
Mortgage-Backed Securities 21
Asset-Backed Securities 21
Pass-Through Securities 21
Other Income Producing Securities 22
Illiquid and Restricted/144A Securities 22
Other Investment Companies 23
Bank and Thrift Obligations 23
Variable Rate Master Demand Notes 23
Debt Securities and Fixed-Income Investing 24
High Yield/High-Risk Securities 24
Trade Claims 25
MANAGEMENT OF THE FUND 25
Directors and Officers 25
The Investment Adviser 27
The Sub-Advisers 30
Joint Trading Accounts 32
Personal Securities Transactions 32
Administrative and Transfer Agency Services 33
PORTFOLIO TRANSACTIONS AND BROKERAGE 33
Portfolio Turnover 33
Placement of Portfolio Brokerage 33
PURCHASE AND REDEMPTION OF SHARES 35
Determination of Offering Price 35
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Net Asset Valuation 35
CALCULATION OF PERFORMANCE
RELATED INFORMATION 36
Total Return 36
Yield Quotations 36
TAXES 36
CAPITAL STOCK OF THE FUND 38
REGISTRATION STATEMENT 38
FINANCIAL STATEMENTS 38
OTHER INFORMATION 38
Independent Certified Public Accountants 38
Custodian 38
Appendix A - Description of Portfolio Securities A-1
Appendix B - Brief Explanation of
Rating Categories B-1
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/DIAMOND/
FUND HISTORY
The Fund was incorporated under the laws of the State of Maryland on August 21,
1985 and is registered with the Securities and Exchange Commission ("SEC") as
an open-end management investment company.
The Fund offers its shares only for purchase by the separate accounts of life
companies to fund benefits under variable life insurance policies or variable
annuity contracts issued by AUSA Life Insurance Company, Inc. ("AUSA"), PFL
Life Insurance Company ("PFL"), Western Reserve Life Assurance Co. of Ohio
("WRL") and Peoples Benefit Life Insurance Company ("Peoples") and Transamerica
Occidental Life Insurance Company ("Transamerica") (the "Life Companies").
Shares may be offered to other life insurance companies in the future.
Because Fund shares are sold to separate accounts established to receive and
invest premiums received under variable life insurance policies and purchase
payments received under the variable annuity contracts, it is conceivable that,
in the future, it may become disadvantageous for variable life insurance
separate accounts and variable annuity separate accounts of the Life Companies
to invest in the Fund simultaneously. Neither the Life Companies nor the Fund
currently foresees any such disadvantages or conflicts, either to variable life
insurance policyholders or to variable annuity contract owners. Any Life
Company may notify the Fund's Board of a potential or existing conflict. The
Fund's Board will then determine if a material conflict exists and what action,
if any, should be taken in response. Such action could include the sale of Fund
shares by one or more of the separate accounts, which could have adverse
consequences. Material conflicts could result from, for example, (1) changes in
state insurance laws, (2) changes in Federal income tax laws, or (3)
differences in voting instructions between those given by variable life
insurance policyholders and those given by variable annuity contract owners.
The Fund's Board might conclude that separate funds should be established for
variable life and variable annuity separate accounts. If this happens, the
affected Life Companies will bear the attendant expenses of establishing
separate funds. As a result, variable life insurance policyholders and variable
annuity contract owners would no longer have the economies of scale typically
resulting from a larger combined fund.
The Fund offers a separate class of common stock for each portfolio. All shares
of a portfolio have equal voting rights, but only shares of a particular
portfolio are entitled to vote on matters concerning only that portfolio. Each
of the issued and outstanding shares of a portfolio is entitled to one vote and
to participate equally in dividends and distributions declared by the portfolio
and, upon liquidation or dissolution, to participate equally in the net assets
of the portfolio remaining after satisfaction of outstanding liabilities. The
shares of a portfolio, when issued, will be fully paid and nonassessable, have
no preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights. The holders
of more than 50% of the shares of the Fund voting for the election of directors
can elect all of the directors of the Fund if they so choose. In such event,
holders of the remaining shares would not be able to elect any directors.
Only the separate accounts of the Life Companies may hold shares of the Fund
and are entitled to exercise the rights directly as described above. To the
extent required by law, the Life Companies will vote the Fund's shares held in
the separate accounts, including Fund shares which are not attributable to
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 Investment Company Act of 1940, as
amended (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.
1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the WRL VKAM Emerging Growth, WRL Alger Aggressive
Growth, WRL Janus Global, and WRL Janus Growth, (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 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, its 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 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/
WRL VKAM 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
2
<PAGE>
in connection with transactions in options, futures contracts and options on
futures contracts shall not be deemed to constitute selling securities short.
(B) The portfolio may not purchase securities on margin, except that the
portfolio may obtain such short-term credits as are necessary for the clearance
of transactions and that margin payments and other deposits in connection with
transactions in options, futures contracts and options on futures contracts
shall not be deemed to constitute purchasing securities on margin.
(C) The portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Limitations (i) and (ii) do not apply to
money market funds or to securities received as dividends, through offers of
exchange, or as a result of a consolidation, merger or other reorganization.
(D) The portfolio may not mortgage or pledge any securities owned or held
by the portfolio in amounts that exceed, in the aggregate, 15% of the
portfolio's net assets, provided that this limitation does not apply in the
case of assets deposited to provide margin or guarantee positions in options,
futures contracts and options on futures contracts or the segregation of assets
in connection with such contracts.
(E) The portfolio may not invest 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/
WRL ALGER AGGRESSIVE 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. 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.
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
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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/
WRL JANUS GLOBAL
The portfolio may not, as a matter of fundamental policy:
1. (a) With respect to 75% of the portfolio's assets, invest in the
securities (other than Government securities as defined in the 1940 Act) of any
one issuer if immediately thereafter, more than 5% of the portfolio's total
assets would be invested in securities of that issuer; or (b) with respect to
100% of the portfolio's assets, own more than either (i) 10% in principal
amount of the outstanding debt securities of an issuer, or (ii) 10% of the
outstanding voting securities of an issuer, except that such restrictions shall
not apply to Government securities, bank money market instruments or bank
repurchase agreements.
2. Invest more than 25% of the portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services; for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction, provided that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this shall not
prevent the portfolio from purchasing or selling options, futures, swaps and
forward contracts or from investing in securities or other instruments backed
by physical commodities).
4. Invest directly in real estate or interests in real estate; however,
the portfolio may own debt or equity securities issued by companies engaged in
those businesses.
5. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
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
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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/
WRL JANUS GROWTH
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% 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 policyowner approval:
(A) A portfolio may not, as a matter of non-fundamental policy: (i) enter
into any futures contracts or options on futures contracts for purposes other
than bona fide hedging transactions within the meaning of Commodity Futures
Trading Commission regulations if the aggregate initial margin deposits and
premiums required to establish positions in futures contracts and related
options that do not fall within the definition of bona fide hedging transactions
would exceed 5% of the fair market value of the portfolio's net assets, after
taking into account unrealized profits and losses on such contracts it has
entered into and (ii) enter into any futures contracts or options on futures
contracts if the aggregate amount of the portfolio's commitments under
outstanding futures contracts positions and options on futures contracts would
exceed the market value of its total assets.
(B) A portfolio may not mortgage or pledge any securities owned or held
by the portfolio in amounts that exceed, in the aggregate, 15% of the
portfolio's net assets, provided that this limitation does not apply to reverse
repurchase agreements or in the case of assets deposited to provide margin or
guarantee positions in options, futures contracts, swaps, forward contracts or
other derivative instruments or the segregation of assets in connection with
such transactions.
(C) A portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities sold
short, and provided that transactions in options, futures contracts, swaps,
forward contracts and other derivative instruments are not deemed to constitute
selling securities short.
(D) A portfolio may not purchase securities on margin, except that a
portfolio may obtain such short-term credits as are necessary for the clearance
of transactions, and provided that margin payments and other deposits made in
connection with transactions in options, futures contracts, swaps, forward
contracts, and other derivative instruments shall not be deemed to constitute
purchasing securities on margin.
(E) A portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include
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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.
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.
/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.
State laws and regulations may impose additional limitations on borrowings.
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 WRL VKAM Emerging Growth 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.
/DIAMOND/
BORROWING
Subject to its investment restrictions, each portfolio may borrow money from
banks for temporary or emergency purposes. As a fundamental policy, the amount
borrowed shall not exceed 25% of total assets for all other portfolios.
To secure borrowings, a portfolio may not mortgage or pledge its securities in
amounts that exceed 15% of its net assets.
The portfolios with a common Sub-Adviser may also borrow (or lend) money to
other portfolios or funds that permit such transactions and are also advised by
that Sub-Adviser, provided each portfolio or fund seeks and obtains permission
from the SEC. There is no assurance that such permission would be granted.
The WRL Alger Aggressive Growth 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.
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/DIAMOND/
SHORT SALES
Each portfolio may sell securities "short against the box." A short sale is the
sale of a security that the portfolio does not own. A short sale is "against
the box" if at all times when the short position is open, the portfolio owns an
equal amount of the securities sold short or securities convertible into, or
exchangeable without further consideration for, securities of the same issue as
the securities sold short.
/DIAMOND/
FOREIGN SECURITIES
Subject to a portfolio's investment restricitions and policies, 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/ HIGHER 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 may be greater in emerging countries or in countries with limited
or emerging markets, In particular, developing countries have relatively
unstable governments, economies based on only a few industries, and securities
markets that trade only a small number of securities. As a result, securities
of issuers located in developing countries may have limited marketability and
may be subject to abrupt or erratic price fluctuations.
At times, a portfolio's foreign securities may be listed on exchanges or traded
in markets which are open on days (such as Saturday) when the portfolio does
not compute a price or accept orders for purchase, sale or exchange of shares.
As a result, the net asset value of the portfolio may be significantly affected
by trading on days when policyholders cannot make transactions.
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.
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 ADS.
FOREIGN EXCHANGE TRANSACTIONS. To the extent a portfolio invests directly in
foreign securities, a portfolio will engage in foreign exchange transactions.
The foreign currency exchange market is subject to little government
regulation, and such transactions generally occur directly between parties
rather than on an exchange or in an organized market. This means that a
portfolio is subject to the full risk of default by a counterparty in such a
transaction. Because such transactions often take place between different time
zones, a portfolio may be required to complete a currency exchange transaction
at a time outside of normal business hours in the counterparty's location,
making prompt settlement of such transaction impossible. This exposes a
portfolio to an increased risk that the counterparty will be unable to settle
the transaction. Although the counterparty in such transactions is often a bank
or other financial institution,
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currency transactions are generally not covered by insurance otherwise
applicable to such institutions.
/DIAMOND/
FOREIGN BANK OBLIGATIONS
A portfolio may invest in foreign bank obligations and obligations of foreign
branches of domestic banks. These investments present 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/
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.
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 trasaction. 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 or purchase
commitments until payment is made. Such of the 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 a 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/
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
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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.
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. Reverse repurchase
agreements may be used to provide cash to satisfy unusually heavy redemption
requests or for temporary or emergency purposes without necessity of selling
portfolio securities or to earn additional income on portfolio securities such
as U.S. Treasury bills and notes. While a reverse repurchase agreement is
outstanding, the portfolio will segregate with its custodian cash and
appropriate 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. A portfolio will enter into reverse repurchase
agreements only with parties that the portfolio's Sub-Adviser deems
creditworthy, and that have been reviewed by the Board of Directors of the
Fund.
/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/
TEMPORARY DEFENSIVE POSITION
For temporary defensive purposes, 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 decrease. Furthermore, when a
portfolio assumes a temporary defensive position it may not be able to achieve
its investment objective.
/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
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 B 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.
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
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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, converts 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
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 would be made 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.
Futures may also be used for managing a portfolio's exposure to change in
securities prices and foreign currencies; as an efficient means of adjusting
its overall exposure to certain markets, or in an effort to enhance income.
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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 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
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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.
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 28. 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
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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 increased by changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some respect
to the purchase of protective put options on portfolio securities. For example,
a portfolio may buy a put option on a futures contract to attempt to hedge the
portfolio's securities against the risk of falling prices.
The amount of risk a portfolio assumes when it buys an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the options bought.
FORWARD CONTRACTS. A portfolio may enter into forward foreign currency exchange
contracts ("forward currency contracts") to attempt to minimize the risk to the
portfolio from adverse changes in the relationship between the U.S. dollar and
other currencies. A forward currency contract is an obligation to buy or sell
an amount of a specified currency for an agreed price (which may be in U.S.
dollars or a foreign currency) at a future date which is individually
negotiated between currency traders and their customers. A portfolio may invest
in forward currency contracts with stated contract values of up to the value of
the portfolio's assets.
A portfolio may exchange foreign currencies for U.S. dollars and for other
foreign currencies in the normal course of business and may buy and sell
currencies through forward currency contracts in order to fix a price for
securities it has agreed to buy or sell. A portfolio may enter into a forward
currency contract, for example, when it enters into a contract to buy or sell a
security denominated in or exposed to fluctuations in a foreign currency in
order to "lock in" the U.S. dollar price of the security ("transaction hedge").
Additionally, when a portfolio's Sub-Adviser believes that a foreign currency
in which portfolio securities are denominated may suffer a substantial decline
against the U.S. dollar, a portfolio may enter into a forward currency contract
to sell an amount of that foreign currency (or a proxy currency whose
performance is expected to replicate the performance of that currency) for U.S.
dollars approximating the value of some or all of the portfolio securities
denominated in that currency (not exceeding the value of the portfolio's assets
denominated in that currency) or by participating in options or futures
contracts with respect to the currency, or, when the portfolio's Sub-Adviser
believes that the U.S. dollar may suffer a substantial decline against a
foreign currency for a fixed U.S. dollar amount ("position hedge"). This type
of hedge seeks to minimize the effect of currency appreciation as well as
depreciation, but does not protect against a decline in the security's value
relative to other securities denominated in the foreign currency.
A portfolio also may enter into a forward currency contract with respect to a
currency where the portfolio is considering the purchase of investments
denominated in that currency but has not yet done so ("anticipatory hedge").
In any of the above circumstances a portfolio may, alternatively, enter into a
forward currency contract with respect to a different foreign currency when a
portfolio's Sub-Adviser believes that the U.S. dollar value of that currency
will correlate with the U.S. dollar value of the currency in which portfolio
securities of, or being considered for purchase by, the portfolio are
denominated ("cross-hedge"). For example, if a portfolio's Sub-Adviser believes
that a particular foreign currency may decline relative to the U.S. dollar, a
portfolio could enter into a contract to sell that currency or a proxy currency
(up to the value of the portfolio's assets denominated in that currency) in
exchange for another currency that the Sub-Adviser expects to remain stable or
to appreciate relative to the U.S. dollar. Shifting a portfolio's currency
exposure from one foreign currency to another removes the portfolio's
opportunity to profit from increases in the value of the original currency and
involves a risk of increased losses to the portfolio if the portfolio's Sub-
Adviser's projection of future exchange rates is inaccurate.
A portfolio also may enter into forward contracts to buy or sell at a later
date instruments in which a portfolio may invest directly or on financial
indices based on those instruments. The market for those types of forward
contracts is developing and it is not currently possible to identify
instruments on which forward contracts might be created in the future.
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
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equal to the aggregate amount of the portfolio's commitments under forward
contracts entered into with respect to position hedges and cross-hedges. If the
value of the segregated securities declines, additional cash or liquid assets
will be segregated on a daily basis so that the value of the account will be
equal to the amount of the portfolio's commitments with respect to such
contracts. As an alternative to maintaining all or part of the segregated
assets, a portfolio may buy call options permitting the portfolio to buy the
amount of foreign currency subject to the hedging transaction by a forward sale
contract or the portfolio may buy put options permitting the portfolio to sell
the amount of foreign currency subject to a forward buy contract.
While forward contracts are not currently regulated by the CFTC, the CFTC may
in the future assert authority to regulate forward contracts. In such event a
portfolio's ability to utilize forward contracts in the manner set forth in the
Prospectus may be restricted. Forward contracts will reduce the potential gain
from a positive change in the relationship between the U.S. dollar and foreign
currencies. Unforeseen changes in currency prices may result in poorer overall
performance for a portfolio than if it had not entered into such contracts. The
use of foreign currency forward contracts will not eliminate fluctuations in
the underlying U.S. dollar equivalent value of the proceeds of or rates of
return on a portfolio's foreign currency denominated portfolio securities.
The matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency denominated asset that
is the subject of the hedging transaction generally will not be precise. In
addition, a portfolio may not always be able to enter into forward contracts at
attractive prices and accordingly may be limited in its ability to use these
contracts in seeking to hedge the portfolio's assets.
Also, with regard to a portfolio's use of cross-hedging transactions, there can
be no assurance that historical correlations between the movement of certain
foreign currencies relative to the U.S. dollar will continue. Thus, at any time
poor correlation may exist between movements in the exchange rates of the
foreign currencies underlying a portfolio's cross-hedges and the movements in
the exchange rates of the foreign currencies in which the portfolio's assets
that are subject of the cross-hedging transactions are denominated.
OPTIONS ON FOREIGN CURRENCIES. A portfolio may buy put and call options and may
write covered put and call options on foreign currencies for hedging purposes
in a manner similar to that in which futures contracts or forward contracts on
foreign currencies may be utilized. For example, a decline in the U.S. dollar
value of a foreign currency in which portfolio securities are denominated will
reduce the U.S. dollar value of such securities, even if their value in the
foreign currency remains constant. In order to protect against such diminutions
in the value of portfolio securities, a portfolio may buy put options on the
foreign currency. If the value of the currency declines, the portfolio will
have the right to sell such currency for a fixed amount in U.S. dollars and
will thereby offset, in whole or in part, the adverse effect on its portfolio
which otherwise would have resulted.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a portfolio may buy call options thereon. The purchase
of such options could offset, at least partially, the effects of the adverse
movements in exchange rates. The purchase of an option on a foreign currency
may constitute an effective hedge against fluctuations in exchange rates,
although, in the event of exchange rate movements adverse to a portfolio's
option position, the portfolio could sustain losses on transactions in foreign
currency options which would require that the portfolio lose a portion or all
of the benefits of advantageous changes in those rates. In addition, in the
case of other types of options, the benefit to a portfolio from purchases of
foreign currency options will be reduced by the amount of the premium and
related transaction costs.
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
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cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other foreign currency held in its portfolio. A call
option is also covered if the portfolio has a call on the same foreign currency
and in the same principal amount as the call written if the exercise price of
the call held (i) is equal to or less than the exercise price of the call
written or (ii) is greater than the exercise price of the call written, and if
the difference is maintained by the portfolio in cash or high-grade liquid
assets in a segregated account with the Fund's custodian.
A portfolio may also write call options on foreign currencies for cross-hedging
purposes that may not be deemed to be covered. A call option on a foreign
currency is for cross-hedging purposes if it is not covered but is designed to
provide a hedge against a decline due to an adverse change in the exchange rate
in the U.S. dollar value of a security which the portfolio owns or has the
right to acquire and which is denominated in the currency underlying the
option. In such circumstances, the portfolio collateralizes the option by
maintaining segregated assets in an amount not less than the value of the
underlying foreign currency in U.S. dollars marked-to-market daily.
A portfolio may buy or write options in privately negotiated transactions on
the types of securities and indices based on the types of securities in which
the portfolio is permitted to invest directly. A portfolio will effect such
transactions only with investment dealers and other financial institutions
(such as commercial banks or savings and loan institutions) deemed
creditworthy, and only pursuant to procedures adopted by the portfolio's Sub-
Adviser for monitoring the creditworthiness of those entities. To the extent
that an option bought or written by a portfolio in a negotiated transaction is
illiquid, the value of an option bought or the amount of the portfolio's
obligations under an option written by the portfolio, as the case may be, will
be subject to the portfolio's limitation on illiquid investments. In the case
of illiquid options, it may not be possible for the portfolio to effect an
offsetting transaction at the time when the portfolio's Sub-Adviser believes it
would be advantageous for the portfolio to do so.
OPTIONS ON SECURITIES. In an effort to reduce fluctuations in net asset value,
a portfolio may write covered put and call options and may buy put and call
options and warrants on securities that are traded on United States and foreign
securities exchanges and over-the-counter ("OTC"). A portfolio also may write
call options that are not covered for cross-hedging purposes. A portfolio may
write and buy options on the same types of securities that the portfolio could
buy directly and may buy options on financial indices as described above with
respect to futures contracts. There are no specific limitations on a
portfolio's writing and buying options on securities.
A put option gives the holder the right, upon payment of a premium, to deliver
a specified amount of a security to the writer of the option on or before a
fixed date at a predetermined price. A call option gives the holder the right,
upon payment of a premium, to call upon the writer to deliver a specified
amount of a security on or before a fixed date at a predetermined price.
A put option written by a portfolio is "covered" if the portfolio (i) maintains
cash not available for investment or other liquid assets with a value equal to
the exercise price in a segregated account with its custodian or (ii) holds a
put on the same security and in the same principal amount as the put written
and the exercise price of the put held is equal to or greater than the exercise
price of the put written. The premium paid by the buyer of an option will
reflect, among other things, the relationship of the exercise price to the
market price and the volatility of the underlying security, the remaining term
of the option, supply and demand and interest rates. A call option written by a
portfolio is "covered" if the portfolio owns the underlying security covered by
the call or has an absolute and immediate right to acquire that security
without additional cash consideration (or has segregated additional cash
consideration with its custodian) upon conversion or exchange of other
securities 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
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the portfolio to the option holder at a lower price than its current market
value. Those risks could be reduced by entering into an offsetting transaction.
The portfolio retains the premium received from writing a put or call option
whether or not the option is exercised.
The writer of an option may have no control when the underlying security must
be sold, in the case of a call option, or bought, in the case of a put option,
since with regard to certain options, the writer may be assigned an exercise
notice at any time prior to the termination of the obligation. Whether or not
an option expires unexercised, the writer retains the amount of the premium.
This amount, of course, may, in the case of a covered call option, be offset by
a decline in the market value of the underlying security during the option
period. If a call option is exercised, the writer experiences a profit or loss
from the sale of the underlying security. If a put option is exercised, the
writer must fulfill the obligation to buy the underlying security.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is
that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the holder
of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously bought. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit a portfolio to write another call option on the underlying security with
either a different exercise price or expiration date or both or, in the case of
a written put option, will permit a portfolio to write another put option to
the extent that the exercise price thereof is secured by deposited high-grade
liquid assets. Also, effecting a closing transaction will permit the cash or
proceeds from the concurrent sale of any securities subject to the option to be
used for other portfolio investments. If a portfolio desires to sell a
particular security on which the portfolio has written a call option, the
portfolio will effect a closing transaction prior to or concurrent with the
sale of the security.
A portfolio may realize a profit from a closing transaction if the price of the
purchase transaction is less than the premium received from writing the option
or the price received from a sale transaction is more than the premium paid to
buy the option; a portfolio may realize a loss from a closing transaction if
the price of the purchase transaction is less than the premium paid to buy the
option. Because increases in the market of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the repurchase of a call option is likely to be offset in whole or in 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
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the security and the exercise price. If the options are not exercised and the
price of the underlying security declines, the amount of such decline will be
offset by the amount of premium received.
The writing of covered put options is similar in terms of risk and return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and a portfolio's gain will be limited to the
premium received. If the market price of the underlying security declines or
otherwise is below the exercise price, the portfolio may elect to close the
position or take delivery of the security at the exercise price and a
portfolio's return will be the premium received from the put options minus the
amount by which the market price of the security is below the exercise price.
A portfolio may buy put options to attempt to hedge against a decline in the
value of its securities. By using put options in this way, a portfolio will
reduce any profit it might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.
A portfolio may buy call options to attempt to hedge against an increase in the
price of securities that the portfolio may buy in the future. The premium paid
for the call option plus any transaction costs will reduce the benefit, if any,
realized by a portfolio upon exercise of the option, and, unless the price of
the underlying security rises sufficiently, the option may expire worthless to
the portfolio.
In purchasing an option, a portfolio would be in a position to realize a gain
if, during the option period, the price of the underlying security increased
(in the case of a call) or decreased (in 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.
SUPRANATIONAL AGENCIES. A portfolio may invest up to 10% of its assets in debt
obligations of supranational agencies such as: the International Bank for
Reconstruction and Development (commonly referred to as the World Bank), which
was chartered to finance development projects in developing member countries;
the European Community, which is a twelve-nation organization engaged in
cooperative economic activities; the European Coal and Steel Community, which
is an economic union of various European nations' steel and coal industries;
and the Asian Development Bank, which is an international development bank
established to lend funds, promote investment and provide technical assistance
to member nations in the Asian and Pacific regions. Debt obligations of
supranational agencies are not considered Government Securities and are not
supported, directly or indirectly, by the U.S. Government.
INDEX OPTIONS. In seeking to hedge all or a portion of its investments, a
portfolio may purchase and write put and call options on securities indices
listed on U.S. or foreign securities exchanges or traded in the
over-the-counter market, which indices include securities held in the
portfolios. The portfolios with such option writing authority may write only
covered options. A portfolio may also use securities index options as a means
of participating in a securities market without making direct purchases of
securities.
A securities index measures the movement of a certain group of securities by
assigning relative values to the securities included in the index. Options on
securities indexes are generally similar to options on specific securities.
Unlike options on securities, however, options on securities indices do not
involve the delivery of an underlying security; the option in the case of an
option on a securities index represents the holder's right to obtain from the
writer in cash a fixed multiple of the amount by which the exercise price
exceeds (in the case of a call) or is less than (in the case of a put) the
closing value of the underlying securities index on the exercise date. A
portfolio may purchase and write put and call options on securities indexes or
securities index futures contracts that are traded on a U.S. exchange or board
of trade or a foreign exchange, to the extent permitted under rules and
interpretations of the Commodity Futures Trading Commission ("CFTC"), as a
hedge against changes in market conditions and interest rates, and for duration
management, and may enter into closing transactions with respect to those
options to terminate existing positions. A securities index fluctuates with
changes in the market values of the securities included in the index.
Securities index options may be based on a broad or narrow market index or on
an industry or market segment.
The delivery requirements of options on securities indices differ from options
on securities. Unlike a securities option, which contemplates the right to take
or make delivery of securities at a specified price, an option on a securities
index gives the holder the right to receive a cash "exercise settlement amount"
equal to (i) the amount, if any, by which the fixed exercise price of the
option exceeds (in the case of a put) or is less than (in the case of a call)
the closing value of the underlying index on the date of exercise, multiplied
by (ii) a fixed "index multiplier." Receipt of this cash amount will depend
upon the closing level of the securities index upon which the option is based
being greater than, in the case of a call, or less than, in the case of a put,
the exercise price of the option. The amount of cash received will be equal to
the difference between the closing price of the index and the exercise price of
the option expressed in dollars times a specified multiple. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount. The writer may offset its position in securities index options
prior to expiration by entering into a closing transaction on an exchange or it
may allow the option to expire unexercised.
The effectiveness of purchasing or writing securities index options as a
hedging technique will depend upon the extent to which price movements in the
portion of a
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securities portfolio being hedged correlate with price movements of the
securities index selected. Because the value of an index option depends upon
movements in the level of the index rather than the price of a particular
security, whether a portfolio realizes a gain or loss from the purchase of
writing of options on an index depends upon movements in the level of prices in
the market generally or, in the case of certain indices, in an industry or
market segment, rather than movements in the price of a particular security. As
a result, successful use by a portfolio of options on securities indices is
subject to the sub-adviser's ability to predict correctly movements in the
direction of the market generally or of a particular industry. This ability
contemplates different skills and techniques from those used in predicting
changes in the price of individual securities.
Securities index options are subject to position and exercise limits and other
regulations imposed by the exchange on which they are traded. The ability of a
portfolio to engage in closing purchase transactions with respect to securities
index options depends on the existence of a liquid secondary market. Although a
portfolio will generally purchase or write securities index options only if a
liquid secondary market for the options purchased or sold appears to exist, no
such secondary market may exist, or the market may cease to exist at some
future date, for some options. No assurance can be given that a closing
purchase transaction can be effected when the sub-adviser desires that a
portfolio engage in such a transaction.
WEBS AND OTHER INDEX-RELATED SECURITIES. A portfolio may invest in shares in an
investment company whose shares are known as "World Equity Benchmark Shares" or
"WEBS." WEBS have been listed for trading on the American Stock Exchange, Inc.
The portfolios also may invest in the CountryBaskets Index Fund, Inc., or
another fund the shares of which are the substantial equivalent of WEBS. A
portfolio may invest in S&P Depositary Receipts, or "SPDRs." SPDRs are
securities that represent ownership in a long-term unit investment trust that
holds a portfolio of common stocks designed to track the performance of the S&P
500 Index. A portfolio investing in a SPDR would be entitled to the dividends
that accrue to the S&P 500 stocks in the underlying portfolio, less trust
expenses.
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
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<PAGE>
option writer and a buyer or seller of futures or forward contracts could lose
amounts substantially in excess of any premium received or initial margin or
collateral posted due to the potential additional margin and collateral
requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges are available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the OCC, thereby reducing the
risk of counterparty default. Further, a liquid secondary market in options
traded on a national securities exchange may be more readily available than in
the OTC market, potentially permitting a portfolio to liquidate open positions
at a profit prior to exercise or expiration, or to limit losses in the event of
adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the OTC market. For example, exercise
and settlement of such options must be made exclusively through the OCC, which
has established banking relationships in applicable foreign countries for this
purpose. As a result, the OCC may, if it determines that foreign government
restrictions or taxes would prevent the orderly settlement of foreign currency
option exercises, or would result in undue burdens on the OCC or its clearing
member, impose special procedures on exercise and settlement, such as technical
changes in the mechanics of delivery of currency, the fixing of dollar
settlement prices or prohibitions, on exercise.
In addition, options on U.S. Government securities, futures contracts, options
on futures contracts, forward contracts and options on foreign currencies may
be traded on foreign exchanges and OTC in foreign countries. Such transactions
are subject to the risk of governmental actions affecting trading in or the
prices of foreign currencies or securities. The value of such positions also
could be adversely affected by (i) other complex foreign political and economic
factors, (ii) lesser availability than in the United States of data on which to
make trading decisions, (iii) delays in a portfolio's ability to act upon
economic events occurring in foreign markets during nonbusiness hours in the
United States, (iv) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States, and (v) low
trading volume.
/DIAMOND/
ZERO COUPON, PAY-IN-KIND AND
STEP COUPON SECURITIES
Subject to any limitations set forth in the policies and investment
restrictions for a portfolio, a portfolio may invest in zero coupon,
pay-in-kind or step coupon securities. Zero coupon and step coupon bonds are
issued and traded at a discount from their face amounts. They do not entitle
the holder to any periodic payment of interest prior to maturity or prior to a
specified date when the securities begin paying current interest. The discount
from the face amount or par value depends on the time remaining until cash
payments begin, prevailing interest rates, liquidity of the security and the
perceived credit quality of the issuer. Pay-in-kind securities may pay all or a
portion of their interest or dividends in the form of additional securities.
Because they do not pay current income, the price of pay-in-kind securities can
be very volatile when interest rates change.
Current Federal income tax law requires holders of zero coupon securities and
step coupon securities to report the portion of the original issue discount on
such securities that accrues that year as interest income, even though the
holders receive no cash payments of interest during the year. In order to
qualify as a "regulated investment company" under the Internal Revenue Code,
each portfolio must distribute its investment company taxable income, including
the original issue discount accrued on zero coupon or step coupon bonds.
Because a portfolio will not receive cash payments on a current basis in
respect of accrued original-issue discount on zero coupon bonds or step coupon
bonds during the period before interest payments begin, in some years a
portfolio may have to distribute cash obtained from other sources in order to
satisfy the distribution requirements under the Code. A portfolio might obtain
such cash from selling other portfolio holdings. These actions are likely to
reduce the assets to which a portfolio's expenses could be allocated and to
reduce the rate of return for the portfolio. In some circumstances, such sales
might be necessary in order to satisfy cash distribution requirements even
though investment considerations might otherwise make it undesirable for the
portfolio to sell the securities at the time.
Generally, the market prices of zero coupon, step coupon and pay-in-kind
securities are more volatile than the prices of securities that pay interest
periodically and in cash and are likely to respond to changes in interest rates
to a greater degree than other types of debt securities having similar
maturities and credit quality.
/DIAMOND/
WARRANTS AND RIGHTS
Subject to its investment limitations, a portfolio may invest in warrants and
rights. Warrants are, in effect, longer-term call options. They give the holder
the right to
20
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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
Subject to a portfolio's investment restrictions and policies, 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 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 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 response to changes in interest rates.
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
Subject to a portfolio's investment restrictions and policies, asset-backed
securities represent interests in pools of consumer loans (generally unrelated
to mortgage loans) and most often are structured as pass-through securities.
Interest and principal payments ultimately depend on payment of the underlying
loans by individuals, although the securities may be supported by letters of
credit or other credit enhancements. The underlying assets (E.G., loans) are
subject to prepayments which shorten the securities' weighted average life and
may lower their returns. If the credit support or enhancement is exhausted,
losses or delays in payment may result if the required payments of principal
and interest are not made. The value of these securities also may change
because of changes in the market's perception of the creditworthiness of the
servicing agent for the pool, the originator of the pool, or the financial
institution providing the credit support or enhancement. A portfolio will
invest its assets in asset-backed securities subject to any limitations set
forth in its investment policies or restrictions.
/DIAMOND/
PASS-THROUGH SECURITIES
Subject to a portfolio's investment restrictions and policies, a portfolio may
invest its net assets in various types of pass-through securities, such as
mortgage-backed securities, asset-backed securities and participation
interests. A pass-through security is a share or certificate of interest in a
pool of debt obligations that have been repackaged by an intermediary, such as
a bank or broker-dealer. The purchaser receives an undivided interest in the
underlying pool of securities. The issuers of the underlying securities make
interest and principal payments to the intermediary which are passed through to
purchasers, such as the portfolio. The most common type of pass-through
securities are mortgage-backed securities. GNMA Certificates are
mortgage-backed securities that evidence an undivided interest in a pool of
mortgage loans. GNMA Certificates differ from traditional bonds in that
principal is paid back monthly by the borrowers over the term of the loan
rather than returned in a lump sum at maturity. The portfolio will generally
purchase "modified pass-through" GNMA Certificates,
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<PAGE>
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.
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 regarding income producing securities in
which a portfolio may invest.)
/DIAMOND/
ILLIQUID AND RESTRICTED/144A SECURITIES
A portfolio may invest up to 15% of its net assets in illiquid securities
(I.E., securities that are not readily marketable).
In recent years, a large institutional market has developed for certain
securities that are not registered under the Securities Act of 1933 ("1933
Act"). Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend on an
efficient institutional market in which such unregistered securities can
readily be resold or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not dispositive of the
liquidity of such investments.
Rule 144A under the 1933 Act established a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. Institutional markets for restricted securities that
might develop as a result of Rule 144A could provide both readily ascertainable
values for restricted securities and the ability to liquidate an investment in
order to satisfy share redemption orders. An insufficient number of qualified
institutional buyers interested in purchasing a Rule 144A-eligible security
held by a portfolio could, however, adversely affect the marketability of such
portfolio security and the portfolio might be unable to dispose of such
security promptly or at reasonable prices.
The Fund's Board of Directors has authorized each portfolio's Sub-Adviser to
make liquidity determinations with respect to Rule 144A securities in
accordance with the guidelines established by the Board of Directors. Under the
guidelines, the portfolio's Sub-Adviser will consider the following factors in
determining whether a Rule 144A security is liquid: 1) the frequency of trades
and quoted prices for the security; 2) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers; 3)
the willingness of dealers to undertake to make a market in the security; and
4) the nature of the marketplace trades, including the time needed to dispose
of the security, the method of soliciting offers and the mechanics of the
transfer. The sale of illiquid securities often requires more time and results
in higher brokerage charges or dealer discounts and other selling expenses than
does the sale of securities eligible for trading on national securities
exchanges or in the OTC markets. The portfolio may be restricted in its ability
to sell
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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 WRL Janus Growth, or WRL Janus 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/
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.
/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
adjustment 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.
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<PAGE>
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.
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/
DEBT SECURITIES AND
FIXED-INCOME INVESTING
Debt securities include securities such as corporate bonds and debentures;
commercial paper; trust preferreds, 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 payment prospects and principal security for such bonds appear
adequate for the present, but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have speculative
characteristics. (See Appendix B 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/
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 B for a description of debt securities rating.)
/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
investment.
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.
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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/
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 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 AND OFFICERS
The Fund is governed by a Board of Directors. Subject to the supervision of the
Board of Directors, the assets of each portfolio are managed by an investment
adviser and sub-advisers, and by portfolio managers. The Board of Directors is
responsible for managing the business and affairs of the Fund and oversees the
operation of the Fund by its officers. It also reviews the management of the
portfolios' assets by the investment adviser and sub-adviser. Information about
the Directors and officers of the Fund is as follows:
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
- - -------------------------------- ---------------------------- -----------------------------------------------------------
<S> <C> <C>
PETER R. BROWN DIRECTOR Retired (January, 2000 to present); Chairman of the Board,
(DOB 5/10/28), Peter Brown Construction Company (construction contrac-
11180 6th Street East tors and engineers), Largo, Florida (1963 - 2000); Trustee
Treasure Island, Florida 33706 of IDEX Mutual Funds, Rear Admiral (Ret.) U.S. Navy
Reserve, Civil Engineer Corps.
CHARLES C. HARRIS DIRECTOR Trustee of IDEX Mutual Funds, (March, 1994 - present)
(DOB 7/15/30), former Trustee of IDEX Fund, IDEX II Series Fund and
35 Winston Drive IDEX Fund 3.
Clearwater, Florida 34616
RUSSELL A. KIMBALL, JR. DIRECTOR General Manager, Sheraton Sand Key Resort (resort
(DOB 8/17/44), hotel), Clearwater, Florida (1975 - present)
1160 Gulf Boulevard
Clearwater Beach, Florida 34630
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
- - -------------------------- ---------------------------- --------------------------------------------------------------
<S> <C> <C>
JOHN R. KENNEY(1,2) CHAIRMAN OF THE BOARD Chairman of the Board, Director and Co-CEO of Great
(DOB 2/8/38) OF DIRECTORS AND Companies, L.L.C.; Chairman of the Board of Directors
PRESIDENT (1982 - present), Chief Executive Officer (1982 - present),
President (1978 - 1987 and December, 1992 - 1999),
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), St. Petersburg, Florida; Chairman of the Board of
Directors (September, 1996 - present), WRL Investment
Services, Inc., St. Petersburg, Florida; Chairman of the
Board of Directors (February, 1997 - present), AEGON
Asset Management Services, Inc., St.Petersburg, Florida;
Director (December, 1990 - present); IDEX Management,
Inc., (investment adviser), St. Petersburg, Florida; Trustee
and Chairman (September, 1996 - present) of IDEX
Mutual Funds (investment companies) St. Petersburg,
Florida.
PAT BAIRD DIRECTOR AND EXECUTIVE President and Trustee (November, 1999 - present), IDEX
(DOB 1/19/54) VICE PRESIDENT Mutual Funds; Executive Vice President, Chief Operating
433 Edgewood Road, NE, Officer (February, 1996 - present) Executive Vice
Cedar Rapids, Iowa 52499 President and CFO (February, 1995 - February, 1996),
Vice President, Chief Financial Officer (May, 1992 -
February, 1995), AEGON USA.
ALLAN HAMILTON(1,2) TREASURER, PRINCIPAL Vice President and Controller (1987 - present), Treasurer
(DOB 11/26/56) FINANCIAL OFFICER (February, 1997 - present).
JOHN K. CARTER(1,2) VICE PRESIDENT, Vice President, Secretary and Counsel (December, 1999 -
(DOB 04/24/61) SECRETARY AND COUNSEL present), IDEX Mutual Funds; Vice President, Counsel and
Assistant Secretary (April, 2000 - present) of Idex Investor
Services, Inc., AEGON Asset Management Services, Inc.
and WRL Investment Services, Inc.; Vice President,
Counsel, Compliance Officer and Assistant Secretary
(April, 2000 - present) of Idex Management, Inc. and WRL
Investment Management, Inc.; Vice President and Counsel
(March, 1997 - May 1999), Salomon Smith Barney;
Assistant Vice President, Associate Corporate Counsel
and Trust Officer (September, 1993 - March 1997),
Franklin Templeton Mutual Funds.
THOMAS E. PIERPAN(1,2) ASSISTANT SECRETARY Assistant Secretary (March, 1995 - December, 1997) of
(DOB 10/18/43) AND VICE PRESIDENT WRL Series Funds, Inc.; Vice President and Assistant
Secretary 1999 - present), Vice President, Counsel and
Secretary (December, 1997 - 1999) of IDEX Mutual Funds
(mutual fund); Assistant Vice President, Counsel and
Assistant Secretary (November, 1997 - present) of
Intersecurities, Inc. (broker-dealer); Senior Vice President,
General Counsel and Assistant Secretary (April, 2000 -
present) of AEGON Equity Group; Senior Vice President
and General Counsel (1999 - present), Vice President
(November, 1993 - present), Associate General Counsel
(February, 1995 - 1997), Assistant Secretary, (February,
1995 - present) of Western Reserve Life Assurance of
Ohio.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
- - ----------------------- ---------------------------- ---------------------------------------------------------
<S> <C> <C>
ALAN M. YAEGER(1,2) EXECUTIVE VICE Executive Vice President (June, 1993 - present), Chief
(DOB 10/21/46) PRESIDENT Financial Officer (December, 1995 - present), Actuary
(1972 - present), Western Reserve Life Assurance
Company of Ohio; Director (September, 1996 - present),
WRL Investment Management, Inc. (investment adviser)
St. Petersburg, Florida; Director (September, 1996 -
present), WRL Investment Services, Inc., St. Petersburg,
Florida.
</TABLE>
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Bos 5068, Clearwater, Florida 33758-5068.
(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 $ to each Director
who is not affiliated with the Investment Adviser or the Sub-Advisers
("disinterested Director"). Each disinterested Director also receives $ ,
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, 1999. The compensation table provides
compensation amounts paid to disinterested Directors of the Fund for the fiscal
year ended December 31, 1999.
DIRECTOR'S FEES PAID - YEAR ENDED DECEMBER 31, 1999
PORTFOLIO AMOUNT PAID
- - ----------------------------- ------------
WRL VKAM Emerging Growth $8,000
WRL Alger Aggressive Growth 6,000
WRL Janus Global 8,000
WRL Janus Growth 11,000
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS TOTAL COMPENSATION
AGGREGATE ACCRUED AS ESTIMATED PAID TO DIRECTORS FROM
COMPENSATION FROM PART OF ANNUAL BENEFITS WRL SERIES FUND, INC. AND
NAME OF PERSON, POSITION WRL SERIES FUND, INC. FUND EXPENSES* UPON RETIREMENT IDEX MUTUAL FUNDS
- - ----------------------------------- ----------------------- ---------------- ----------------- --------------------------
<S> <C> <C> <C> <C>
Peter R. Brown, Director $15,500 0 N/A $43,750
Charles C. Harris, Director 15,500 0 N/A 43,750
Russell A. Kimball, Jr., Director 15,500 0 N/A 15,500
</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 Mutual Funds to a disinterested Director or
Trustee on a current basis for services rendered as director. Deferred
compensation amounts will accumulate based on the value of Class A shares of a
portfolio of IDEX Mutual Funds (without imposition of sales charge), as elected
by the Director. As of April 1, 1999, 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") located at 570 Carillon
Parkway, St. Petersburg, FL 33716, 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.
27
<PAGE>
("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 N.V., 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 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 p. 47.
Advisory Fee. The method of computing the investment advisory fee is fully
described in the Fund's prospectus. For the years ended December 31, 1999, 1998
and 1997, the Investment Adviser was paid fees for its services to each
portfolio in the following amounts:
ADVISORY FEES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
PORTFOLIO 1999 1998 1997
- - ----------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
WRL Alger Aggressive Growth $ 5,873,932 $ 3,361,604 $ 2,249,801
WRL VKAM Emerging Growth 8,946,705 5,408,098 4,075,498
WRL Janus Global 10,293,952 7,537,671 5,591,818
WRL Janus Growth 25,489,599 18,111,607 13,716,824
----------- ----------- -----------
TOTAL $50,604,188 $34,418,980 $25,633,941
</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 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
28
<PAGE>
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,
2001, to pay expenses on behalf of the portfolios to the extent normal
operating expenses (including investment advisory fees but excluding interest,
taxes, brokerage fees, commissions and extraordinary charges) exceed, as a
percentage of each portfolio's average daily net assets, 1.00%. The following
expenses were paid by the investment adviser for the fiscal years ended
December 31, 1999, 1998, and 1997 (WRL served as investment adviser for 1996):
PORTFOLIO EXPENSES PAID BY INVESTMENT ADVISER
YEAR ENDED DECEMBER 31
-----------------------
PORTFOLIO 1999 1998 1997
- - ----------------------------- ------ ------ -----
WRL Alger Aggressive Growth -0- -0- -0-
WRL VKAM Emerging Growth -0- -0- -0-
WRL Janus Global -0- -0- -0-
WRL Janus Growth -0- -0- -0-
Effective May 1, 2000, the Investment Adviser has entered into an agreement
with the Fund on behalf of, and pursuant to which, the Investment Adviser will
be reimbursed for operating expenses paid on behalf of a portfolio during the
previous 36 months, but only if, after such reimbursement, the portfolio's
expense ratio does not exceed the expense cap. The agreement has an initial
term through April 30, 2001, and will automatically renew for one-year terms
unless terminated by a 30 day written notice to the Fund.
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. The following Administrative Services fees were paid by
the portfolios for the fiscal year ended December 31, 1999:
ADMINISTRATIVE SERVICES FEES
PORTFOLIO 1999 1998 1997
- - ------------------------------ ----------- ---------- -----------
WRL Alger Aggressive Growth $178,687 $73,408 $122,776
WRL VKAM Emerging Growth 214,882 95,721 166,269
WRL Janus Global 223,428 99,277 165,294
WRL Janus Growth 306,127 143,999 260,374
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 AFSG Securities Corporation (AFSG) located at 4333
Edgewood Road NE, Cedar Rapids, Iowa 52494. The Distribution Plan and related
Agreement were approved by the Fund's Board of Directors, including a majority
of Directors who are not "interested persons" of the Fund (as defined in the
1940 Act) on October 3, 1996 as amended by the Board March 29, 1999, and the
Distribution Plan was approved by the shareholders of each portfolio of the
Fund on December 16, 1996. AFSG is an affiliate of the Investment Adviser.
Under the Distribution Plan and Distribution Agreement, the Fund, on behalf of
the portfolios, will reimburse AFSG after each calendar month for certain Fund
distribution expenses incurred or paid by AFSG, 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 AFSG 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.
29
<PAGE>
AFSG submits to the Directors of the Fund for approval annual distribution
budgets and quarterly reports of distribution expenses with respect to each
portfolio. AFSG 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 AFSG deems fair and are approved by the Fund's Board
of Directors. AFSG has determined that it will not seek payment by the Fund of
distribution expenses incurred with respect to any portfolio before April 30,
2001. (ISI waived payment by the Fund for the fiscal year ended
December 31, 1999.) Prior to AFSG 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
Each Sub-Adviser serves, pursuant to each Sub-Advisory Agreement dated January
1, 1997 between WRL Management and the respective Sub-Adviser, on behalf of
each portfolio. The Sub-Advisory Agreements were approved by the Board of
Directors of the Fund, including a majority of the Directors who are not
"interested persons" of the Fund (as defined in the 1940 Act) on October 3,
1996 as amended May 1, 1999, and by the shareholders of each portfolio of the
Fund on December 16, 1996. The Sub-Advisory Agreements provide that they will
continue in effect 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. The
agreements may also be terminated under the term of an Exemptive Order granted
by the SEC under section 6(c) of the 1940 Act from section 15(a) and rule 18f-2
under the 1940 Act (Release #23379).
Pursuant to the Sub-Advisory Agreements, each Sub-Adviser provides investment
advisory assistance and portfolio management advice to the Investment Adviser
for their respective portfolio(s). Subject to review by the Investment Adviser
and the Board of Directors of the Fund, the Sub-Advisers are responsible for
the actual management of their respective portfolio(s) and for making decisions
to buy, sell or hold a particular security. Each Sub-Adviser bears all of its
expenses in connection with the performance of its services under their Sub-
Advisory Agreement such as compensating and furnishing office space for their
officers and employees connected with investment and economic research, trading
and investment management of the respective portfolio(s).
Each Sub-Adviser is a registered investment adviser under the Investment
Advisers Act of 1940, as amended. The Sub-Advisers for the portfolios of the
Fund are:
/5 DIAMONDS/
FRED ALGER MANAGEMENT, INC.
Fred Alger Management, Inc. ("Alger") serves as Sub-Adviser to the WRL Alger
Aggressive Growth.
Alger, located at One World Trade Center, Suite 9333, New York, New York 10048,
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 is generally engaged in the business of
rendering investment advisory services to institutions and, to a lesser extent,
individuals. Alger has been engaged in the business of rendering investment
advisory services since 1964 and, as of March 31, 2000, had approximately $21.8
billion under management.
/DIAMOND/ PORTFOLIO MANAGER:
DAVID D. ALGER AND DAVID HYUN are primarily responsible for the day-to-day
management of WRL Alger Aggressive Growth. Mr. Alger has been employed by Alger
Management as Executive Vice President and Director of Research Since 1971 and
as President since 1995. Mr. Hyun has been employed by Alger Management as a
senior research analyst since 1991, as a portfolio manager since 1997, and
Sennor Vice President. Mr. Alger has served as portfolio Manager of WRL Alger
Aggressive Growth since its inception. Mr. Hyun has served as co-portfolio
Manager of WRL Alger Aggressive Growth sinceFebruary 1998. Mr. Alger and Mr.
Hyun also serve as portfolio managers for other mutual funds and investment
accounts managed by Alger Management.
/5 DIAMONDS/
VAN KAMPEN ASSET
MANAGEMENT INC. (`VKAM")
Van Kampen Asset Management Inc. ("VKAM") serves as Sub-Adviser to WRL VKAM
Emerging Growth.
VKAM, located at 1 Parkview Plaza, P.O. Box 5555 Oakbrook Terrace, Illinois
60181, is a wholly-owned subsidiary of Van Kampen Investments Inc., which, in
turn, is an indirect wholly-owned subsidiary of Morgan Stanley Dean Witter &
Co., a financial services company.
30
<PAGE>
/DIAMOND/ PORTFOLIO MANAGER:
GARY M. LEWIS leads an investment team and is primarily responsible for the
day-to-day management of WRL VKAM Emerging Growth. Mr. Lewis has been Senior
Vice President of Van Kampen since October 1995. Previously, he served as Vice
President and portfolio manager of Van Kampen from 1989 to October 1995.
/5 DIAMONDS/
JANUS CAPITAL CORPORATION
Janus Capital Corporation ("Janus") serves as the Sub-Adviser to the WRL Janus
Growth and the WRL Janus Global.
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 $261 billion as of
February 1, 2000. Kansas City Southern Industries, Inc. ("KCSI") owns 82% of
Janus indirectly through Stilwell Financial, Inc.. KCSI, whose address is 114
West 11th Street, Kansas City, Missouri 64105-1804, is a publicly-traded
holding company with a 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.
/DIAMOND/ PORTFOLIO MANAGERS:
EDWARD KEELY has served as manager of the WRL Janus Growth since January 2000.
He previously served as co-portfolio manager of this portfolio since January
1999. Prior to joining Janus in 1998, Mr. Keely was a senior vice president of
investments at Founders.
HELEN YOUNG HAYES, CFA AND LAURENCE CHANG, CFA have served as co-portfolio
managers of the WRL Janus Global Portfolio since January 2000. Ms. Hayes
previously served as manager of this portfolio since its inception. She has
been employed by Janus since 1987.
Mr. Chang has been employed by Janus since 1993. Before joining Janus, Mr.
Chang was a project director at the National Security Archive.
31
<PAGE>
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 management by the Sub-Adviser. The table below lists those
percentages by portfolio.
<TABLE>
<CAPTION>
PORTFOLIO PERCENTAGE OF AVERAGE DAILY NET ASSETS
- - ------------------------------- ------------------------------------------------
<S> <C>
WRL Janus Growth 0.40%(1)
WRL Janus Global 0.40%(2)
WRL VKAM Emerging Growth 0.40%, less 50% of amount of excess expenses(3)
WRL Alger Aggressive Growth 0.40%
</TABLE>
- - ------------------------------
(1) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the first $3 billion of the portfolio's average daily net assets
(resulting in a net fee of 0.3875%) and 0.25% of assets above $3 billion
(resulting in a net fee of 0.375%). This waiver will terminate on June 25,
2000.
(2) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the portfolio's average daily net assets above $2 billion (resulting in a
net fee of 0.3875%). This waiver will terminate on June 25, 2000.
(3) Excess expenses are those expenses paid by the Investment Adviser on behalf
of a portfolio pursuant to any expense limitation.
The method of computing each Sub-Adviser's fees is set forth above. For the
years ended December 31, 1999, 1998 and 1997 each Sub-Adviser was paid fees for
their services in the following amounts (no fees are included for WRL Value
Line Aggressive Growth, WRL Great Companies - AmericaSM or WRL Great Companies
- - - TechnologySM as these portfolios had not yet commenced operations as of
December 31, 1999):
SUB-ADVISORY FEES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
SUB-ADVISER PORTFOLIO 1999 1998 1997
- - ------------- ----------------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Alger WRL Alger Aggressive Growth $2,936,966 $1,680,802 $1,124,900
VKAM WRL VKAM Emerging Growth 4,473,352 2,704,049 2,037,749
Janus WRL Janus Growth(1) 12,744,800 9,055,804 6,858,412
WRL Janus Global(2) 5,146,976 3,768,835 2,795,909
</TABLE>
- - ------------------------------
(1 Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the first $3 billion of the portfolio's average daily net assets (resulting
in a net fee of 0.3875%) and 0.25% of assets above $3 billion (resulting in
a net fee of 0.375%). This waiver will terminate on June 25, 2000.
(2 Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the portfolio's average daily net assets above $2 billion (resulting in a
net fee of 0.3875%). This waiver will terminate on June 25, 2000.
Through June 25, 2000, provided that it continues to serve as sub-adviser for
the portfolios, Janus Capital will compensate WRL for its services in
connection with promotion, marketing and distribution in an amount equal to
0.0375% of the average daily net assets of WRL Janus Growth on the first $3
billion of assets and 0.075% on assets in excess of $3 billion. With respect to
WRL Janus Global, the amount will be equal to 0.0375% of the portfolio's
average daily net assets above $2 billion.
/DIAMOND/
JOINT TRADING ACCOUNTS
Subject to approval by the Fund's Board, the WRL Janus Growth and WRL Janus
Global 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 WRL Janus Growth and WRL Janus Global 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.
/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.
The Board is required to review and approve the Code of Ethics for each
Sub-Adviser. Each Sub-Adviser is also 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.
32
<PAGE>
/DIAMOND/
ADMINISTRATIVE AND TRANSFER
AGENCY SERVICES
Effective January 1, 1997, the Fund entered into an Administrative Services and
Transfer Agency Agreement with WRL Services located at 570 Carillon Parkway,
St. Petersburg, Florida 33716, 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
servicesin connection with its serving as the Fund's investment adviser.
PORTFOLIO TRANSACTIONS AND BROKERAGE
/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 held during the year.
Changes in security holdings are made by a portfolio's Sub-Adviser when it is
deemed necessary. Such changes may result from: liquidity needs; securities
having reached a price or yield objective; anticipated changes in interest
rates or the credit standing of an issuer; or developments not foreseen at the
time of the investment decision.
A Sub-Adviser may engage in a significant number of short-term transactions if
such investing serves a portfolio's objective. The rate of portfolio turnover
will not be a limiting factor when such short-term investing is considered
appropriate. Increased turnover results in higher brokerage costs or mark-up
charges for a portfolio; these charges are ultimately borne by the
policyowners.
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, 1999, 1998 and 1997:
PORTFOLIO TURNOVER RATES
YEAR ENDED DECEMBER 31
----------------------------------------
PORTFOLIO 1999 1998 1997
- - ----------------------------- ------------ ----------- -----------
WRL Alger Aggressive Growth 101.71% 117.44% 136.18%
WRL VKAM Emerging Growth 117.72% 99.50% 99.78%
WRL Janus Global 68.10% 87.36% 97.54%
WRL Janus Growth 70.95% 35.29% 85.88%
The future annual turnover rates cannot be precisely predicted, although an
annual turnover rate in excess of 100% is not presently anticipated for WRL
Alger Aggressive Growth; 150% for WRL Janus Growth; and 200% for WRL Janus
Global.
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
33
<PAGE>
reasonably competitive spreads or commissions, a portfolio will not necessarily
be paying the lowest spread or commission available. A portfolio does not have
any obligation to deal with any broker, dealer or group of brokers or dealers
in the execution of transactions in portfolio securities.
Decisions as to the assignment of portfolio brokerage business for a portfolio
and negotiation of its commission rates are made by the Sub-Adviser, whose
policy is to obtain "best execution" (prompt and reliable execution at the most
favorable security price) of all portfolio transactions. In placing portfolio
transactions, the Sub-Adviser may give consideration to brokers who provide
supplemental investment research, in addition to such research obtained for a
flat fee, to the Sub-Adviser, and pay spreads or commissions to such brokers or
dealers furnishing such services which are in excess of spreads or commissions
which another broker or dealer may charge for the same transaction.
In selecting brokers and in negotiating commissions, the Sub-Adviser considers
such factors as: the broker's reliability; the quality of its execution
services on a continuing basis; the financial condition of the firm; and
research products and services provided, which include: (i) furnishing advice,
either directly or through publications or writings, as to the value of
securities, the advisability of purchasing or selling specific securities and
the availability of securities or purchasers or sellers of securities and (ii)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends and portfolio strategy and products and other
services (such as third party publications, reports and analyses, and computer
and electronic access, equipment, software, information and accessories) that
assist each Sub-Adviser in carrying out its responsibilities.
Supplemental research obtained through brokers or dealers will be in addition
to, and not in lieu of, the services required to be performed by a Sub-Adviser.
The expenses of a Sub-Adviser will not necessarily be reduced as a result of
the receipt of such supplemental information. A Sub-Adviser may use such
research products and services in servicing other accounts in addition to the
respective portfolio. If a Sub-Adviser determines that any research product or
service has a mixed use, such that it also serves functions that do not assist
in the investment decision-making process, the Sub-Adviser will allocate the
costs of such service or product accordingly. The portion of the product or
service that a Sub-Adviser determines will assist it in the investment
decision-making process may be paid for in brokerage commission dollars. Such
allocation may create a conflict of interest for the Sub-Adviser. Conversely,
such supplemental information obtained by the placement of business for a
Sub-Adviser will be considered by and may be useful to the Sub-Adviser in
carrying out its obligations to a portfolio.
When a portfolio purchases or sells a security in the OTC market, the
transaction takes place directly with a principal market-maker, without the use
of a broker, except in those circumstances where, in the opinion of the
Sub-Adviser, better prices and executions are likely to be achieved through the
use of a broker.
Securities held by a portfolio may also be held by other separate accounts,
mutual funds or other accounts for which the Investment Adviser or Sub-Adviser
serves as an adviser, or held by the Investment Adviser or Sub-Adviser for
their own accounts. Because of different investment objectives or other
factors, a particular security may be bought by the Investment Adviser or Sub-
Adviser for one or more clients when one or more clients are selling the same
security. If purchases or sales of securities for a portfolio or other entities
for which they act as investment adviser or for their advisory clients arise
for consideration at or about the same time, transactions in such securities
will be made, insofar as feasible, for the respective entities and clients in a
manner deemed equitable to all. To the extent that transactions on behalf of
more than one client of the Investment Adviser or Sub-Adviser during the same
period may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
On occasions when the Investment Adviser or a Sub-Adviser deems the purchase or
sale of a security to be in the best interests of a portfolio as well as other
accounts or companies, it may to the extent permitted by applicable laws and
regulations, but will not be obligated to, aggregate the securities to be sold
or purchased for 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; Van
34
<PAGE>
Kampen Funds Inc., 1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, Illinois
60181, As stated above, any such placement of portfolio business will be
subject to the ability of the broker-dealer to provide best execution and to
the Conduct Rules of the National Association of Securities Dealers, Inc.
COMMISSIONS PAID BY THE PORTFOLIOS
AGGREGATE COMMISSIONS
YEAR ENDED DECEMBER 31
---------------------------
PORTFOLIO 1999 1998
- - --------------------------------- ------------- -------------
WRL Alger Aggressive Growth(1) $ 907,331 $ 916,267
WRL VKAM Emerging Growth(2) 1,305,965 920,884
WRL Janus Global 2,219,248 2,373,255
WRL Janus Growth 2,717,764 1,023,925
<TABLE>
<CAPTION>
AFFILIATED BROKERAGE COMMISSIONS
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------------------
PORTFOLIO 1997 1999 % 1998 % 1997 %
- - --------------------------------- ------------- -------------- -------------- --------------- ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
WRL Alger Aggressive Growth(1) $ 754,459 903,540 99.58% 912,105 99.55 $749,587 99.35%
WRL VKAM Emerging Growth(2) 627,400 9,346 < 1% 1,308 < 1% N/A N/A
WRL Janus Global 2,305,145 N/A N/A N/A N/A N/A N/A
WRL Janus Growth 1,367,104 N/A N/A N/A N/A N/A N/A
</TABLE>
------------------------------
(1) The percentage of the portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through Fred Alger Company,
Incorporated for the fiscal year ended December 31, 1999, 1998 and 1997
was 98.90%, 99.27% and 98.37%, respectively.
(2) The percentage of the portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through Morgan Stanley &
Co., Incorporated for the fiscal year ended December 31, 1999, 1998 and
1997 was 1.06%, < 1% and N/A, respectively.
PURCHASE AND REDEMPTION OF SHARES
/DIAMONDS/ 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, Martin Luther King's Birthday, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.) The per share net asset value of a portfolio is determined by
dividing the total value of the securities and other assets, less liabilities,
by the total number of shares outstanding. In determining net asset value,
securities listed on the national securities exchanges and traded on the NASDAQ
National Market are valued at the closing prices on such markets, or if such a
price is lacking for the trading period immediately preceding the time of
determination, such securities are valued at their current bid price. Foreign
securities and currencies are converted to U.S. dollars using the exchange rate
in effect at the close of the Exchange. Other securities for which quotations
are not readily available are valued at fair values as determined in good faith
by a portfolio's Investment Adviser under the supervision of the Fund's Board
of Directors. Money market instruments maturing in 60 days or less are valued
on the amortized cost basis. Values of gold bullion held by a portfolio are
based upon daily quotes provided by banks or brokers dealing in such
commodities.
35
<PAGE>
CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief description of how performance is calculated.
The following sections describe how performance data is calculated in greater
detail.
/DIAMOND/
TOTAL RETURN
Total return quotations for each of the portfolios are computed by finding the
average annual compounded rates of return over the relevant periods that would
equate the initial amount invested to the ending redeemable value, according to
the following equation:
P (1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value (at the end
of the applicable period of a hypotheti-
cal $1,000 payment made at the begin-
ning of the applicable period)
The total return quotation calculations for a portfolio reflect the deduction
of a proportionate 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 are based on a specific thirty-day period
and are computed by dividing the net investment income per share earned during
the period by the maximum offering price per share on the last date of the
period, according to the following formula:
a-b
YIELD = 2 [( --- + 1)6 - 1]
cd
Where: a = dividends and interest earned dur-
ing the period by the portfolio
b = expenses accrued for the period
(net of reimbursement)
c = the average daily number of shares
outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per
share on the last day of the period
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 either qualified, and expects to continue to qualify, for
treatment as a regulated investment company ("RIC") under the Internal Revenue
Code of 1986, as amended (the "Code"). In order to qualify for that treatment,
a portfolio must distribute to its Policyowners for each taxable year at least
90% of its investment company taxable income ("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) 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 (3) 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. If each portfolio qualifies as a regulated investment
company and distributes to its shareholders substantially all of its net income
and net capital gains, then each portfolio should have little or no income
taxable to it under the Code.
36
<PAGE>
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 generally includes all securities of the same issuer). For
purposes of section 817(h), all securities of the same issuer, all interests in
the same real property project, and all interest in the same commodity are
treated as a single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities and political
subdivisions all will be considered securities issued by the same issuer.
If a portfolio fails to qualify as a regulated investment company, the
portfolio will be subject to federal, and possibly state, corporate taxes on
its taxable income and gains (without any deduction for its distributions to
its shareholders) and distributions to its shareholders will constitute
ordinary income to the extent of such Fund's available earnings and profits.
Owners of variable life insurance and annuity contracts which have invested in
such a portfolio might be taxed currently on the investment earnings under
their contracts and thereby lose the benefit of tax deferral. In addition, if a
portfolio failed to comply with the diversification requirements of section
817(h) of the Code and the regulations thereunder, owners of variable life
insurance and annuity contracts which have invested in the portfolio could be
taxed on the investment earnings under their contracts and thereby lose the
benefit of tax deferral. For additional information concerning the consequences
of failure to meet the requirements of section 817(h), see the 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, 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.
Foreign Investments - portfolios investing in foreign securities or currencies
(which may include [list portfolios so authorized] may be required to pay
withholding, income or other taxes to foreign governments or U.S. possession.
Foreign tax withholding from dividends and interest, if any, is generally at a
rate between 10% and 35%. The investment yield of any portfolio that invests in
foreign securities or currencies is reduced by these foreign taxes. Holders of
Policies and Annuity Contracts investing in such portfolios bear the cost of
any foreign taxes but will not be able to claim a foreign tax credit or
deduction for these foreign taxes. 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.
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.
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 the portfolio 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. A portfolio, however, may
qualify for, and may make, an election permitted under Section 853 of the Code
so that shareholders may be eligible to claim a credit or deduction on their
Federal income tax returns for, and will be required to treat as part of the
amounts distributed to them, their pro rata portion of qualified taxes paid or
incurred by the portfolio to foreign countries (which taxes relate primarily to
investment income). The portfolio may make an election under Section 853 of the
Code, provided that more than 50% of the value of the portfolio's total assets
at the close of the taxable year consists of securities in foreign
corporations, and the portfolio satisfies applicable distribution provisions of
the Code. The foreign tax credit available to shareholders is subject to
37
<PAGE>
certain limitations imposed by the Code. In addition, another election is
available that would involve marking to market a portfolio's PFIC stock at the
end of each taxable year (and on certain other dates prescribed in the Code),
with the result that unrealized gains are treated as though they were realized
although any such gains recognized will be ordinary income rather than capital
gain. If this election were made, tax at the portfolio level under the PFIC
rules would be eliminated, but a portfolio could, in limited circumstances,
incur nondeductible interest charges. A portfolio's intention to qualify
annually as a regulated investment company may limit a portfolio's
election with respect to PFIC stock.
The foregoing is only a general summary of some of the important Federal income
tax considerations generally affecting the portfolios and their shareholders.
No attempt is made to present a complete explanation of the Federal tax
treatment of the portfolios' activities, and this discussion and the discussion
in the prospectuses and/or statements of additional information for the
Policies and Annuity Contracts are not intended as a substitute for careful tax
planning. Accordingly, potential investors are urged to consult their own tax
advisors for more detailed information and for information regarding any state,
local, or foreign taxes applicable to the policies, annuity contracts and the
holders thereof.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each portfolio. The Fund is currently comprised of the following
portfolios: WRL VKAM Emerging Growth, WRL Alger Aggressive Growth, WRL Janus
Global, and WRL Janus Growth.
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 of the Fund for the year
ended December 31, 1999 and the report of the Fund's independent accountants
are included in the 1999 Annual Report, and are incorporated herein by
reference to such report.
OTHER INFORMATION
/DIAMOND/
INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS
PricewaterhouseCoopers LLP, located at 400 North Ashley Street, Suite 2800,
Tampa, Florida 33602, serves as the Fund's independent certified public
accountants. The Fund has engaged PricewaterhouseCoopers LLP to examine, in
accordance with generally accepted auditing standards, the financial statements
of each of the Fund's portfolios.
/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.
38
<PAGE>
APPENDIX A
DESCRIPTION OF PORTFOLIO SECURITIES
The following is intended only as a supplement to the information
contained in the Prospectus and should be read only in conjunction with the
Prospectus. Terms defined in the Prospectus and not defined herein have the
same meanings as those in the Prospectus.
1. CERTIFICATE OF DEPOSIT.* A certificate of deposit generally is a
short-term, interest bearing negotiable certificate issued by a commercial bank
or savings and loan association against funds deposited in the issuing
institution.
2. EURODOLLAR CERTIFICATE OF DEPOSIT.* A Eurodollar certificate of
deposit is a short-term obligation of a foreign subsidiary of a U.S. bank
payable in U.S. dollars.
3. FLOATING RATE NOTE.* A floating rate note is debt issued by a
corporation or commercial bank that is typically several years in term but
whose interest rate is reset every one to six months.
4. 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 and 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.
A-2
<PAGE>
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 SEC 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.
A-3
<PAGE>
APPENDIX B
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 then for higher rated bonds.
BB, B, and Predominantly speculative with respect to the issuer's capacity to
CC, CC, C meet required interest and principal payments. BB - lowest degree of
speculation; C- the highest degree of speculation. Quality and
protective characteristics outweighed by large uncertainties or major
risk exposure to adverse conditions.
D In default.
</TABLE>
PLUS (+) OR MINUS (-) - The ratings from "AA" to "BBB" may be modified by the
addition of a plus or minus to show relative standing within the major rating
categories.
UNRATED - Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
<TABLE>
<S> <C> <C>
MOODY'S INVESTORS SERVICE, INC. Aaa Highest qualty, 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 Medum-grade obligations; neither highly protected nor poorly
secured. Interest and principal appear adequate for the present but
certain protective elements may be lacking or may be unreliable over
any great length of time.
Ba More unceratin, 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 assur-
ance of timely interest and principal payments or maintenance of
other contract terms over time.
Caa Poor standing, may be in default; elements of danger with respect to
principal or interest payments.
Ca Speculative in a high degree; could be in default or have other
marked short-comings.
C Lowest-rated; extremely poor prospects of ever attaining investment
standing.
</TABLE>
UNRATED - Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is 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.
B-1
<PAGE>
WRL SERIES FUND, INC.
WRL VKAM EMERGING GROWTH
WRL JANUS GLOBAL
WRL JANUS GROWTH
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 570 Carillon Parkway, St. Petersburg, FL 33716 or by calling the
Fund at (800) 851-9777.
Investment Adviser:
WRL INVESTMENT MANAGEMENT, INC.
Sub-Advisers:
VAN KAMPEN ASSET MANAGEMENT INC.
JANUS CAPITAL CORPORATION
The date of the Prospectus to which this Statement of Additional Information
relates and the date of this Statement of Additional Information is May 1,
2000.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page in this Statement
of
Additional Information
-----------------------
<S> <C>
FUND HISTORY 1
INVESTMENT OBJECTIVES AND POLICIES 2
Investment Restrictions
WRL VKAM Emerging Growth 2
WRL Janus Global 3
WRL Janus Growth 4
INVESTMENT POLICIES 5
Lending 5
Borrowing 6
Short Sales 6
Foreign Securities 6
Foreign Bank Obligations 7
Forward Foreign Currency Contracts 7
When-Issued, Delayed Settlement and Forward Delivery Securities 7
Repurchase and Reverse Repurchase Agreements 8
Temporary Defensive Position 8
U.S. Government Securities 8
Non-Investment Grade Debt Securities 8
Convertible Securities 9
Investments in Futures, Options and Other Derivative Instruments 9
Zero Coupon, Pay-In-Kind and Step Coupon Securities 19
Warrants and Rights 20
Mortgage-Backed Securities 20
Asset-Backed Securities 20
Pass-Through Securities 20
Other Income Producing Securities 21
Illiquid and Restricted/144A Securities 21
Other Investment Companies 22
Bank and Thrift Obligations 22
Variable Rate Master Demand Notes 23
Debt Securities and Fixed-Income Investing 23
High Yield/High-Risk Securities 23
Trade Claims 24
MANAGEMENT OF THE FUND 24
Directors and Officers 24
The Investment Adviser 26
The Sub-Advisers 29
Joint Trading Accounts 30
Personal Securities Transactions 30
Administrative and Transfer Agency Services 30
PORTFOLIO TRANSACTIONS AND BROKERAGE 31
Portfolio Turnover 31
Placement of Portfolio Brokerage 31
PURCHASE AND REDEMPTION OF SHARES 33
Determination of Offering Price 33
Net Asset Valuation 33
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page in this Statement
of
Additional Information
-----------------------
<S> <C>
CALCULATION OF PERFORMANCE
RELATED INFORMATION 3
Total Return 33
Yield Quotations 34
TAXES 34
CAPITAL STOCK OF THE FUND 36
REGISTRATION STATEMENT 36
FINANCIAL STATEMENTS 36
OTHER INFORMATION 36
Certified Public Accountants 36
Custodian
Appendix A - Description of Portfolio Securities A-1
Appendix B - Brief Explanation of
Rating Categories B-1
</TABLE>
ii
<PAGE>
/diamond/ FUND HISTORY
The Fund was incorporated under the laws of the State of Maryland on August 21,
1985 and is registered with the Securities and Exchange Commission ("SEC") as
an open-end management investment company.
The Fund offers its shares only for purchase by the separate accounts of life
companies to fund benefits under variable life insurance policies or variable
annuity contracts issued by AUSA Life Insurance Company, Inc. ("AUSA"), PFL
Life Insurance Company ("PFL"), Western Reserve Life Assurance Co. of Ohio
("WRL") and Peoples Benefit Life Insurance Company ("Peoples") and Transamerica
Occidental Life Insurance Company ("Transamerica") (the "Life Companies").
Shares may be offered to other life insurance companies in the future.
Because Fund shares are sold to separate accounts established to receive and
invest premiums received under variable life insurance policies and purchase
payments received under the variable annuity contracts, it is conceivable that,
in the future, it may become disadvantageous for variable life insurance
separate accounts and variable annuity separate accounts of the Life Companies
to invest in the Fund simultaneously. Neither the Life Companies nor the Fund
currently foresees any such disadvantages or conflicts, either to variable life
insurance policyholders or to variable annuity contract owners. Any Life
Company may notify the Fund's Board of a potential or existing conflict. The
Fund's Board will then determine if a material conflict exists and what action,
if any, should be taken in response. Such action could include the sale of Fund
shares by one or more of the separate accounts, which could have adverse
consequences. Material conflicts could result from, for example, (1) changes in
state insurance laws, (2) changes in Federal income tax laws, or (3)
differences in voting instructions between those given by variable life
insurance policyholders and those given by variable annuity contract owners.
The Fund's Board might conclude that separate funds should be established for
variable life and variable annuity separate accounts. If this happens, the
affected Life Companies will bear the attendant expenses of establishing
separate funds. As a result, variable life insurance policyholders and variable
annuity contract owners would no longer have the economies of scale typically
resulting from a larger combined fund.
The Fund offers a separate class of common stock for each portfolio. All shares
of a portfolio have equal voting rights, but only shares of a particular
portfolio are entitled to vote on matters concerning only that portfolio. Each
of the issued and outstanding shares of a portfolio is entitled to one vote and
to participate equally in dividends and distributions declared by the portfolio
and, upon liquidation or dissolution, to participate equally in the net assets
of the portfolio remaining after satisfaction of outstanding liabilities. The
shares of a portfolio, when issued, will be fully paid and nonassessable, have
no preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights. The holders
of more than 50% of the shares of the Fund voting for the election of directors
can elect all of the directors of the Fund if they so choose. In such event,
holders of the remaining shares would not be able to elect any directors.
Only the separate accounts of the Life Companies may hold shares of the Fund
and are entitled to exercise the rights directly as described above. To the
extent required by law, the Life Companies will vote the Fund's shares held in
the separate accounts, including Fund shares which are not attributable to
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 Investment Company Act of 1940, as
amended (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.
1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the WRL VKAM Emerging Growth, WRL Janus Global and
WRL Janus Growth (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 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, its 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 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.
INESTMENT RESTRICTIONS
/diamond/ WRL VKAM 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.
2
<PAGE>
(B) The portfolio may not purchase securities on margin, except that the
portfolio may obtain such short-term credits as are necessary for the clearance
of transactions and that margin payments and other deposits in connection with
transactions in options, futures contracts and options on futures contracts
shall not be deemed to constitute purchasing securities on margin.
(C) The portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Limitations (i) and (ii) do not apply to
money market funds or to securities received as dividends, through offers of
exchange, or as a result of a consolidation, merger or other reorganization.
(D) The portfolio may not mortgage or pledge any securities owned or held
by the portfolio in amounts that exceed, in the aggregate, 15% of the
portfolio's net assets, provided that this limitation does not apply in the
case of assets deposited to provide margin or guarantee positions in options,
futures contracts and options on futures contracts or the segregation of assets
in connection with such contracts.
(E) The portfolio may not invest 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/ WRL JANUS GLOBAL
The portfolio may not, as a matter of fundamental policy:
1. (a) With respect to 75% of the portfolio's assets, invest in the
securities (other than Government securities as defined in the 1940 Act) of any
one issuer if immediately thereafter, more than 5% of the portfolio's total
assets would be invested in securities of that issuer; or (b) with respect to
100% of the portfolio's assets, own more than either (i) 10% in principal
amount of the outstanding debt securities of an issuer, or (ii) 10% of the
outstanding voting securities of an issuer, except that such restrictions shall
not apply to Government securities, bank money market instruments or bank
repurchase agreements.
2. Invest more than 25% of the portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services; for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of this
restriction, provided that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this shall not
prevent the portfolio from purchasing or selling options, futures, swaps and
forward contracts or from investing in securities or other instruments backed
by physical commodities).
4. Invest directly in real estate or interests in real estate; however,
the portfolio may own debt or equity securities issued by companies engaged in
those businesses.
5. Lend any security or make any other loan if, as a result, more than
25% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the disposition
of its portfolio securities.
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,
3
<PAGE>
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/ WRL JANUS 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 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 policyowner approval:
(A) The portfolio may not, as a matter of non-fundamental policy: (i) enter
into any futures contracts or options on futures contracts for purposes other
than bona fide hedging transactions within the meaning of Commodity Futures
Trading Commission regulations if the aggregate initial margin deposits and
premiums required to establish positions in futures contracts and related
options that do not fall within the definition of bona fide hedging
transactions would exceed 5% of the
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fair market value of the portfolio's net assets, after taking into account
unrealized profits and losses on such contracts it has entered into and (ii)
enter into any futures contracts or options on futures contracts if the
aggregate amount of the portfolio's commitments under outstanding futures
contracts positions and options on futures contracts would exceed the market
value of its total assets.
(B) The portfolio may not mortgage or pledge any securities owned or held
by the portfolio in amounts that exceed, in the aggregate, 15% of the
portfolio's net assets, provided that this limitation does not apply to reverse
repurchase agreements or in the case of assets deposited to provide margin or
guarantee positions in options, futures contracts, swaps, forward contracts or
other derivative instruments or the segregation of assets in connection with
such transactions.
(C) The portfolio may not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount to the securities
sold short, and provided that transactions in options, futures contracts,
swaps, forward contracts and other derivative instruments are not deemed to
constitute selling securities short.
(D) The portfolio may not purchase securities on margin, except that 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) The portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 or any securities for
which the Board of Directors or the Sub-Adviser has made a determination of
liquidity, as permitted under the 1940 Act.
(F) The portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Restrictions (i) and (ii) do not apply to
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) The portfolio may not invest more than 25% of its net assets at the
time of purchase in the securities of foreign issuers and obligors.
(H) The portfolio may not invest in companies for the purpose of
exercising control or management.
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.
/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.
State laws and regulations may impose additional limitations on borrowings.
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 WRL VKAM Emerging Growth, 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.
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/diamond/ BORROWING
Subject to its investment restrictions, each portfolio may borrow money from
banks for temporary or emergency purposes. As a fundamental policy, the amount
borrowed shall not exceed 25% of total assets for all other portfolios.
To secure borrowings, a portfolio may not mortgage or pledge its securities in
amounts that exceed 15% of its net assets.
The portfolios with a common Sub-Adviser may also borrow (or lend) money to
other portfolios or funds that permit such transactions and are also advised by
that Sub-Adviser, provided each portfolio or fund seeks and obtains permission
from the SEC. There is no assurance that such permission would be granted.
/diamond/ SHORT SALES
Each portfolio may sell securities "short against the box." A short sale is the
sale of a security that the portfolio does not own. A short sale is "against
the box" if at all times when the short position is open, the portfolio owns an
equal amount of the securities sold short or securities convertible into, or
exchangeable without further consideration for, securities of the same issue as
the securities sold short.
/diamond/ FOREIGN SECURITIES
Subject to a portfolio's investment restricitions and policies, 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:
o CURRENCY TRADING COSTS. A portfolio incurs costs in converting foreign
currencies into U.S. dollars, and vice versa.
o 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.
o LESS INFORMATION AVAILABLE. There is generally less public information
available about foreign companies.
o MORE DIFFICULT BUSINESS NEGOTIATIONS. A portfolio may find it
difficult to enforce obligations in foreign countries or to negotiate
favorable brokerage commission rates.
o REDUCED LIQUIDITY/INCREASED VOLATILITY. Some foreign securities are
less liquid and their prices more volatile, than securities of
comparable U.S. companies.
o SETTLEMENT DELAYS. Settling foreign securities may take longer than
settlements in the U.S.
o HIGHER CUSTODY CHARGES. Custodianship of shares may cost more for
foreign securities than it does for U.S. securities.
o 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.
o POLITICAL INSTABILITY. In some countries, political instability, war
or diplomatic developments could affect investments.
These risks may be greater in emerging countries or in countries with limited
or emerging markets, In particular, developing countries have relatively
unstable governments, economies based on only a few industries, and securities
markets that trade only a small number of securities. As a result, securities
of issuers located in developing countries may have limited marketability and
may be subject to abrupt or erratic price fluctuations.
At times, a portfolio's foreign securities may be listed on exchanges or traded
in markets which are open on days (such as Saturday) when the portfolio does
not compute a price or accept orders for purchase, sale or exchange of shares.
As a result, the net asset value of the portfolio may be significantly affected
by trading on days when policyholders cannot make transactions.
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.
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 ADS.
FOREIGN EXCHANGE TRANSACTIONS. To the extent a portfolio invests directly in
foreign securities, a portfolio will
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engage in foreign exchange transactions. The foreign currency exchange market
is subject to little government regulation, and such transactions generally
occur directly between parties rather than on an exchange or in an organized
market. This means that a portfolio is subject to the full risk of default by a
counterparty in such a transaction. Because such transactions often take place
between different time zones, a portfolio may be required to complete a
currency exchange transaction at a time outside of normal business hours in the
counterparty's location, making prompt settlement of such transaction
impossible. This exposes a portfolio to an increased risk that the counterparty
will be unable to settle the transaction. Although the counterparty in such
transactions is often a bank or other financial institution, currency
transactions are generally not covered by insurance otherwise applicable to
such institutions.
/diamond/ FOREIGN BANK OBLIGATIONS
A portfolio may invest in foreign bank obligations and obligations of foreign
branches of domestic banks. These investments present 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/ 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.
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 trasaction. 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 or purchase
commitments until payment is made. Such of the 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 a 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.
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/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.
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. Reverse repurchase
agreements may be used to provide cash to satisfy unusually heavy redemption
requests or for temporary or emergency purposes without necessity of selling
portfolio securities or to earn additional income on portfolio securities such
as U.S. Treasury bills and notes. While a reverse repurchase agreement is
outstanding, the portfolio will segregate with its custodian cash and
appropriate 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. A portfolio will enter into reverse repurchase
agreements only with parties that the portfolio's Sub-Adviser deems
creditworthy, and that have been reviewed by the Board of Directors of the
Fund.
/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/ TEMPORARY DEFENSIVE POSITION
For temporary defensive purposes, 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 decrease. Furthermore, when a
portfolio assumes a temporary defensive position it may not be able to achieve
its investment objective.
/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
determined by Moody's Investors Service, Inc.
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("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 B 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.
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, converts 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
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.
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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 would be made 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.
Futures may also be used for managing a portfolio's exposure to change in
securities prices and foreign currencies; as an efficient means of adjusting
its overall exposure to certain markets, or in an effort to enhance income.
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 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
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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.
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 28. 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
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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 increased by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is similar in some respect
to the purchase of protective put options on portfolio securities. For example,
a portfolio may buy a put option on a futures contract to attempt to hedge the
portfolio's securities against the risk of falling prices.
The amount of risk a portfolio assumes when it buys an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the options bought.
FORWARD CONTRACTS. A portfolio may enter into forward foreign currency exchange
contracts ("forward currency contracts") to attempt to minimize the risk to the
portfolio from adverse changes in the relationship between the U.S. dollar and
other currencies. A forward currency contract is an obligation to buy or sell
an amount of a specified currency for an agreed price (which may be in U.S.
dollars or a foreign currency) at a future date which is individually
negotiated between currency traders and their customers. A portfolio may invest
in forward currency contracts with stated contract values of up to the value of
the portfolio's assets.
A portfolio may exchange foreign currencies for U.S. dollars and for other
foreign currencies in the normal course of business and may buy and sell
currencies through forward currency contracts in order to fix a price for
securities it has agreed to buy or sell. A portfolio may enter into a forward
currency contract, for example, when it enters into a contract to buy or sell a
security denominated in or exposed to fluctuations in a foreign currency in
order to "lock in" the U.S. dollar price of the security ("transaction hedge").
Additionally, when a portfolio's Sub-Adviser believes that a foreign currency
in which portfolio securities are denominated may suffer a substantial decline
against the U.S. dollar, a portfolio may enter into a forward currency contract
to sell an amount of that foreign currency (or a proxy currency whose
performance is expected to replicate the performance of that currency) for U.S.
dollars approximating the value of some or all of the portfolio securities
denominated in that currency (not exceeding the value of the portfolio's assets
denominated in that currency) or by participating in options or futures
contracts with respect to the currency, or, when the portfolio's Sub-Adviser
believes that the U.S. dollar may suffer a substantial decline against a
foreign currency for a fixed U.S. dollar amount ("position hedge"). This type
of hedge seeks to minimize the effect of currency appreciation as well as
depreciation, but does not protect against a decline in the security's value
relative to other securities denominated in the foreign currency.
A portfolio also may enter into a forward currency contract with respect to a
currency where the portfolio is considering the purchase of investments
denominated in that currency but has not yet done so ("anticipatory hedge").
In any of the above circumstances a portfolio may, alternatively, enter into a
forward currency contract with respect to a different foreign currency when a
portfolio's Sub-Adviser believes that the U.S. dollar value of that currency
will correlate with the U.S. dollar value of the currency in which portfolio
securities of, or being considered for purchase by, the portfolio are
denominated ("cross-hedge"). For example, if a portfolio's Sub-Adviser believes
that a particular foreign currency may decline relative to the U.S. dollar, a
portfolio could enter into a contract to sell that currency or a proxy currency
(up to the value of the portfolio's assets denominated in that currency) in
exchange for another currency that the Sub-Adviser expects to remain stable or
to appreciate relative to the U.S. dollar. Shifting a portfolio's currency
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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 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
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put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the portfolio to hedge the
increased cost up to the amount of premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium received, and only if exchange
rates move in the expected direction. If that does not occur, the option may be
exercised and the portfolio would be required to buy or sell the underlying
currency at a loss which may not be offset by the amount of the premium.
Through the writing of options on foreign currencies, a portfolio also may lose
all or a portion of the benefits which might otherwise have been obtained from
favorable movements in exchange rates.
A portfolio may write covered call options on foreign currencies. A call option
written on a foreign currency by a portfolio is "covered" if the portfolio owns
the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated
account by its custodian) upon conversion or exchange of other foreign currency
held in its portfolio. A call option is also covered if the portfolio has a
call on the same foreign currency and in the same principal amount as the call
written if the exercise price of the call held (i) is equal to or less than the
exercise price of the call written or (ii) is greater than the exercise price
of the call written, and if the difference is maintained by the portfolio in
cash or high-grade liquid assets in a segregated account with the Fund's
custodian.
A portfolio may also write call options on foreign currencies for cross-hedging
purposes that may not be deemed to be covered. A call option on a foreign
currency is for cross-hedging purposes if it is not covered but is designed to
provide a hedge against a decline due to an adverse change in the exchange rate
in the U.S. dollar value of a security which the portfolio owns or has the
right to acquire and which is denominated in the currency underlying the
option. In such circumstances, the portfolio collateralizes the option by
maintaining segregated assets in an amount not less than the value of the
underlying foreign currency in U.S. dollars marked-to-market daily.
A portfolio may buy or write options in privately negotiated transactions on
the types of securities and indices based on the types of securities in which
the portfolio is permitted to invest directly. A portfolio will effect such
transactions only with investment dealers and other financial institutions
(such as commercial banks or savings and loan institutions) deemed
creditworthy, and only pursuant to procedures adopted by the portfolio's Sub-
Adviser for monitoring the creditworthiness of those entities. To the extent
that an option bought or written by a portfolio in a negotiated transaction is
illiquid, the value of an option bought or the amount of the portfolio's
obligations under an option written by the portfolio, as the case may be, will
be subject to the portfolio's limitation on illiquid investments. In the case
of illiquid options, it may not be possible for the portfolio to effect an
offsetting transaction at the time when the portfolio's Sub-Adviser believes it
would be advantageous for the portfolio to do so.
OPTIONS ON SECURITIES. In an effort to reduce fluctuations in net asset value,
a portfolio may write covered put and call options and may buy put and call
options and warrants on securities that are traded on United States and foreign
securities exchanges and over-the-counter ("OTC"). A portfolio also may write
call options that are not covered for cross-hedging purposes. A portfolio may
write and buy options on the same types of securities that the portfolio could
buy directly and may buy options on financial indices as described above with
respect to futures contracts. There are no specific limitations on a
portfolio's writing and buying options on securities.
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
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not less than the market value of the underlying security, marked-to-market
daily. A portfolio would write a call option for cross-hedging purposes,
instead of writing a covered call option, when the premium to be received from
the cross-hedge transaction would exceed that which would be received from
writing a covered call option and the portfolio's Sub-Adviser believes that
writing the option would achieve the desired hedge.
If a put or call option written by a portfolio was exercised, the portfolio
would be obligated to buy or sell the underlying security at the exercise
price. Writing a put option involves the risk of a decrease in the market value
of the underlying security, in which case the option could be exercised and the
underlying security would then be sold by the option holder to the portfolio at
a higher price than its current market value. Writing a call option involves
the risk of an increase in the market value of the underlying security, in
which case the option could be exercised and the underlying security would then
be sold by the portfolio to the option holder at a lower price than its current
market value. Those risks could be reduced by entering into an offsetting
transaction. The portfolio retains the premium received from writing a put or
call option whether or not the option is exercised.
The writer of an option may have no control when the underlying security must
be sold, in the case of a call option, or bought, in the case of a put option,
since with regard to certain options, the writer may be assigned an exercise
notice at any time prior to the termination of the obligation. Whether or not
an option expires unexercised, the writer retains the amount of the premium.
This amount, of course, may, in the case of a covered call option, be offset by
a decline in the market value of the underlying security during the option
period. If a call option is exercised, the writer experiences a profit or loss
from the sale of the underlying security. If a put option is exercised, the
writer must fulfill the obligation to buy the underlying security.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is
that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the holder
of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously bought. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit a portfolio to write another call option on the underlying security with
either a different exercise price or expiration date or both or, in the case of
a written put option, will permit a portfolio to write another put option to
the extent that the exercise price thereof is secured by deposited high-grade
liquid assets. Also, effecting a closing transaction will permit the cash or
proceeds from the concurrent sale of any securities subject to the option to be
used for other portfolio investments. If a portfolio desires to sell a
particular security on which the portfolio has written a call option, the
portfolio will effect a closing transaction prior to or concurrent with the
sale of the security.
A portfolio may realize a profit from a closing transaction if the price of the
purchase transaction is less than the premium received from writing the option
or the price received from a sale transaction is more than the premium paid to
buy the option; a portfolio may realize a loss from a closing transaction if
the price of the purchase transaction is less than the premium paid to buy the
option. Because increases in the market of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the repurchase of a call option is likely to be offset in whole or in 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
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and then write a call option against that security. The exercise price of a
call option may be below ("in-the-money"), equal to ("at-the-money") or above
("out-of-the-money") the current value of the underlying security at the time
the option is written. Buy-and-write transactions using in-the-money call
options may be used when it is expected that the price of the underlying
security will remain flat or decline moderately during the option period.
Buy-and-write transactions using at-the-money call options may be used when it
is expected that the price of the underlying security will remain fixed or
advance moderately during the option period. Buy-and-write transactions using
out-of-the-money call options may be used when it is expected that the premiums
received from writing the call option plus the appreciation in the market price
of the underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call options
are exercised in such transactions, a portfolio's maximum gain will be the
premium received by it for writing the option, adjusted upwards or downwards by
the difference between the portfolio's purchase price of the security and the
exercise price. If the options are not exercised and the price of the
underlying security declines, the amount of such decline will be offset by the
amount of premium received.
The writing of covered put options is similar in terms of risk and return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and a portfolio's gain will be limited to the
premium received. If the market price of the underlying security declines or
otherwise is below the exercise price, the portfolio may elect to close the
position or take delivery of the security at the exercise price and a
portfolio's return will be the premium received from the put options minus the
amount by which the market price of the security is below the exercise price.
A portfolio may buy put options to attempt to hedge against a decline in the
value of its securities. By using put options in this way, a portfolio will
reduce any profit it might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.
A portfolio may buy call options to attempt to hedge against an increase in the
price of securities that the portfolio may buy in the future. The premium paid
for the call option plus any transaction costs will reduce the benefit, if any,
realized by a portfolio upon exercise of the option, and, unless the price of
the underlying security rises sufficiently, the option may expire worthless to
the portfolio.
In purchasing an option, a portfolio would be in a position to realize a gain
if, during the option period, the price of the underlying security increased
(in the case of a call) or decreased (in 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
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rate swap, cap or floor transaction unless the unsecured senior debt or the
claims-paying ability of the other party thereto is rated in one of the three
highest rating categories of at least one nationally recognized statistical
rating organization at the time of entering into such transaction. A
portfolio's Sub-Adviser will monitor the creditworthiness of all counterparties
on an ongoing basis. If there is a default by the other party to such a
transaction, a portfolio will have contractual remedies pursuant to the
agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. The Sub-Advisers have determined
that, as a result, the swap market has become relatively liquid. Caps and
floors are more recent innovations for which standardized documentation has not
yet been developed and, accordingly, they are less liquid than swaps. To the
extent a portfolio sells (I.E., writes) caps and floors, it will segregate with
the custodian cash or other liquid assets having an aggregate net asset value
at least equal to the full amount, accrued on a daily basis, of the portfolio's
obligations with respect to any caps or floors.
Interest rate swap transactions are subject to limitations set forth in each
portfolio's policies. These transactions may in some instances involve the
delivery of securities or other underlying assets by a portfolio or its
counterparty to collateralize obligations under the swap. Under the
documentation currently used in those markets, the risk of loss with respect to
interest rate swaps is limited to the net amount of the interest payments that
a portfolio is contractually obligated to make. If the other party to an
interest rate swap that is not collateralized defaults, a portfolio would risk
the loss of the net amount of the payments that the portfolio contractually is
entitled to receive. A portfolio may buy and sell (I.E., write) caps and floors
without limitation, subject to the segregated account requirement described
above.
In addition to the instruments, strategies and risks described in this
Statement of Additional Information and in the Prospectus, there may be
additional opportunities in connection with options, futures contracts, forward
currency contracts, and other hedging techniques, that become available as each
portfolio's Sub-Adviser develops new techniques, as regulatory authorities
broaden the range of permitted transactions and as new instruments and
techniques are developed. A Sub-Adviser may use these opportunities to the
extent they are consistent with each portfolio's respective investment
objective and are permitted by each portfolio's respective investment
limitations and applicable regulatory requirements.
SUPRANATIONAL AGENCIES. A portfolio may invest up to 10% of its assets in debt
obligations of supranational agencies such as: the International Bank for
Reconstruction and Development (commonly referred to as the World Bank), which
was chartered to finance development projects in developing member countries;
the European Community, which is a twelve-nation organization engaged in
cooperative economic activities; the European Coal and Steel Community, which
is an economic union of various European nations' steel and coal industries;
and the Asian Development Bank, which is an international development bank
established to lend funds, promote investment and provide technical assistance
to member nations in the Asian and Pacific regions. Debt obligations of
supranational agencies are not considered Government Securities and are not
supported, directly or indirectly, by the U.S. Government.
INDEX OPTIONS. In seeking to hedge all or a portion of its investments, a
portfolio may purchase and write put and call options on securities indices
listed on U.S. or foreign securities exchanges or traded in the
over-the-counter market, which indices include securities held in the
portfolios. The portfolios with such option writing authority may write only
covered options. A portfolio may also use securities index options as a means
of participating in a securities market without making direct purchases of
securities.
A securities index measures the movement of a certain group of securities by
assigning relative values to the securities included in the index. Options on
securities indexes are generally similar to options on specific securities.
Unlike options on securities, however, options on securities indices do not
involve the delivery of an underlying security; the option in the case of an
option on a securities index represents the holder's right to obtain from the
writer in cash a fixed multiple of the amount by which the exercise price
exceeds (in the case of a call) or is less than (in the case of a put) the
closing value of the underlying securities index on the exercise date. A
portfolio may purchase and write put and call options on securities indexes or
securities index futures contracts that are traded on a U.S. exchange or board
of trade or a foreign exchange, to the extent permitted under rules and
interpretations of the Commodity Futures Trading Commission ("CFTC"), as a
hedge against changes in market conditions and interest rates, and for duration
management, and may enter into closing transactions with respect to those
options to terminate existing positions. A securities index fluctuates with
changes in the market values of the securities included in the index.
Securities index options may be based on a broad or narrow market index or on
an industry or market segment.
The delivery requirements of options on securities indices differ from options
on securities. Unlike a securities option, which contemplates the right to take
or make delivery of securities at a specified price, an option on a securities
index gives the holder the right to receive a cash "exercise settlement amount"
equal to (i) the amount, if any, by which the fixed exercise price of the
option exceeds (in the case of a put) or is less than (in
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the case of a call) the closing value of the underlying index on the date of
exercise, multiplied by (ii) a fixed "index multiplier." Receipt of this cash
amount will depend upon the closing level of the securities index upon which
the option is based being greater than, in the case of a call, or less than, in
the case of a put, the exercise price of the option. The amount of cash
received will be equal to the difference between the closing price of the index
and the exercise price of the option expressed in dollars times a specified
multiple. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. The writer may offset its position
in securities index options prior to expiration by entering into a closing
transaction on an exchange or it may allow the option to expire unexercised.
The effectiveness of purchasing or writing securities index options as a
hedging technique will depend upon the extent to which price movements in the
portion of a securities portfolio being hedged correlate with price movements
of the securities index selected. Because the value of an index option depends
upon movements in the level of the index rather than the price of a particular
security, whether a portfolio realizes a gain or loss from the purchase of
writing of options on an index depends upon movements in the level of prices in
the market generally or, in the case of certain indices, in an industry or
market segment, rather than movements in the price of a particular security. As
a result, successful use by a portfolio of options on securities indices is
subject to the sub-adviser's ability to predict correctly movements in the
direction of the market generally or of a particular industry. This ability
contemplates different skills and techniques from those used in predicting
changes in the price of individual securities.
Securities index options are subject to position and exercise limits and other
regulations imposed by the exchange on which they are traded. The ability of a
portfolio to engage in closing purchase transactions with respect to securities
index options depends on the existence of a liquid secondary market. Although a
portfolio will generally purchase or write securities index options only if a
liquid secondary market for the options purchased or sold appears to exist, no
such secondary market may exist, or the market may cease to exist at some
future date, for some options. No assurance can be given that a closing
purchase transaction can be effected when the sub-adviser desires that a
portfolio engage in such a transaction.
WEBS AND OTHER INDEX-RELATED SECURITIES. A portfolio may invest in shares in an
investment company whose shares are known as "World Equity Benchmark Shares" or
"WEBS." WEBS have been listed for trading on the American Stock Exchange, Inc.
The portfolios also may invest in the CountryBaskets Index Fund, Inc., or
another fund the shares of which are the substantial equivalent of WEBS. A
portfolio may invest in S&P Depositary Receipts, or "SPDRs." SPDRs are
securities that represent ownership in a long-term unit investment trust that
holds a portfolio of common stocks designed to track the performance of the S&P
500 Index. A portfolio investing in a SPDR would be entitled to the dividends
that accrue to the S&P 500 stocks in the underlying portfolio, less trust
expenses.
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
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the portfolio's ability to meet redemption requests or other current
obligations.
ADDITIONAL RISKS OF OPTIONS ON FOREIGN CURRENCIES, FORWARD CONTRACTS AND
FOREIGN INSTRUMENTS. Unlike transactions entered into by a portfolio in futures
contracts, options on foreign currencies and forward contracts are not traded
on contract markets regulated by the CFTC or (with the exception of certain
foreign currency options) by the SEC. To the contrary, such instruments are
traded through financial institutions acting as market-makers, although foreign
currency options are also traded OTC. In an OTC trading environment, many of
the protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of
time. Although the buyer of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, an option writer and a buyer or seller of futures or forward
contracts could lose amounts substantially in excess of any premium received or
initial margin or collateral posted due to the potential additional margin and
collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges are available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the OCC, thereby reducing the
risk of counterparty default. Further, a liquid secondary market in options
traded on a national securities exchange may be more readily available than in
the OTC market, potentially permitting a portfolio to liquidate open positions
at a profit prior to exercise or expiration, or to limit losses in the event of
adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the OTC market. For example, exercise
and settlement of such options must be made exclusively through the OCC, which
has established banking relationships in applicable foreign countries for this
purpose. As a result, the OCC may, if it determines that foreign government
restrictions or taxes would prevent the orderly settlement of foreign currency
option exercises, or would result in undue burdens on the OCC or its clearing
member, impose special procedures on exercise and settlement, such as technical
changes in the mechanics of delivery of currency, the fixing of dollar
settlement prices or prohibitions, on exercise.
In addition, options on U.S. Government securities, futures contracts, options
on futures contracts, forward contracts and options on foreign currencies may
be traded on foreign exchanges and OTC in foreign countries. Such transactions
are subject to the risk of governmental actions affecting trading in or the
prices of foreign currencies or securities. The value of such positions also
could be adversely affected by (i) other complex foreign political and economic
factors, (ii) lesser availability than in the United States of data on which to
make trading decisions, (iii) delays in a portfolio's ability to act upon
economic events occurring in foreign markets during nonbusiness hours in the
United States, (iv) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States, and (v) low
trading volume.
/diamond/ZERO COUPON, PAY-IN-KIND AND
STEP COUPON SECURITIES
Subject to any limitations set forth in the policies and investment
restrictions for a portfolio, a portfolio may invest in zero coupon,
pay-in-kind 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
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to reduce the assets to which a portfolio's expenses could be allocated and to
reduce the rate of return for the portfolio. In some circumstances, such sales
might be necessary in order to satisfy cash distribution requirements even
though investment considerations might otherwise make it undesirable for the
portfolio to sell the securities at the time.
Generally, the market prices of zero coupon, step coupon and pay-in-kind
securities are more volatile than the prices of securities that pay interest
periodically and in cash and are likely to respond to changes in interest rates
to a greater degree than other types of debt securities having similar
maturities and credit quality.
/diamond/ WARRANTS AND RIGHTS
Subject to its investment limitations, a portfolio may invest in warrants and
rights. Warrants are, in effect, longer-term call options. They give the holder
the right to purchase a given number of shares of a particular company at
specified prices, usually higher than the market price at the time of issuance,
for a period of years or to perpetuity. The purchaser of a warrant expects the
market price of the security will exceed the purchase price of the warrant plus
the exercise price of the warrant, thus giving him a profit. Of course, because
the market price may never exceed the exercise price before the expiration date
of the warrant, the purchaser of the warrant risks the loss of the entire
purchase price of the warrant. Warrants generally trade in the open market and
may be sold rather than exercised. Warrants are sometimes sold in unit form
with other securities of an issuer. Units of warrants and common stock may be
employed in financing young unseasoned companies. The purchase price of a
warrant varies with the exercise price of the warrant, the current market value
of the underlying security, the life of the warrant and various other
investment factors.
In contrast, rights, which also represent the right to buy common shares,
normally have a subscription price lower than the current market value of the
common stock and a life of two to four weeks.
Warrants and rights may be considered more speculative than certain other types
of investments in that they do not entitle a holder to dividends or voting
rights with respect to the securities which may be purchased, nor do they
represent any rights in the assets of the issuing company. Also, the value of a
warrant or right does not necessarily change with the value of the underlying
securities and a warrant or right ceases to have value if it is not exercised
prior to the expiration date.
/diamond/ MORTGAGE-BACKED SECURITIES
Subject to a portfolio's investment restrictions and policies, 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 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 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 response to changes in interest rates.
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
Subject to a portfolio's investment restrictions and policies, 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
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of pass-through securities, such as mortgage-backed securities, asset-backed
securities and participation interests. A pass-through security is a share or
certificate of interest in a pool of debt obligations that have been repackaged
by an intermediary, such as a bank or broker-dealer. The purchaser receives an
undivided interest in the underlying pool of securities. The issuers of the
underlying securities make interest and principal payments to the intermediary
which are passed through to purchasers, such as the portfolio. The most common
type of pass-through securities are mortgage-backed securities. GNMA
Certificates are mortgage-backed securities that evidence an undivided interest
in a pool of mortgage loans. GNMA Certificates differ from traditional bonds in
that principal is paid back monthly by the borrowers over the term of the loan
rather than returned in a lump sum at maturity. The portfolio will generally
purchase "modified pass-through" GNMA Certificates, which entitle the holder to
receive a share of all interest and principal payments paid and owned on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment. GNMA Certificates are backed
as to the timely payment of principal and interest by the full faith and credit
of the U.S. Government.
The Federal Home Loan Mortgage Corporation ("FHLMC") issues two types of
mortgage pass-through securities: mortgage participation certificates ("PCs")
and guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates
in that each PC represents a pro rata share of all interest and principal
payments made and owned on the underlying pool. FHLMC guarantees timely
payments of interest on PCs and the full return of principal. GMCs also
represent a pro rata interest in a pool of mortgages. However, these
instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. This type of security is guaranteed by FHLMC as to
timely payment of principal and interest, but is not backed by the full faith
and credit of the U.S. Government.
FNMA issues guaranteed mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owned on the underlying pool. This type of security is guaranteed by
FNMA as to timely payment of principal and interest, but it is not backed by
the full faith and credit of the U.S. Government.
/diamond/OTHER INCOME PRODUCING
SECURITIES
Subject to each portfolio's investment restrictions and policies, other types
of income producing securities that a portfolio may purchase include, but are
not limited to, the following types of securities:
VARIABLE AND FLOATING RATE OBLIGATIONS. These types of securities are
relatively long-term instruments that often carry demand features
permitting the holder to demand payment of principal at any time or at
specified intervals prior to maturity.
STANDBY COMMITMENTS. These instruments, which are similar to a put,
give a portfolio the option to obligate a broker, dealer or bank to
repurchase a security held by the portfolio at a specified price.
TENDER OPTION BONDS. Tender option bonds are relatively long-term bonds
that are coupled with the agreement of a third party (such as a broker,
dealer or bank) to grant the holders of such securities the option to
tender the securities to the institution at periodic intervals.
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.
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 regarding income producing securities in
which a portfolio may invest.)
/diamond/ ILLIQUID AND RESTRICTED/144A SECURITIES
A portfolio may invest up to 15% of its net assets in illiquid securities
(I.E., securities that are not readily marketable).
In recent years, a large institutional market has developed for certain
securities that are not registered under the Securities Act of 1933 ("1933
Act"). Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend on an
efficient institutional market in which such unregistered securities can
readily be resold or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not dispositive of the
liquidity of such investments.
Rule 144A under the 1933 Act established a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. Institutional markets for restricted securities that
might develop as a result of Rule 144A could provide both readily ascertainable
values for restricted securities and the ability to liquidate an investment in
order to satisfy share redemption orders. An insufficient number of qualified
institutional buyers interested in purchasing a Rule 144A-eligible security
held by a portfolio could, however, adversely affect the marketability of such
portfolio security and the portfolio might be unable to dispose of such
security promptly or at reasonable prices.
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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 WRL Janus Growth, or WRL Janus 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/ 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
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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.
/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
adjustment 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.
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/ DEBT SECURITIES AND
FIXED-INCOME INVESTING
Debt securities include securities such as corporate bonds and debentures;
commercial paper; trust preferreds, 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 payment prospects and principal security for such bonds appear
adequate for the present, but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have speculative
characteristics. (See Appendix B 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/ 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 B for a description of debt securities rating.)
/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
23
<PAGE>
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 investment.
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/ 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 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 AND OFFICERS
The Fund is governed by a Board of Directors. Subject to the supervision of the
Board of Directors, the assets of each portfolio are managed by an investment
adviser and sub-advisers, and by portfolio managers. The Board of Directors is
responsible for managing the business and affairs of the Fund and oversees the
operation of the Fund by its officers. It also reviews the management of the
portfolios' assets by the investment adviser and sub-adviser. Information about
the Directors and officers of the Fund is as follows:
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
- - -------------------------------- ---------------------------- -----------------------------------------------------------
<S> <C> <C>
PETER R. BROWN DIRECTOR Retired (January, 2000 - present); Chairman of the Board,
(DOB 5/10/28), Peter Brown Construction Company (construction contrac-
11180 6th Street East tors and engineers), Largo, Florida (1963 - 2000); Trustee
Treasure Island, Florida 33706 of IDEX Mutual Funds, Rear Admiral (Ret.) U.S. Navy
Reserve, Civil Engineer Corps.
CHARLES C. HARRIS DIRECTOR Trustee of IDEX Mutual Funds, (March, 1994 - present)
(DOB 7/15/30), former Trustee of IDEX Fund, IDEX II Series Fund and
35 Winston Drive IDEX Fund 3.
Clearwater, Florida 34616
RUSSELL A. KIMBALL, JR. DIRECTOR General Manager, Sheraton Sand Key Resort (resort
(DOB 8/17/44), hotel), Clearwater, Florida (1975 - present)
1160 Gulf Boulevard
Clearwater Beach, Florida 34630
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
- - -------------------------- ---------------------------- -------------------------------------------------------------
<S> <C> <C>
JOHN R. KENNEY(1,2) CHAIRMAN OF THE BOARD Chairman of the Board, Director and Co-CEO of Great
(DOB 2/8/38) OF DIRECTORS AND Companies, L.L.C.; Chairman of the Board of Directors
PRESIDENT (1982 - present), Chief Executive Officer (1982 - present),
President (1978 - 1987 and December, 1992 - 1999),
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), St. Petersburg, Florida; Chairman of the Board of
Directors (September, 1996 - present), WRL Investment
Services, Inc., St. Petersburg, Florida; Chairman of the
Board of Directors (February, 1997 - present), AEGON
Asset Management Services, Inc., St.Petersburg, Florida;
Director (December, 1990 - present); IDEX Management,
Inc., (investment adviser), St. Petersburg, Florida; Trustee
and Chairman (September, 1996 - present) of IDEX
Mutual Funds (investment companies) St. Petersburg,
Florida.
PAT BAIRD DIRECTOR AND EXECUTIVE President and Trustee (November, 1999 - present), IDEX
(DOB 1/19/54) VICE PRESIDENT Mutual Funds; Executive Vice President, Chief Operating
433 Edgewood Road, NE, Officer (February, 1996 - present) Executive Vice
Cedar Rapids, Iowa 52499 President and CFO (February, 1995 - February, 1996),
Vice President, Chief Financial Officer (May, 1992 -
February, 1995), AEGON USA.
ALLAN HAMILTON(1,2) TREASURER, PRINCIPAL Vice President and Controller (1987 - present), Treasurer
(DOB 11/26/56) FINANCIAL OFFICER (February, 1997 - present).
JOHN K. CARTER(1,2) VICE PRESIDENT, Vice President, Secretary and Counsel (December, 1999 -
(DOB 04/24/61) SECRETARY AND COUNSEL present), IDEX Mutual Funds; Vice President, Counsel and
Assistant Secretary (April, 2000 - present) of Idex Investor
Services, Inc., AEGON Asset Management Services, Inc.
and WRL Investment Services, Inc.; Vice President,
Counsel, Compliance Officer and Assistant Secretary
(April, 2000 - present) of Idex Management, Inc. and WRL
Investment Management, Inc.; Vice President and Counsel
(March, 1997 - May 1999), Salomon Smith Barney;
Assistant Vice President, Associate Corporate Counsel
and Trust Officer (September, 1993 - March 1997),
Franklin Templeton Mutual Funds.
THOMAS E. PIERPAN(1,2) ASSISTANT SECRETARY, Vice President, Secretary and Counsel (December, 1997 -
(DOB 10/18/43) AND VICE PRESIDENT December, 1999); Assistant Secretary (March, 1995 -
(DOB 10/18/43) December, 1997) of WRL Series Funds, Inc.; Vice
President and Assistant Secretary 1999 - present), Vice
President, Counsel and Secretary (December, 1997 -
1999) of IDEX Mutual Funds (mutual fund); Assistant Vice
President, Counsel and Assistant Secretary (November,
1997 - present) of Intersecurities, Inc. (broker-dealer);
Senior Vice President, General Counsel and Assistant
Secretary (April, 2000 - present) of AEGON Equity Group;
Senior Vice President and General Counsel (1999 -
present), Vice President (November, 1993 - present),
Associate General Counsel (February, 1995 - 1997),
Assistant Secretary, (February, 1995 - present) of Western
Reserve Life Assurance of Ohio.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
- - ----------------------- ---------------------------- ---------------------------------------------------------
<S> <C> <C>
ALAN M. YAEGER(1,2) EXECUTIVE VICE Executive Vice President (June, 1993 - present), Chief
(DOB 10/21/46) PRESIDENT Financial Officer (December, 1995 - present), Actuary
(1972 - present), Western Reserve Life Assurance
Company of Ohio; Director (September, 1996 - present),
WRL Investment Management, Inc. (investment adviser)
St. Petersburg, Florida; Director (September, 1996 -
present), WRL Investment Services, Inc., St. Petersburg,
Florida.
</TABLE>
(1) The principal business address is Western Reserve Life Assurance
Co. of Ohio, P.O. Bos 5068, Clearwater, Florida 33758-5068.
(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 $10,000 to each Director
who is not affiliated with the Investment Adviser or the Sub-Advisers
("disinterested Director"). Each disinterested Director also receives $1,500,
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, 1999. The compensation table provides
compensation amounts paid to disinterested Directors of the Fund for the fiscal
year ended December 31, 1999.
Director's Fees Paid - Year Ended December 31, 1999
<TABLE>
<CAPTION>
PORTFOLIO AMOUNT PAID
- - ---------- ------------
<S> <C>
WRL VKAM Emerging Growth $8,000
WRL Janus Global 8,000
WRL Janus Growth 11,000
</TABLE>
Compensation Table
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS TOTAL COMPENSATION
AGGREGATE ACCRUED AS ESTIMATED PAID TO DIRECTORS FROM
COMPENSATION FROM PART OF ANNUAL BENEFITS WRL SERIES FUND, INC. AND
NAME OF PERSON, POSITION WRL SERIES FUND, INC. FUND EXPENSES* UPON RETIREMENT IDEX MUTUAL FUNDS
- - ----------------------------------- ----------------------- ---------------- ----------------- --------------------------
<S> <C> <C> <C> <C>
Peter R. Brown, Director $15,500 0 N/A $43,750
Charles C. Harris, Director 15,500 0 N/A 43,750
Russell A. Kimball, Jr., Director 15,500 0 N/A 15,500
</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 Mutual Funds to a disinterested Director or
Trustee on a current basis for services rendered as director. Deferred
compensation amounts will accumulate based on the value of Class A shares of a
portfolio of IDEX Mutual Funds (without imposition of sales charge), as elected
by the Director. As of April 1, 1999, 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") located at 570 Carillon
Parkway, St. Petersburg, FL 33716, 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.
26
<PAGE>
("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 N.V., 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 (that commenced operations prior to
that date) on December 16, 1996. The Investment Advisory Agreement provides
that it will continue in effect 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 p. 29.
Advisory Fee. The method of computing the investment advisory fee is fully
described in the Fund's prospectus. For the years ended December 31, 1999, 1998
and 1997, the Investment Adviser was paid fees for its services to each
portfolio in the following amounts:
ADVISORY FEES
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------
Portfolio 1999 1998 1997
- - --------- ------------- ------------- -------------
<S> <C> <C> <C>
WRL VKAM Emerging Growth $ 8,946,705 $ 5,408,098 $ 4,075,498
WRL Janus Global 10,293,952 7,537,671 5,591,818
WRL Janus Growth 25,489,599 18,111,607 13,716,824
TOTAL $44,730,256 $31,057,376 $23,384,140
=========== =========== ===========
</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 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,
2001, to pay expenses on behalf of the
27
<PAGE>
portfolios 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%. The following expenses were paid by the investment
adviser for the fiscal years ended December 31, 1999, 1998, and 1997 (WRL
served as investment adviser for 1996):
PORTFOLIO EXPENSES PAID BY INVESTMENT ADVISER
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------
Portfolio 1999 1998 1997
- - ---------- ------ ------ -----
<S> <C> <C> <C>
WRL VKAM Emerging Growth -0- -0- -0-
WRL Janus Global -0- -0- -0-
WRL Janus Growth -0- -0- -0-
</TABLE>
Effective May 1, 2000, the Investment Adviser has entered into an agreement
with the Fund on behalf of, and pursuant to which, the Investment Adviser will
be reimbursed for operating expenses paid on behalf of a portfolio during the
previous 36 months, but only if, after such reimbursement, the portfolio's
expense ratio does not exceed the expense cap. The agreement has an initial
term through April 30, 2001, and will automatically renew for one-year terms
unless terminated by a 30 day written notice to the Fund.
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. The following Administrative Services fees were paid by
the portfolios for the fiscal year ended December 31, 1999:
ADMINISTRATIVE SERVICES FEES
<TABLE>
<CAPTION>
Portfolio 1999 1998 1997
- - --------- ----------- ---------- -----------
<S> <C> <C> <C>
WRL VKAM Emerging Growth $214,882 $95,721 $166,269
WRL Janus Global 223,428 99,277 165,294
WRL Janus Growth 306,127 143,999 260,374
</TABLE>
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 AFSG Securities Corporation (AFSG) located at 4333
Edgewood Road NE, Cedar Rapids, Iowa 52494. The Distribution Plan and related
Agreement were approved by the Fund's Board of Directors, including a majority
of Directors who are not "interested persons" of the Fund (as defined in the
1940 Act) on October 3, 1996 as amended by the Board March 29, 1999, and the
Distribution Plan was approved by the shareholders of each portfolio of the
Fund on December 16, 1996 (by all portfolio's that had commenced operations on
that date). AFSG is an affiliate of the Investment Adviser.
Under the Distribution Plan and Distribution Agreement, the Fund, on behalf of
the portfolios, will reimburse AFSG after each calendar month for certain Fund
distribution expenses incurred or paid by AFSG, 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 AFSG 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.
AFSG submits to the Directors of the Fund for approval annual distribution
budgets and quarterly reports of distribution expenses with respect to each
portfolio. AFSG 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 AFSG deems fair and are approved by the Fund's Board
of Directors. AFSG has determined that it will not seek payment by the Fund of
distribution expenses incurred with respect
28
<PAGE>
to any portfolio before April 30, 2001. (ISI waived payment by the Fund for the
fiscal year ended December 31, 1999.) Prior to AFSG 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
Each Sub-Adviser serves, pursuant to each Sub-Advisory Agreement dated January
1, 1997 between WRL Management and the respective Sub-Adviser, on behalf of
each portfolio. The Sub-Advisory Agreements were approved by the Board of
Directors of the Fund, including a majority of the Directors who 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 (by all portfolios that had commenced operations on that date). The
Sub-Advisory Agreements provide that they will continue in effect 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. The agreements may also be
terminated under the term of an Exemptive Order granted by the SEC under
section 6(c) of the 1940 Act from section 15(a) and rule 18f-2 under the 1940
Act. (Release #23379).
Pursuant to the Sub-Advisory Agreements, each Sub-Adviser provides investment
advisory assistance and portfolio management advice to the Investment Adviser
for their respective portfolio(s). Subject to review by the Investment Adviser
and the Board of Directors of the Fund, the Sub-Advisers are responsible for
the actual management of their respective portfolio(s) and for making decisions
to buy, sell or hold a particular security. Each Sub-Adviser bears all of its
expenses in connection with the performance of its services under their Sub-
Advisory Agreement such as compensating and furnishing office space for their
officers and employees connected with investment and economic research, trading
and investment management of the respective portfolio(s).
Each Sub-Adviser is a registered investment adviser under the Investment
Advisers Act of 1940, as amended. The Sub-Advisers for the portfolios of the
Fund are:
/diamond//diamond//diamond//diamond/
VAN KAMPEN ASSET
MANAGEMENT INC. (`VKAM")
Van Kampen Asset Management Inc. ("VKAM") serves as Sub-Adviser to WRL VKAM
Emerging Growth.
VKAM, located at 1 Parkview Plaza, P.O. Box 5555 Oakbrook Terrace, Illinois
60181, is a wholly-owned subsidiary of Van Kampen Investments Inc., which, in
turn, is an indirect wholly-owned subsidiary of Morgan Stanley Dean Witter &
Co., a financial services company.
/diamond/ PORTFOLIO MANAGER:
GARY M. LEWIS leads an investment team and is primarily responsible for the
day-to-day management of WRL VKAM Emerging Growth. Mr. Lewis has been Senior
Vice President of Van Kampen since October 1995. Previously, he served as Vice
President - portfolio Manager of Van Kampen from 1989 to October 1995.
/diamond//diamond//diamond//diamond/
JANUS CAPITAL CORPORATION
Janus Capital Corporation ("Janus") serves as the Sub-Adviser to the WRL Janus
Growth and the WRL Janus Global.
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 $261 billion as of
February 1, 2000. Kansas City Southern Industries, Inc. ("KCSI") owns 82% of
Janus indirectly through Stilwell Financial, Inc. KCSI, whose address is 114
West 11th Street, Kansas City, Missouri 64105-1804, is a publicly-traded
holding company with a 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.
/diamond/ PORTFOLIO MANAGERS:
EDWARD KEELY has served as manager of the WRL Janus Growth portfolio since
January 2000. He previously served as co-portfolio manager of this portfolio
since January 1999. Prior to joining Janus in 1998, Mr. Keely was a senior vice
president of investments at Founders.
HELEN YOUNG HAYES, CFA AND LAURENCE CHANG, CFA have served as co-portfolio
managers of the WRL Janus Global portfolio since January 2000. Ms. Hayes
previously served as manager of this portfolio since its inception. She has
been employed by Janus since 1987.
Mr. Chang has been employed by Janus since 1993. Before joining Janus, Mr.
Chang was a project director at the National Security Archive.
29
<PAGE>
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 management by the Sub-Adviser. The table below lists those
percentages by portfolio.
<TABLE>
<CAPTION>
PORTFOLIO PERCENTAGE OF AVERAGE DAILY NET ASSETS
- - ---------- ------------------------------------------------
<S> <C>
WRL Janus Growth 0.40%(1)
WRL Janus Global 0.40%(2)
WRL VKAM Emerging Growth 0.40%, less 50% of amount of excess expenses(3)
</TABLE>
- - ------------------------------
(1) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the first $3 billion of the portfolio's average daily net assets
(resulting in a net fee of 0.3875%) and 0.25% of assets above $3 billion
(resulting in a net fee of 0.375%). This waiver will terminate on June 25,
2000.
(2) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the portfolio's average daily net assets above $2 billion (resulting in a
net fee of 0.3875%). This waiver will terminate on June 25, 2000.
(3) Excess expenses are those expenses paid by the Investment Adviser on behalf
of a portfolio pursuant to any expense
limitation.
The method of computing each Sub-Adviser's fees is set forth above. For the
years ended December 31, 1999, 1998 and 1997 each Sub-Adviser was paid fees for
their services in the following amounts:
Sub-Advisory Fees
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
Sub-adviser Portfolio 1999 1998 1997
- - ------------- -------------------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
VKAM WRL VKAM Emerging Growth $4,473,352 $2,704,049 2,037,749
Janus WRL Janus Growth(1) 12,744,800 9,055,804 6,858,412
WRL Janus Global(2) 5,146,976 3,768,835 2,795,909
</TABLE>
- - ------------------------------
(1) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the first $3 billion of the portfolio's average daily net assets
(resulting in a net fee of 0.3875%) and 0.25% of assets above $3 billion
(resulting in a net fee of 0.375%). This waiver will terminate on June 25,
2000.
(2) Janus has voluntarily agreed to waive 0.0125% of its sub-advisory fee for
the portfolio's average daily net assets above $2 billion (resulting in a
net fee of 0.3875%). This waiver will terminate on June 25, 2000.
Through June 25, 2000, provided that it continues to serve as sub-adviser for
the portfolios, Janus Capital will compensate WRL for its services in
connection with promotion, marketing and distribution in an amount equal to
0.0375% of the average daily net assets of WRL Janus Growth on the first $3
billion of assets and 0.075% on assets in excess of $3 billion. With respect to
WRL Janus Global, the amount will be equal to 0.0375% of the portfolio's
average daily net assets above $2 billion.
/diamond/ JOINT TRADING ACCOUNTS
Subject to approval by the Fund's Board, the WRL Janus Growth and WRL Janus
Global 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 WRL Janus Growth and WRL Janus Global 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.
/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.
The Board is required to review and approve the Code of Ethics for each
Sub-Adviser. Each Sub-Adviser is also 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/ ADMINISTRATIVE AND TRANSFER
AGENCY SERVICES
Effective January 1, 1997, the Fund entered into an Administrative Services and
Transfer Agency Agreement
30
<PAGE>
with WRL Services located at 570 Carillon Parkway, St. Petersburg, Florida
33716, 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 servicesin
connection with its serving as the Fund's investment adviser.
PORTFOLIO TRANSACTIONS AND BROKERAGE
/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 held during the year.
Changes in security holdings are made by a portfolio's Sub-Adviser when it is
deemed necessary. Such changes may result from: liquidity needs; securities
having reached a price or yield objective; anticipated changes in interest
rates or the credit standing of an issuer; or developments not foreseen at the
time of the investment decision.
A Sub-Adviser may engage in a significant number of short-term transactions if
such investing serves a portfolio's objective. The rate of portfolio turnover
will not be a limiting factor when such short-term investing is considered
appropriate. Increased turnover results in higher brokerage costs or mark-up
charges for a portfolio; these charges are ultimately borne by the
policyowners.
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, 1999, 1998 and 1997:
PORTFOLIO TURNOVER RATES
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
Portfolio 1999 1998 1997
- - -------------------------- ----------- -------- -------
<S> <C> <C> <C>
WRL VKAM Emerging Growth 117.72% 99.50% 99.78%
WRL Janus Global 68.10% 87.36% 97.54%
WRL Janus Growth 70.95% 35.29% 85.88%
</TABLE>
The future annual turnover rates cannot be precisely predicted, although an
annual turnover rate in excess of 150% is not presently anticipated for WRL
Janus Growth; and 200% for WRL Janus Global.
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
31
<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; Van Kampen Funds Inc., 1
Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, Illinois 60181. 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.
32
<PAGE>
COMMISSIONS PAID BY THE PORTFOLIOS
<TABLE>
<CAPTION>
Aggregate Commissions Affiliated Brokerage Commissions
Year Ended December 31 Year Ended December 31
-------------------------- --------------------------------------------------------
Portfolio 1999 1998 1997 1999 % 1998 % 1997 %
- - ---------- ------------- ------------ ------------ --------- ------ ------- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
WRL VKAM Emerging Growth(1) $1,305,965 $ 920,884 $ 627,400 $9,346 < 1% 1,308 < 1% $N/A N/A
WRL Janus Global 2,219,248 2,373,255 2,305,145 N/A N/A N/A N/A N/A N/A
WRL Janus Growth 2,717,764 1,023,925 1,367,104 N/A N/A N/A N/A N/A N/A
</TABLE>
- - ------------------------------
(1) The percentage of the portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through Morgan Stanley &
Co., Incorporated for the fiscal year ended December 31, 1999, 1998 and
1997 was 1.06%, < 1% and N/A, respectively.
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, Martin Luther King's Birthday, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.) The per share net asset value of a portfolio is determined by
dividing the total value of the securities and other assets, less liabilities,
by the total number of shares outstanding. In determining net asset value,
securities listed on the national securities exchanges and traded on the NASDAQ
National Market are valued at the closing prices on such markets, or if such a
price is lacking for the trading period immediately preceding the time of
determination, such securities are valued at their current bid price. Foreign
securities and currencies are converted to U.S. dollars using the exchange rate
in effect at the close of the Exchange. Other securities for which quotations
are not readily available are valued at fair values as determined in good faith
by a portfolio's Investment Adviser under the supervision of the Fund's Board
of Directors. Money market instruments maturing in 60 days or less are valued
on the amortized cost basis. Values of gold bullion held by a portfolio are
based upon daily quotes provided by banks or brokers dealing in such
commodities.
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>
33
<PAGE>
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 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>
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 either qualified, and expects to continue to qualify, for
treatment as a regulated investment company ("RIC") under the Internal Revenue
Code of 1986, as amended (the "Code"). In order to qualify for that treatment,
a portfolio must distribute to its Policyowners for each taxable year at least
90% of its investment company taxable income ("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) 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 (3) 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. If each portfolio qualifies as a regulated investment
company and distributes to its shareholders substantially all of its net income
and net capital gains, then each portfolio should have little or no income
taxable to it under the Code.
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 generally includes all securities of the same issuer). For
purposes of section 817(h), all securities of the same issuer, all interests in
the same real property project, and all interest in the same commodity are
treated as a single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities and political
subdivisions all will be considered securities issued by the same issuer.
34
<PAGE>
If a portfolio fails to qualify as a regulated investment company, the
portfolio will be subject to federal, and possibly state, corporate taxes on
its taxable income and gains (without any deduction for its distributions to
its shareholders) and distributions to its shareholders will constitute
ordinary income to the extent of such Fund's available earnings and profits.
Owners of variable life insurance and annuity contracts which have invested in
such a portfolio might be taxed currently on the investment earnings under
their contracts and thereby lose the benefit of tax deferral. In addition, if a
portfolio failed to comply with the diversification requirements of section
817(h) of the Code and the regulations thereunder, owners of variable life
insurance and annuity contracts which have invested in the portfolio could be
taxed on the investment earnings under their contracts and thereby lose the
benefit of tax deferral. For additional information concerning the consequences
of failure to meet the requirements of section 817(h), see the 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, 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.
Foreign Investments - portfolios investing in foreign securities or currencies
(which may include [list portfolios so authorized] may be required to pay
withholding, income or other taxes to foreign governments or U.S. possession.
Foreign tax withholding from dividends and interest, if any, is generally at a
rate between 10% and 35%. The investment yield of any portfolio that invests in
foreign securities or currencies is reduced by these foreign taxes. Holders of
Policies and Annuity Contracts investing in such portfolios bear the cost of
any foreign taxes but will not be able to claim a foreign tax credit or
deduction for these foreign taxes. 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.
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.
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 the portfolio 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. A portfolio, however, may
qualify for, and may make, an election permitted under Section 853 of the Code
so that shareholders may be eligible to claim a credit or deduction on their
Federal income tax returns for, and will be required to treat as part of the
amounts distributed to them, their pro rata portion of qualified taxes paid or
incurred by the portfolio to foreign countries (which taxes relate primarily to
investment income). The portfolio may make an election under Section 853 of the
Code, provided that more than 50% of the value of the portfolio's total assets
at the close of the taxable year consists of securities in foreign
corporations, and the portfolio satisfies applicable distribution provisions of
the Code. The foreign tax credit available to shareholders is subject to
certain limitations imposed by the Code. In addition, another election is
available that would involve marking to market a portfolio's PFIC stock at the
end of each taxable year (and on certain other dates prescribed in the Code),
with the result that unrealized gains are treated as though they were realized
although any such gains recognized will be ordinary income rather than capital
gain. If this election were made, tax at the portfolio level under the PFIC
rules would be eliminated, but a portfolio could, in limited circumstances,
incur nondeductible interest charges. A portfolio's intention to qualify
annually as a regulated investment company may limit a portfolio's
election with respect to PFIC stock.
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
35
<PAGE>
investors are urged to consult their own tax advisors for more detailed
information and for information regarding any state, local, or foreign taxes
applicable to the policies, annuity contracts and the holders thereof.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each portfolio. The Fund is currently comprised of the following
portfolios: WRL VKAM Emerging Growth, WRL Janus Global and WRL Janus Growth.
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 of the Fund for the year
ended December 31, 1999 and the report of the Fund's independent accountants
are included in the 1999 Annual Report, and are incorporated herein by
reference to such report.
OTHER INFORMATION
/diamond/ CERTIFIED PUBLIC ACCOUNTANTS
PricewaterhouseCoopers LLP, located at 160 Federal Street, Boston,
Massachusetts 02110-9862, serves as the Fund's certified public accountants.
The Fund has engaged PricewaterhouseCoopers LLP to examine, in accordance with
generally accepted auditing standards, its annual report.
/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.
36
<PAGE>
APPENDIX A
DESCRIPTION OF PORTFOLIO SECURITIES
The following is intended only as a supplement to the information
contained in the Prospectus and should be read only in conjunction with the
Prospectus. Terms defined in the Prospectus and not defined herein have the
same meanings as those in the Prospectus.
1. Certificate of Deposit.* A certificate of deposit generally is a
short-term, interest bearing negotiable certificate issued by a commercial bank
or savings and loan association against funds deposited in the issuing
institution.
2. Eurodollar Certificate of Deposit.* A Eurodollar certificate of
deposit is a short-term obligation of a foreign subsidiary of a U.S. bank
payable in U.S. dollars.
3. Floating Rate Note.* A floating rate note is debt issued by a
corporation or commercial bank that is typically several years in term but
whose interest rate is reset every one to six months.
4. 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 and 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.
A-2
<PAGE>
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 SEC 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.
A-3
<PAGE>
APPENDIX B
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 capac-
ity to pay principal and interest then for higher rated bonds.
BB, B, and Predominantly speculative with respect to the issuer's capacity to
CC, CC, C meet required interest and principal payments. BB - lowest degree of
speculation; C- the highest degree of speculation. Quality and
protective characteristics outweighed by large uncertainties or major
risk exposure to adverse conditions.
D In default.
</TABLE>
PLUS (+) OR MINUS (-) - The ratings from "AA" to "BBB" may be modified by the
addition of a plus or minus to show relative standing within the major rating
categories.
UNRATED - Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
<TABLE>
<S> <C> <C>
MOODY'S INVESTORS SERVICE, INC. Aaa Highest qualty, 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 Medum-grade obligations; neither highly protected nor poorly
secured. Interest and principal appear adequate for the present but
certain protective elements may be lacking or may be unreliable over
any great length of time.
Ba More unceratin, 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 assur-
ance of timely interest and principal payments or maintenance of
other contract terms over time.
Caa Poor standing, may be in default; elements of danger with respect to
principal or interest payments.
Ca Speculative in a high degree; could be in default or have other
marked short-comings.
C Lowest-rated; extremely poor prospects of ever attaining investment
standing.
</TABLE>
UNRATED - Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is 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.
B-1
<PAGE>
PART C
OTHER INFORMATION
Item 23. Exhibits
List all exhibits filed as part of the Registration Statement.
(a) 1. (A) Articles of Incorporation of WRL Series Fund, Inc. (2)
(B) Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (2)
(C) Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (2)
(D) Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (2)
(E) Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (2)
(F) Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (2)
(G) Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (2)
(H) Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (3)
(I) Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (3)
(J) Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (4)
(K) Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (6)
(L) Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (7)
(M) Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (8)
(N) Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc.
(b) Bylaws of WRL Series Fund, Inc. (2)
(c) Not applicable.
(d) Investment Advisory Agreements
(1) Investment Advisory Agreement on behalf of the Portfolios of
the WRL Series Fund, Inc. with WRL Investment Management,
Inc. (8)
(2) Sub-Advisory Agreement on behalf of WRL Janus Growth and WRL
Janus Global of the Fund. (6)
(3) Sub-Advisory Agreement on behalf of WRL J.P. Morgan Money
Market of the Fund. (8)
(4) Sub-Advisory Agreement on behalf of WRL VKAM Emerging Growth
of the Fund. (8)
(5) Sub-Advisory Agreement on behalf of WRL LKCM Strategic Total
Return of the Fund. (8)
(6) Sub-Advisory Agreement on behalf of WRL Federated Growth &
Income of the Fund. (8)
(7) Sub-Advisory Agreement on behalf of WRL Alger Aggressive
Growth of the Fund. (8)
(8) Sub-Advisory Agreement on behalf of WRL Dean Asset
Allocation of the Fund. (8)
(9) Sub-Advisory Agreement on behalf of WRL C.A.S.E. Growth of
the Fund. (8)
(10) Co-Sub-Advisory Agreements on behalf of WRL GE International
Equity of the Fund.
(11) Sub-Advisory Agreement on behalf of WRL NWQ Value Equity of
the Fund. (8)
1
<PAGE>
(12) Sub-Advisory Agreement on behalf of WRL GE U.S. Equity of
the Fund. (8)
(13) Sub-Advisory Agreement on behalf of WRL Third Avenue Value
of the Fund.(8)
(14) Sub-Advisory Agreement on behalf of WRL AEGON Balanced of
the Fund. (8)
(15) Sub-Advisory Agreement on behalf of WRL AEGON Bond of the
Fund. (8)
(16) Sub-Advisory Agreement on behalf of WRL J. P. Morgan Real
Estate Securities of the Fund. (8)
(17) Form of Sub-Advisory Agreement on behalf of WRL T. Rowe
Price Small Cap and WRL T. Rowe Price Dividend Growth of the
Fund. (8)
(18) Form of Sub-Advisory Agreement on behalf of WRL Goldman
Sachs Small Cap and WRL Goldman Sachs Growth of the Fund.
(8)
(19) Form of Sub-Advisory Agreement on behalf of WRL Salomon All
Cap of the Fund. (8)
(20) Form of Sub-Advisory Agreement on behalf of WRL Dreyfus Mid
Cap of the Fund. (8)
(21) Form of Sub-Advisory Agreement on behalf of WRL Pilgrim
Baxter Growth of the Fund. (8)
(22) Form of Sub-Advisory Agreement on behalf of WRL Great
Companies - Americasm and WRL Great Companies -
Technology.(sm)(12)
(23) Form of Sub-Advisory Agreement on behalf of WRL Value Line
Aggressive Growth. (12)
(e) Distribution Agreement. (8)
(f) Director's Deferred Compensation Plan. (1)
(g) Form of Custodian Agreement. (3)
(h) Administrative Services and Transfer Agency Agreement. (3)
(i) Opinion and consent of John K. Carter, Esq. as to legality
of the securities being registered.
(j) Consent of PricewaterhouseCoopers LLP
(k) Not applicable.
(l) Not applicable.
(m) Plan of Distribution. (5)
(n) Not applicable
(o) Reserved
(p) Code of Ethics
(1) WRL Series Fund, Inc.
SUB-ADVISERS
------------
(2) AEGON USA Investment Management, Inc. (10)
(3) Fred Alger Management, Inc. (10)
(4) C.A.S.E. Management, Inc. (10)
(5) Dean Investment Associates (10)
(6) Federated Investment Management Company (10)
(7) GE Asset Management Incorporated (10)
(8) Goldman Sachs Asset Management Inc. (10)
(9) Janus Capital Corporation (10)
(10) Luther King Capital Management Corporation (10)
(11) NWQ Investment Management Company, Inc. (10)
(12) Pilgrim Baxter & Associates, Ltd. (10)
(13) Salomon Brothers Asset Management Inc (10)
(14) Transamerica Investment Management, LLC (10)
(15) T. Rowe Price Associates, Inc. (10)
(16) Great Companies, L.L.C. (9)
(17) Van Kampen Asset Management, Inc.
(18) EQSF Advisers, Inc.
(19) The Dreyfus Corporation
2
<PAGE>
- - ---------------------
(1) Previously filed with Post-Effective Amendment No. 23 to Form N-1A dated
April 19, 1996 and incorporated herein by reference.
(2) Previously filed with Post-Effective Amendment No. 25 to Form N-1A dated
October 17, 1996, and incorporated herein by reference.
(3) Previously filed with Post-Effective Amendment No. 26 to Form N-1A dated
December 26, 1996 and incorporated herein by reference.
(4) Previously filed with Post-Effective Amendment No. 28 to Form N-1A dated
April 24, 1997, and incorporated herein by reference.
(5) Previously filed with Post-Effective Amendment No. 29 to Form N-1A dated
June 30, 1997, and incorporated herein by reference.
(6) Previously filed with Post-Effective Amendment No. 31 to Form N-1A dated
October 16, 1997, and incorporated herein by reference.
(7) Previously filed with Post-Effective Amendment No. 34 to Form N-1A dated
April 22, 1998, and incorporated herein by reference.
(8) Previously filed with Post-Effective Amendment No. 36 to Form N-1A dated
April 27, 1999, and incorporated herein by reference.
(9) To be filed by amendment.
(10) Previously filed with Post-Effective Amendment No. 35 to Form N-1A dated
February 28, 2000 (File No. 33-2659), and incorporated herein by
reference.
(11) Previously filed with Post-Effective Amendment No. 37 to Form N-1A dated
February 12, 2000, and incorporated herein by reference.
Item 24. 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 theWRL Janus 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 WRL VKAM Emerging Growth
and WRL Janus Global Portfolios Common Stock are also sold to the Mutual Fund
Account, established by PFL Life Insurance Company. Shares of the WRL Janus
Growth, WRL AEGON Bond, WRL J.P. Morgan Money Market, WRL Janus Global, WRL LKCM
Strategic Total Return, WRL AEGON Balanced, WRL Alger Aggressive Growth, WRL
VKAM Emerging Growth, WRL Federated Growth & Income, WRL GE International
Equity, WRL Third Avenue Value, WRL NWQ Value Equity, WRL GE U.S. Equity , WRL
Dean Asset Allocation, WRL Pilgrim Baxter Mid Cap Growth, WRL Dreyfus Mid Cap,
WRL T. Rowe Price Dividend Growth, WRL T. Rowe Price Small Cap, WRL Salomon All
Cap, WRL Goldman Sachs Growth and WRL Goldman Sachs Small Cap Portfolio Common
Stock are sold to Pooled Account No. 27 established by AUSA Life Insurance
Company, Inc. Shares of the WRL Alger Aggressive Growth, WRL Janus Global, WRL
Janus Growth, WRL LKCM Strategic Total Return and WRL J.P. Morgan Real Estate
Securities are sold to Peoples Benefit Life Insurance Company. Shares of Fund
portfolios are also sold to Transamerica Occidental Life Insurance Company and
Peoples Benefit Life Insurance Company, affiliates of Western Reserve.
Item 25. 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
3
<PAGE>
("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 26. 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, Fund Operations
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., 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
Associate General 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.
4
<PAGE>
B. WRL Janus Growth and WRL Janus Global: Sub-Adviser - Janus
------------------------------------------------------------
Capital Corporation
-------------------
Janus Capital Corporation, the Sub-Adviser to WRL Janus Growth and
WRL Janus Global 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, CEO, Director and President of the Sub-Adviser Director
of Janus Distributors, Inc., 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 Chairman and Chief
Investment Officer of Janus Capital Corporation, has no
substantial business, profession, vocation or employment other
than his positions with Janus Capital Corporation. Michael N.
Stolper, a Director of Janus Capital Corporation, is President of
Stolper & Company, 525 "B" Street, Suite 1080, San Diego, CA
92101, an investment performance consultant. Michael E. Herman, a
Director of Janus Capital Corporation, is Chairman of the Finance
Committee of Ewing Marion Kauffman Foundation, 4900 Oak, Kansas
City, MO 64112. Thomas A. McDonnell, a Director of Janus Capital
Corporation, is President, Director and CEO of DST Systems, Inc.,
333 West 11th Street, 5th Floor, Kansas City, MO 64105, a provider
of data processing and recordkeeping services for various mutual
funds. Landon H. Rowland, a Director of Janus Capital, President
and Chief Executive Officer of Kansas City Southern Industries,
Inc. Steven R. Goodbarn is Vice President and Chief Financial
Officer 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., Janus
Service Corporation, and Idex Management, Inc. and Vice President
of Finance of Janus Capital International Ltd., Margie G. Hurd,
Vice President and Chief Operations Officer of Janus Capital,
Director and President of Janus Service Corporation. Mark B.
Whiston, Vice President and Chief Marketing Officer of Janus
Capital, Director and President 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. WRL J. P. Morgan Money Market and WRL J. P. Morgan Real Estate
--------------------------------------------------------------
Securities: Sub-Adviser - J.P. Morgan Investment Management Inc.
----------------------------------------------------------------
J.P. Morgan Investment Management Inc., the Sub-Adviser to WRL J.
P. Morgan Money Market and WRL J. P. Morgan Real Estate Securities
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; Keith M. Schappert, President, Chairman,
Director and Managing Director; Jeff M. Garrity, Director and
Managing Director; Isabel H. Sloane, Director and Managing
Director; Gilbert Van Hassel, Director and Managing Director (J.P.
Morgan Investment Management Inc., Akasaka Park Building, 2-20,
Akasaka 5-chome, Minatoku, Tokyo, Japan); Hendrik Van Riel,
Director and Managing Director (J.P. Morgan Investment Management
Inc., 28 King Street, London, England SW1Y 6XA); John W.
Schmidlin, Director (J.P. Morgan Investment Management Inc., 345
Park Avenue, New York, New York 10154).
5
<PAGE>
D. WRL AEGON Bond and WRL AEGON Balanced: Sub-Adviser - AEGON USA
----------------------------------------------------------------
Investment Management, Inc.
---------------------------
AEGON USA Investment Management, Inc. ("AIMI"), the Sub-Adviser to
the WRL AEGON Bond and WRL AEGON 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 Mutual Fund's Income Plus
and Tax Exempt. Douglas C. Kolsrud is Director, Chairman of the
Board and President of AIMI; Director, Senior Vice President,
Chief Investment Officer and Corporate Actuary of Life Investors
Insurance Company of America ("LIICA"), Bankers United Life
Assurance Company ("Bankers United"), PFL Life Insurance Company
("PFL Life"); First AUSA Life Insurance Company ("First AUSA") and
Monumental Life Insurance Company ("Monumental Life"); Director,
Chief Investment Officer and Vice President of Monumental General
Casualty Company ("Monumental General") and Commonwealth General
Corporation; Senior Vice President, Chief Investment Officer and
Corporate Actuary of Western Reserve Life Assurance Co. of Ohio
("Western Reserve"); Director and President of AIMI; Executive
Vice President of AEGON USA, Inc.; Chief Investment Officer of
Diversified Financial Products Inc., and Director of United
Financial Services, Inc., Realty Information Systems, Inc., AEGON
USA Realty Advisors Inc., Southlife, Inc. and Quantra Corporation;
Brenda K. Clancy, Director, Treasurer, Vice President and Chief
Financial Officer of LIICA and Monumental Life; Treasurer, Vice
President and Chief Financial Officer of Bankers United and PFL
Life; Director, Treasurer and Vice President of First AUSA and
Investors Warranty of America, Inc.; Director, Treasurer and
Cashier of Massachusetts Fidelity Trust Company; Director and Vice
President of Peoples Benefit Life Insurance Company, Academy Life
Insurance Company and Pension Life Insurance Company of America;
Director and Vice President of Veterans Life Insurance Company;
Treasurer and Vice President of Money Services, Inc. and
Commonwealth General Corporation; Director and Treasurer of
Zahorik Company, Inc.; Vice President of Western Reserve,
Commonwealth General Assignment Corporation; Monumental Agency
Group, Inc. and AEGON Assignment Corporation of Kentucky; Director
of AEGON USA Securities, Inc., AEGON USA Investment Management,
Inc. and AEGON USA Realty Advisors Inc.; Treasurer of AUSA Life
and AUSA Holding Company; Assistant Secretary of Benefit Plans,
Inc.; Senior Vice President and Treasurer of AEGON USA, Inc.;
Assistant Treasurer of Diversified Financial Products, Inc.,
Independence Automobile Association, Inc. and Independence
Automobile Club, Inc. and Senior Vice President, Treasurer and
Controller of Cadet Holding Corp.; Craig D. Vermie, Director of
AIMI; Director, Secretary, Vice President and General Counsel of
LIICA, Bankers United, PFL Life, and First AUSA; Director, Vice
President, General Counsel and Assistant Secretary of Monumental
Life; Vice President, Corporate Counsel and Assistant Secretary of
Western Reserve; Director, Vice President and Assistant Secretary
of Monumental General Casualty Company and Zahorik Company, Inc.;
Director, Secretary and Vice President of Investors Warranty of
America, Inc.; Secretary, Vice President and General Counsel of
AEGON USA, Inc.; Director, Counsel, Assistant Secretary of
Commonwealth General Corporation; Director and Vice President of
The Whitestone Corporation; Director and Secretary of Peoples
Benefit Life Assurance Company, Veterans Life Insurance Company,
Massachusetts Fidelity Trust Company, AUSA Holding Company, Cadet
Holding Corp., AEGON Management Company and AEGON USA Charitable
Foundation, Inc.; Director and Assistant Secretary of Academy Life
Insurance Company, Providian Auto & Home Insurance Company,
Providian Life Insurance Company, Providian Property & Casualty
Insurance Company, Monumental Agency Group, Inc., Creditor
Resources, Inc., Great American Insurance Agency, Inc. and
Monumental General Mass Marketing, Inc.; Director, Pension Life
Insurance Company of America, Monumental General Insurance Group,
Inc, United Financial Services, Inc., AEGON Financial Services
Group, Inc., AIMI, Southlife, Inc., Durco Agency, Inc., Executive
Management & Consultant Services, Inc., Monumental General
Administrators, Inc., AUSA Financial Markets, Inc., Short Hills
Management Company, Corpa Reinsurance Company, AEGON Special
Markets Group and Monumental General Mass Marketing, Inc.;
Secretary, AUSA Life Insurance Company , Inc., Money Services,
Inc., Supplemental Insurance Division, Inc.; Assistant Secretary,
Bankers Financial Life Insurance Company, ZCI, Inc.;
6
<PAGE>
Clifford A. Sheets, Executive Vice President, Director of
Securities of AIMI; Vice President of Life Investors Insurance
Company of America, Bankers United Life Assurance Company, PFL
Life Insurance Company, First AUSA Life Insurance Company, Western
Reserve Life Assurance Co. of Ohio, AUSA Life Insurance Company,
Inc., Monumental General Casualty Company and Monumental Life
Insurance Company; Second Vice President of Peoples Benefit Life
Insurance Company, Academy Life Insurance Company, Veterans Life
Insurance Company Providian Auto & Home Insurance Company,
Providian Fire Insurance Company, Providian Property & Casualty
Insurance Company; Eric B. Goodman, Executive Vice President and
Head of Portfolio Management of AIMI, Vice President of Life
Investors Insurance Company of America, Bankers United Life
Assurance Company, PFL Life Insurance Company, Western Reserve
Life Assurance Co. of Ohio, AUSA Life Insurance Company, Inc. and
Monumental Life Insurance Company; Second Vice President of
Peoples Benefit Life Insurance Company, Academy Life Insurance
Company, Pension Life Insurance Company of America, Veterans Life
Insurance Company, Providian Auto & Home Insurance Company,
Providian Fire Insurance Company and Providian Property & Casualty
Insurance Company; William S. Cook, Executive Vice President and
Head of Portfolio Management of AIMI, Vice President of Life
Investors Insurance Company of America, Bankers United Life
Assurance Company, PFL Life Insurance Company, Western Reserve
Life Assurance Co. of Ohio, AUSA Life Insurance Company, Inc. and
Monumental Life Insurance Company; Second Vice President of
Peoples Benefit Life Insurance Company, Academy Life Insurance
Company, Pension Life Insurance Company of America, Veterans Life
Insurance Company, Providian Auto & Home Insurance Company,
Providian Fire Insurance Company and Providian Property & Casualty
Insurance Company; David R. Ludke, Executive Vice President of
AIMI Chief Actuary and Vice President of Diversified Financial
Products Inc., Second Vice President of Academy Life Insurance
Company, Pension Life Insurance Company of America, Veterans Life
Insurance Company, Providian Auto & Home Insurance Company,
Providian Fire Insurance Company and Providian Property & Casualty
insurance Company; David M. Carney, Senior Vice President and
Chief Financial Officer of AIMI, Vice President of Life Investors
Insurance Company of America, Peoples Benefit Life Insurance
Company, Bankers United Life Assurance Company, Academy Life
Insurance Company, Pension Life Insurance Company of America, PFL
Life Insurance Company, Western Reserve Life Insurance Co. of
Ohio, AUSA Life Insurance Company, Inc. Veterans Life Insurance
Company, Monumental General Insurance Group, Inc., Monumental
General Casualty Company, Monumental Life Insurance Company,
Commonwealth General Corporation and Investors Warranty of
America, Inc.; Ralph M. O'Brian, Senior Vice President of AIMI,
Vice President of Life Investors Insurance Company of America,
Bankers United Life Assurance Company, PFL Life Insurance Company,
First AUSA Life Insurance Company, Western Reserve Life Assurance
Co. of Ohio, AUSA Life Insurance Company, Inc., Monumental General
Casualty Company, Monumental Life Insurance Company and AEGON USA
Managed Portfolios, Inc.; Second Vice President of Peoples Benefit
Life Insurance Company, Academy Life Insurance Company, Pension
Life Insurance Company of America, Veterans Life Insurance
Company, Providian Auto & Home Insurance Company, Providian Fire
Insurance Company and Providian Property & Casualty Insurance
Company; Trust Officer of Massachusetts Fidelity Trust Company;
David R. Halfpap, Senior Vice President of AIMI, Vice President
and Assistant Secretary of AEGON USA Managed Portfolios, Inc.;
Vice President of Life Investors Insurance Company of America,
Bankers United Life Assurance Company, PFL Life Insurance Company,
First AUSA Life Insurance Company, Western Reserve Life Assurance
Co. of Ohio, AUSA Life Insurance Company, Inc., Monumental General
Casualty Company and Monumental Life Insurance Company, Second
Vice President of Peoples Benefit Life Insurance Company, Academy
Life Insurance Company, Pension Life Insurance Company of America,
Veterans Life Insurance Company, Providian Auto & Home Insurance
Company. Providian Fire Insurance Company and Providian Property &
Casualty Insurance Company; Steven P. Opp, Senior Vice President
of AIMI; Kirk W. Buese, Senior Vice President of AIMI; Vice
President of Life Investors Insurance Company of America, Bankers
United Life Assurance Company, PFL Life Insurance Company, Western
Reserve Life Assurance Co. of Ohio, AUSA Life Insurance Company,
Inc., Monumental Life Insurance Company, PB Investment Advisors,
Inc.; Second Vice President of Peoples Benefit Life Insurance
Company, Academy Life Insurance Company of America, Veterans Life
Insurance Company, Providian Auto & Home Insurance Company,
Providian Fire Insurance Company, Providian Property & Casualty
Insurance Company; Gregory W. Theobald, Vice President and
Assistant Secretary of AIMI, Life Investors Insurance Company of
America, Bankers United
7
<PAGE>
Life Assurance Company, PFL Life Insurance Company, First AUSA
Insurance Company, Western Reserve Life Assurance Co. of Ohio,
AUSA Life Insurance Company, Inc., Monumental General Casualty
Company, Monumental Life Insurance Company, Vice President of
Money Services, Inc., Secretary of AEGON USA Managed Portfolios,
Inc.; Lewis O. Funkhouser, Vice President of AIMI; Jon D.
Kettering, Vice President of AIMI, Life Investors Insurance
Company of America, Bankers United Life Assurance Company, PFL
Life Insurance Company, First AUSA Life Insurance Company, Western
Reserve Life Assurance Co. of Ohio, AUSA Life Insurance Company,
Inc., Monumental General Casualty Company, Monumental Life
Insurance Company; Second Vice President of Peoples Benefit Life
Insurance Company, Academy Life Insurance Company, Pension Life
Insurance Company of America, Veterans Life Insurance Company,
Providian Auto & Home Insurance Company, Providian Fire Insurance
Company and Providian Property & Casualty Insurance Company;
Robert L. Hanson, Vice President of AIMI, Life Investors Insurance
Company of America, Bankers United Life Assurance Company, PFL
Life Insurance Company, First AUSA Life Insurance Company, Western
Reserve Life Assurance Co. of Ohio, AUSA Life Insurance Company,
Inc., Monumental General Casualty Company, Monumental Life
Insurance Company; Second Vice President of Peoples Benefit Life
Insurance Company, Academy Life Insurance Company, Pension Life
Insurance Company of America, Veterans Life Insurance Company,
Providian Auto & Home Insurance Company, Providian Fire Insurance
Company and Providian Property & Casualty Insurance Company;
Bradley Beman, Vice President of AIMI, Michael B. Simpson, Vice
President of AIMI, Life Investors Insurance Company of America,
Bankers United Life Assurance Company, PFL Life Insurance Company,
Western Reserve Life Assurance Co. of Ohio, AUSA Life Insurance
Company, Inc., Monumental Life Insurance Company; Second Vice
President of Peoples Benefit Life Insurance Company, Academy Life
Insurance Company, Pension Life Insurance Company of America,
Veterans Life Insurance Company, Providian Auto & Home Insurance
Company, Providian Fire Insurance Company and Providian Property &
Casualty Insurance Company; Douglas A. Dean, Vice President of
AIMI; Stephanie M. Phelps, Vice President of AIMI; Jon L. Skaags,
Vice President of AIMI, Life Investors Insurance Company of
America, Bankers United Life Assurance Company, PFL Life Insurance
Company, First AUSA Life Insurance Company, Monumental Life
Insurance Company; Second Vice President of Peoples Benefit Life
Insurance Company, Academy Life Insurance Company, Pension Life
Insurance Company of America, Veterans Life Insurance Company,
Providian Auto & Home Insurance Company, Providian Fire Insurance
Company, Providian Property & Casualty Insurance Company; Daniel
P. Fox, Vice President of AIMI; Robert S. Jett III, Secretary of
AIMI, Assistant Secretary of AUSA Life Insurance Company, Money
Services, Inc. and AUSA Financial Markets, Inc.; and Counsel and
Vice President of Investors Warranty of America, Inc. and Blaine
E. Rolland, Treasurer of AIMI.
E. WRL VKAM Emerging Growth: Sub-Adviser: - Van Kampen Asset
---------------------------------------------------------
Management Inc.
----------------
Van Kampen Asset Management Inc. (the "Sub-Adviser") serves as
investment adviser to a number of investment companies. The
directors and executive officers of the Sub-Adviser are: Richard
F. Powers, III, Chairman, Chief Executive Officer and Director of
the Sub-Adviser, Van Kampen Investment Advisory Corp. ("VK
Adviser") and Van Kampen; Dennis J. McDonnell, President, Chief
Operating Officer and a Director of the Sub-Adviser and the VK
Adviser and Executive Vice President and a Director of Van Kampen;
A. Thomas Smith, Executive Vice President, General Counsel and a
Director of the Sub-Adviser, the VK Adviser and Van Kampen;
William R. Rybak, Executive Vice President, Chief Financial
Officer and a Director of the Sub-Adviser, the VK Adviser and Van
Kampen; Michael H. Santo, Executive Vice President, Chief
Administrative Officer and Director of the Sub-Adviser and the VK
Adviser and Executive Vice President of Van Kampen; Stephen L.
Boyd, Executive Vice President and Chief Investment Officer -
Equity Investments of the Sub-Adviser and the VK Adviser; and
Peter W. Hegel, Executive Vice President and Chief Investment
Officer - Fixed Income Investments of the Sub-Adviser and the VK
Adviser. All of these executive officers and / or directors have
no substantial business, profession, vocation or employment other
than their positions with the Sub-Adviser, its subsidiaries and
affiliates. The business address of each of the executive officers
and / or directors of the Sub-Adviser is 1 Parkview Plaza, P.O.
Box 5555, Oakbrook Terrace, Illinois 60181 - 5555.
8
<PAGE>
F. WRL LKCM Strategic Total Return: Sub-Adviser - Luther King
------------------------------------------------------------
Capital Management Corporation
-------------------------------
Luther King Capital Management Corporation, the Sub-Adviser to the
WRL LKCM Strategic Total Return, 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, Joan M. Maynard, Vincent G. Melashenko,
Steven R. Purvis, Timothy E. Harris, and Barbara S. Garcia,
officers of Luther King Capital Management Corporation, have no
substantial business, profession, vocation or employment other
than their positions with Luther King Capital Management
Corporation.
G. WRL Federated Growth & Income: Sub-Adviser - Federated Investment
------------------------------------------------------------------
Counseling
-----------
Federated Investment Counseling, the Sub-Adviser to WRL Federated
Growth & Income, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated
Investors, Inc.
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 $140 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: John B. Fisher,
President; William D. Dawson III, Henry A. Frantzen and J. Thomas
Madden, Executive Vice Presidents; Joseph M. Balestrino, Drew J.
Collins, Jonathan C. Conley, Deborah A. Cunnigham, Mark E.
Durbiano, Sandra L. McInerney, Susan M. Nason, Mary Jo Ochson and
Robert J. Ostrowski ,Senior Vice Presidents; Todd A. Abraham, J.
Scott Albrecht, Randall S. Bauer, David A. Briggs, Micheal W.
Casey, Kenneth J. Cody, Alexandre de Bethmann, Michael P.
Donnelly, Linda A. Duessel, Donald T. Ellenberger, Kathleen M.
Foody-Malus, Thomas M. Franks, Edward C. Gonzales, James E.
Grefenstette, Susan R. Hill, Stephen A. Keen, Robert K. Kinsey,
Robert M. Kowit, Jeff A. Kozemchak, Steven Lehman, Marian R.
Marinack, Frank Semack, Aash M. Shah, Christopher J. Smith, Tracy
P. Stouffer, Edward J. Tiedge, Paige M. Wilhelm, Arthur J. Barry,
Marc Halperin, Richard J. Lazarchic, Keith Sabol and Jolanta M.
Wysocka, Vice Presidents; Robert E. Cauley, Lee R. Cunningham II,
Paul S. Drotch, Salvatore A. Esposito, Donna M. Fabiano, John T.
Gentry, William R. Jamison, Constantine Kartsonas, Natalie F.
Metz, Joseph M. Natoli, Keith J. Sabol, John Sheehy, Michael W.
Sirianni, Leonardo A. Vila, Nancy J. Belz, B. Anthony Delserone,
Gary E. Falwell, John C. Kerber, Grant K. McKay and Lori A. Wolff,
Assistant 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
9
<PAGE>
some of the investment advisers to other mutual funds.
H. WRL Alger Aggressive Growth: Sub-Adviser - Fred Alger Management,
-----------------------------------------------------------------
Inc.
-----
Fred Alger Management, Inc. ("Alger Management"), the Sub-Adviser
to WRL Alger Aggressive Growth, 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 1 World Trade Center, Suite 9333, New York, NY
10048. The principal business address of Alger, Inc. is 30
Montgomery Street, Jersey City, NJ 07302.
I. WRL Dean Asset Allocation: Sub-Adviser - Dean Investment
---------------------------------------------------------
Associates
-----------
Dean Investment Associates ("Dean"), the Sub-Adviser to WRL Dean
Asset Allocation, 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;
Robert D. Dean is President; Frank H. Scott is Senior Vice
President; John C. Riazzi is Vice President and Director of
Consulting Services; Richard M. Luthman is Senior Vice President.
The business address of each of the Officers of the Sub-Adviser is
2480 Kettering Tower, Dayton, Ohio 45423-2480.
J. WRL C.A.S.E. Growth: Sub-Adviser - C.A.S.E. Management, Inc.
-------------------------------------------------------------
C.A.S.E. Management, Inc. ("C.A.S.E."), the Sub-Adviser to WRL
C.A.S.E. Growth, 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 William Fagin, 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. WRL GE International Equity: & WRL GE U.S. Equity - Sub-Adviser -
-----------------------------------------------------------------
GE Investment Management Incorporated.
--------------------------------------
GE Investment Management Incorporated ("GEIM") also serves as a
Co-Sub-Adviser for WRL
10
<PAGE>
GE/Scottish Equitable International Equity and serves as
Sub-Adviser to WRL GE 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. The directors
and executive officers of GEIM are: John H. Myers, President and
Director, Michael J. Cosgrove, Executive Vice President and
Director, Alan M. Lewis, Executive Vice President, General
Counsel, and Director; Robert A. MacDougall, Executive Vice
President; Eugene K. Bolton, Executive Vice President and
Director; Donald W. Torey, Executive Vice President and Director,
Ralph R. Layman, Executive Vice President and Director, Thomas J.
Szkutak, Executive Vice President, Chief Financial Officer and
Director and Geoffrey R. Norman, Executive Vice President and
Director. All of these officers and/or directors have no
substantial business, profession, vocation or employment other
than their positions with GEIC and its affiliates.
L. WRL NWQ Value Equity: Sub-Adviser - NWQ Investment Management
---------------------------------------------------------------
Company, Inc.
-------------
NWQ Investment Management Company, Inc. ("NWQ") serves as
Sub-Adviser for WRL NWQ Value Equity. 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, Executive Managing Director (Feb. 1999)/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),
Executive Managing Director (Feb. 1999); Phyllis G. Thomas,
Managing Director; Louis T. Chambers (Atlanta), 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; Ronald R. Sternal
(Minneapolis, MN), Vice President and Michael Wood (San
Francisco), Vice President.
M. WRL Third Avenue Value: Sub-Adviser - EQSF Advisers, Inc.
----------------------------------------------------------
EQSF Advisers, Inc. ("EQSF") serves as Sub-Adviser for WRL Third
Avenue Value. 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 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
11
<PAGE>
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.; Barbara Whitman,
Director, is a Director of Third Avenue Trust and a Registered
Representative of M.J. Whitman, Inc.
N. WRL Goldman Sachs Small Cap and WRL Goldman Sach Growth:
--------------------------------------------------------
Sub-Adviser - Goldman Sachs Asset Management
--------------------------------------------
Goldman Sachs Asset Management ("GSAM"), located at One New York
Plaza, New York, NY 10004, serves as sub-adviser to the WRL
Goldman Sachs Small Cap and WRL Goldman Sachs Growth. David B.
Ford serves as Co-Head of GSAM and as Managing Director of
Goldman Sachs, & Co.; John P. McNulty serves as Co-Head of GSAM
and Managing Director of Goldman, Sachs & Co.
O. WRL Salomon All Cap: Sub-Adviser - Salomon Brothers Asset
-----------------------------------------------------------
Management Inc.
---------------
Salomon Brothers Asset Management Inc ("SBAM"), 7 World Trade
Center, New York, NY, 10048 serves as sub-adviser to WRL Salomon
Mid Cap. Michael S. Hyland, President and Managing Director, also
serves as Managing Director of Salomon Brothers Inc., New York,
NY, Director and Chairman of Salomon Brothers Asset Management
Limited, London, England; Director of Salomon Brothers Asset
Management Japan Limited, Tokyo, Japan, and Chairman of Salomon
Brothers Asset Management (Ireland) Limited ; Vilas V. Gadkari,
Managing Director, also serves as Managing Director and Chief
Investment Officer of Salomon Brothers Asset Management Limited,
London England, Managing Director of Salomon Brothers Inc., New
York, NY, and Salomon Brothers International Limited, London,
England ; Zacharay Snow, Secretary also serves as Managing
Director of Salomon Brothers Inc, New York, NY; Alan M. Mandel,
Vice President and Chief Operating Officer, serves as Director of
Salomon Brothers Inc., New York, NY; Mutual Funds; Mitchel E.
Schulman, Director and Chief Operating Officer - Mutual Funds also
serves as Director and Chief Operating Officer of Salomon Brothers
Inc., New York, NY; Marcus A. Peckman, Director, Vice President
and Chief Financial Officer also serves as Director of Salomon
Brothers, Inc., New York, NY; Jeffrey S. Scott, Chief Compliance
Officer; Michael F. Rosenbaum, Chief Legal Officer, also serves as
Chief Legal Officer of Salomon Brothers Asset Management Limited,
London, England, Chief Legal officer of Salomon Brothers Asset
Management Asia Pacific Limited, Hong Kong, Corporate Secretary of
The Travelers Investment Management Company, New York, NY, and
General Counsel to Asset Management, Travelers Group Inc., New
York, NY and its predecessors; and Thomas W. Jasper, Treasurer,
also serves as Managing Director of Salomon Brothers Inc, New
York, NY.
P. WRL T. Rowe Price Small Cap and WRL T. Rowe Price Dividend Growth:
------------------------------------------------------------------
Sub-Adviser - T. Rowe Price Associates, Inc.
--------------------------------------------
T. Rowe Price Associates, Inc., ("T. Rowe") 100 E. Pratt Street,
Baltimore, MD 21202, serves as sub-adviser to WRL T. Rowe Price
Dividend Growth and WRL T. Rowe Price Small Cap. James E. Halbkat,
Jr., Director of T. Rowe. Mr. Halbkat is President of U.S. Monitor
Corporation, a provider of public response systems. Mr. Halbkat's
address is P.O. Box 23109, Hilton Head Island, South Carolina
29925; Richard L. Menschel, Director of T. Rowe. Mr. Menschel is a
limited partner of The Goldman Sachs Group, L.P., an investment
banking firm. Mr. Menschel's address is 85 Broad Street, 2nd
Floor, New York, New York 10004. Robert L. Strickland, Director of
T. Rowe. Mr. Strickland retired as Chairman of Lowe's Companies,
Inc., a retailer of specialty home supplies, as of January 31,
1998 and continues to serve as a Director. He is a Director of
Hannaford Bros., Co., a food retailer. Mr. Stickland's address is:
2000 W. First Street, Suite 604, Winston-Salem, North Carolina
27104. Philip C. Walsh, Director of T. Rowe is a retired mining
industry executive. Mr. Walsh's address is Pleasant Valley,
Peapack, New Jersey 07977. Anne Marie Whittemore, Director of T.
Rowe. Mrs. Whittemore is a partner of the law firm of McGuire,
Woods, Battle & Boothe L.L.P. and a Director of Owens & Minor,
Inc., Fort James Corporation; and Albemarle Corporation. Mrs.
Whittemore's address is: One James Center, Richmond, Virginia
23219. Henry H. Hopkins Director and Managing Director of T. Rowe;
Director of T. Rowe Price Insurance Agency, Inc.; Vice President
and Director of T. Rowe Price (Canada), Inc., T. Rowe
12
<PAGE>
Price Investment Services, Inc., T. Rowe Price Services, Inc., T.
Rowe Price Threshold Fund Associates, Inc., T. Rowe Price Trust
Company, TRP Distribution, Inc., and TRPH Corporation; Director of
T. Rowe Price Insurance Agency, Inc.; Vice President of
Price-Fleming, T. Rowe Price Real Estate Group, Inc., T. Rowe
Price Retirement Plan Services, Inc., T. Rowe Price Stable Asset
Management, Inc., and T. Rowe Price Strategic Partners Associates,
Inc.; James A.C. Kennedy III, Director and Managing Director of T.
Rowe, President and Director of T. Rowe Price Strategic Partners
Associates, Inc.; Director and Vice President of T. Rowe Price
Threshold Fund Associates, Inc.; John H. LaPorte, Jr., Director
and Managing Director of T. Rowe; William T. Reynolds, Director
and Managing Director of T. Rowe; Chairman of the Board of T. Rowe
Price Stable Asset Management, Inc.; Director of TRP Finance,
Inc.; James S. Riepe, Vice-Chairman of the Board, Director, and
Managing Director of T. Rowe; Chairman of the Board and President
of T. Rowe Price Trust Company; Chairman of the Board of T. Rowe
Price (Canada), Inc., T. Rowe Price Investment Services, Inc., T.
Rowe Price Investment Technologies, Inc. T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Services, Inc.; Director of
Price-Fleming, T. Rowe Price Insurance Agency, Inc., and TRPH
Corporation; Director and President of TRP Distribution, Inc., TRP
Suburban Second, Inc., and TRP Suburban, Inc.; and Director and
Vice President of T. Rowe Price Stable Asset Management, Inc.;
George A. Roche, Chairman of the Board, President and Managing
Director of T. Rowe; Chairman of the Board of TRP Finance, Inc.,
Director of Price-Fleming, T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Strategic Partners, Inc.; and Director and
Vice President of T. Rowe Price Threshold Fund Associates, Inc.,
TRP Suburban Second, Inc., and TRP Suburban, Inc.; Brian C.
Rogers, Director and Managing Director of T. Rowe, Vice President
of T. Rowe Price Trust Company; M. David Testa, Vice-Chairman of
the Board, Chief Investment Officer, and Managing Director of T.
Rowe; Chairman of the Board of Price-Fleming; President and
Director of T. Rowe Price (Canada), Inc.; Director and Vice
President of T. Rowe Price Trust Company; and Director of TRPH
Corporation; Edward C. Bernard, Managing Director of T. Rowe;
Director and President of T. Rowe Price Insurance Agency, Inc.,
and T. Rowe Price Investment Services, Inc.; Director of T. Rowe
Price Services, Inc.; Vice President of TRP Distribution, Inc.;
Michael A. Goff, Managing Director of T. Rowe; Director and the
President of T. Rowe Price Investment Technologies, Inc.; Charles
E. Vieth, Managing Director of T. Rowe; Director and President of
T. Rowe Price Retirement Plan Services, Inc.; Director and Vice
President of T. Rowe Price Investment Services, Inc. and T. Rowe
Price Services, Inc.; Vice President of T. Rowe Price (Canada),
Inc., T. Rowe Price Trust Company, and TRP Distribution, Inc.;
Alvin M. Younger, Jr., Chief Financial Officer, Managing Director,
Secretary and Treasurer of T. Rowe; Director, Vice President,
Treasurer, and Secretary of TRP Suburban Second, Inc. and TRP
Suburban, Inc.; Director of TRP Finance, Inc.; Secretary and
Treasurer for Price-Fleming, T. Rowe Price (Canada), Inc., T. Rowe
Price Insurance Agency, Inc., T. Rowe Price Investment Services,
Inc., T. Rowe Price Real Estate Group, Inc., T. Rowe Price
Retirement Plan Services, Inc., T. Rowe Price Services, Inc., T.
Rowe Price Stable Asset Management, Inc., T. Rowe Price Strategic
Partners Associates, Inc., T. Rowe Price Threshold Fund
Associates, Inc., T. Rowe Price Trust Company, TRP Distribution,
Inc., and TRPH Corporation; Treasurer and Clerk of T. Rowe Price
Insurance Agency of Massachusetts, Inc.; Preston G. Athey,
Managing Director of T. Rowe; Brian W.H. Berghuis, Managing
Director of T. Rowe; Stephen W. Boesel, Managing Director of T.
Rowe; Vice President of T. Rowe Price Trust Company; Gregory A.
McCrickard, Managing Director of T. Rowe; Vice President of T.
Rowe Price Trust Company; Mary J. Miller, Managing Director of T.
Rowe; Charles A. Morris, Managing Director of T. Rowe; George A.
Murnaghan, Managing Director of T. Rowe; Executive Vice President
of Price-Fleming; Vice President of T. Rowe Price Investment
Services, Inc., and T. Rowe Price Trust Company; Edmund M. Notzon
III, Managing Director of T. Rowe; Vice President of T. Rowe Price
Trust Company; Wayne D. O'Melia, Managing Director of T. Rowe;
Director and President of T. Rowe Price Services, Inc.; Vice
President of T. Rowe Price Trust Company; Larry J. Puglia,
Managing Director of T. Rowe; Vice President of T. Rowe Price
(Canada), Inc.; John R. Rockwell, Managing Director of T. Rowe;
Director and Senior Vice President of T. Rowe Price Retirement
Plan Services, Inc.; Director and Vice President of T. Rowe Price
Stable Asset Management, Inc. and T. Rowe Price Trust Company;
Vice President of T. Rowe Price Investment Services, Inc.; R. Todd
Ruppert, Managing Director of T. Rowe; President and Director of
TRPH Corporation; Vice President of T. Rowe Price Retirement Pan
Services, Inc., and T. Rowe Price Trust Company; Robert W. Smith,
Managing Director of T. Rowe; Vice President of Price-Fleming;
William J. Stromberg,
13
<PAGE>
Managing Director of T. Rowe; Richard T. Whitney, Managing
Director of T. Rowe; Vice President of Price-Fleming and T. Rowe
Price Trust Company.
Q. WRL Pilgrim Baxter Mid Cap Growth: Sub-Adviser - Pilgrim Baxter &
-----------------------------------------------------------------
Associates, Ltd.
----------------
Pilgrim Baxter & Associates, Ltd., ("Pilgrim") 825 Duportail Road,
Wayne, PA 19087, serves as sub-adviser to WRL Pilgrim Baxter Mid
Cap Growth. Harold J. Baxter, Chairman, Chief Executive Officer
and Director, also serves as Trustee to PBHG Fund Distributors
(same address), Pilgrim Baxter Value Investors, Inc., Director and
Chairman of PBHG Insurance Series Fund, Inc., Trustee of PBHG Fund
Services, and Chairman and Director of The PBGH Funds, Inc., The ;
Gary L. Pilgrim, Chief Investment Officer and Director, Director
of Pilgrim Baxter Value Investors, Inc., Trustee of PBHG Fund
Services, and President of PBHG Advisor Funds, Inc., PBHG
Insurance Series Fund, Inc., and The PBHG Funds, Inc. (all same
address); Eric C. Schnieder, Chief Financial Officer and
Treasurer, is Chief Financial Officer and Treasurer of Pilgrim
Baxter Value Investors, Inc., and Chief Financial Officer of PBHG
Fund Services; Stephen M. Wellman, Vice President, Operations; Amy
S. Yuter, Chief Compliance Officer, is Chief Compliance Officer of
PBHG Fund Distributors, Pilgrim Baxter Value Investors, Inc., and
is Director of NSCP, an industry association; and John M. Zerr,
General Counsel and Secretary, also serves as General Counsel and
Secretary of Pilgrim Baxter Value Investors, Inc., PBHG Fund
Distributors, PBHG Fund Services, and as Vice President and
Secretary of PBHG Advisor Funds, Inc., and PBHG Insurance Series
Fund, Inc.
R. WRL Dreyfus Mid Cap: Sub-Adviser - The Dreyfus Corporation
-----------------------------------------------------------
The Dreyfus Corporation ("Dreyfus"), 200 Park Avenue, New York,
New York 10166, serves as sub-adviser to WRL Dreyfus Mid Cap.
Burton Cook Borgelt, Director, also serves as Director of DeVlieg
Bullard, Inc, Mellon Bank Corporation, Pittsburgh, PA, Mellon
Bank, N.A., Pittsburgh, PA and Dentsply International, Inc., York,
PA; Frank V. Cahouet, Director, also serves as Director, Chairman
and CEO of Mellon Bank Corporation and Mellon Bank N.A., One
Mellon Bank Center, Pittsburgh, PA: Stephen E. Canter, Director,
Vice Chairman and Chief Investment Officer, also serves as
Chairman, Director and President of Dreyfus Investment Advisors,
Inc., and as Director of The Dreyfus Trust Company; Christopher M.
Condron, Chief Executive Officer, Chief Operations Officer,
President and Director; Mark N. Jacobs, Vice President and General
Counsel; Lawrence S. Kash, Director and Vice Chairman,
Distribution, also serves as Director of Dreyfus Investment
Advisors, Inc., Chairman and Chief Executive Officer of Dreyfus
Brokerage Services, Inc., Director and President of Dreyfus
Service Corporation and Dreyfus Precious Metals, Inc., and
Director of Dreyfus Service Organization, Inc.; ,William T.
Sandalls, Jr., Senior Vice President and Chief Financial Officer,
also serves as Director and Chairman of Dreyfus Transfer, Inc.,
One American Express Plaza, Providence, RI 02903, Executive Vice
President and Chief Financial Officer of Dreyfus Service
Corporation, and Director and Treasurer of Dreyfus Investment
Advisors, Inc. and Seven Six Seven Agency; William K. Smith,
Chairman and Director, also serves as President and Director of
The Bridgewater Land Co., Inc. and Mellon Preferred Capital
Corporation, Boston, MA, and Director, Chairman, President and CEO
of Shearson Summit Euromanagement, Inc. and Shearson Summit
EuroPartners Inc., Pittsburgh, PA; Richard F. Syron, Director,
also serves as Chairman and Chief Executive Officer of the
American Stock Exchange, 86 Trinity Place, New York, NY; and
Mandell L. Berman, Director, is also self-employed as a Real
Estate Consultant, Residential Builder and Private Investor,
Southfield, MI.
S. WRL Great Companies - America(sm) and WRL Great Companies -
---------------------------------------------------------
Technology(sm) : Sub-Adviser - Great Companies, L.L.C..:
------------------------------------------------------
Great Companies, L.L.C., 8550 Ulmerton Road, Largo, Florida 33771
serves as sub-adviser to WRL Great Companies - America(sm) and WRL
Great Companies - Technology(sm). John R. Kenney serves as
Director, Chairman and Co-CEO. Mr. Kenney also serves as Chairman
and President of WRL Series Fund, Inc., Chairman and Trustee of
IDEX Mutual Funds, Chairman and CEO of Western Reserve Life
Assurance Co. of Ohio, Chairman and President of WRL Investment
Management, Inc., Chairman of WRL
14
<PAGE>
Investment Services, Inc., AEGON Asset Management, Inc., and IDEX
Management, Inc., located at 570 Carillon Parkway, St. Petersburg,
Florida 33716; James H. Huguet, Director, President and Co-CEO,
also serves as President and Director of Great Companies, Inc.;
Alan Warrick, Director, also serves as Managing Director of AEGON
USA, 425 W. Capital, Suite 3200, Little Rock, Arkansas; Gerald
Bollman, Executive Vice President, also serves as Executive Vice
President of Great Companies, Inc.; Jerome C. Vahl, Director, also
serves as Director and President of Western Reserve Life Assurance
Co. of Ohio, Director of Idex Investor Services, Inc., Idex
Management, Inc., WRL Investment Management, Inc., and WRL
Investment Services, Inc., located at 570 Carillon Parkway, St.
Petersburg, FL 33716; and as Vice President of AEGON USA, Cedar
Rapids, IA; and Thomas R. Moriarty, Director, also serves as
Chairman, CEO and President of Idex Management, Inc.; Senior Vice
President, Treasurer and Principal Financial Officer of IDEX
Mutual Funds; Director and President of ISI Insurance Agency,
Inc.; President of PW Securities, Inc.; Director, President and
CEO of Idex Investor Services, Inc.; Vice President of Western
Reserve Life Assurance Co. of Ohio; and CFO of AEGON Asset
Management Services, Inc., located at 570 Carillon Parkway, St.
Petersburg, FL 33716.
T. WRL Value Line Aggressive Growth: Sub-Adviser - Value Line, Inc.
----------------------------------------------------------------
Value Line, Inc., 220 East 42nd Street, New York, New York serves
as sub-adviser to WRL Value Line Aggressive Growth. David T.
Henigson, Director, Vice President, Treasurer, Internal Auditor
and Compliance Officer also serves as Director and Vice President
of Value Line Securities, Inc.; Jean Bernard Buttner, Chairman,
CEO and President, also serves as Chairman, Director and CEO of
Arnold Bernhard & Co., Chairman, CEO and Director of Value Line
Publishing, Inc., and Chairman and Director of Value Line
Securities, Inc.; Samuel Eisenstadt, Director, Chairman of
Research and Sr. Vice President; Harold Bernard, Jr., Director;
William S. Thomas, Esq., Director, also serves as an attorney at
Brobeck, Phleger & Harrison, San Francisco, CA; and Howard A.
Brecher, Secretary, Director and Vice President, also serves as
Secretary and Director of Arnold Bernhard & Co., Inc.
Item 27. Principal Underwriter
---------------------
(a) AFSG Securities Corporation ("AFSG") is the principal
underwriter for the Contracts. AFSG currently serves as
principal underwriter for the PFL Endeavor VA Separate
Account, the PFL Retirement Builder Variable Annuity
Account, the PFL Life Variable Annuity Account A, the PFL
Wright Variable Annuity Account, the AUSA Endeavor
Variable Annuity Account, Separate Account C of First
Providian Life and Health Insurance Company, and the
Separate Account I, Separate Account II, and Separate
Account V of Providian Life and Health Insurance Company,
WRL Series Life Account, WRL Series Annuity Account B and
AUSA Series Life Account.
(b) Directors and Officers of AFSG:
<TABLE>
<CAPTION>
(1) (2) (3)
Name and Principal Position and Offices Position and Offices
Business Address with Underwriter with Registrant
- - ---------------- ---------------- ---------------
<S> <C> <C> <C>
Larry N. Norman (1) Director and President N/A
Harvey E. Willis (1) Vice President and Secretary N/A
Lisa Wachendorf (1) Compliance Officer N/A
Debra C. Cubero (1) Vice President N/A
Gregory J. Garvin (1) Vice President N/A
Michael F. Lane (1) Vice President N/A
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Sara J. Stange (1) Director and Vice President N/A
Brenda K. Clancy (1) Vice President N/A
Michael G. Ayers (1) Treasurer/Controller N/A
Colleen S. Lyons (1) Assistant Secretary N/A
John F. Reesor (1) Assistant Secretary N/A
Anne Spaes (1) Vice President N/A
Priscilla I. Hechler (2) Assistant Vice President and Assistant Vice President
Assistant Secretary and Assistant Secretary
Thomas E. Pierpan (2) Assistant Secretary Secretary, Vice President
And Associate General Counsel
Richard C. Hicks (2) Assistant Vice President N/A
and Assistant Secretary
Nancy C. Hassett (2) Assistant Secretary N/A
Gina A. Babka (2) Assistant Secretary N/A
</TABLE>
- - --------------------------------------
(1) 4333 Edgewood Road, N.E., Cedar Rapids, IA 52499-0001
(2) 570 Carillon Parkway, St. Petersburg, FL 33716-1202
Item 28. 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 570 Carillon
Parkway, St. Petersburg. Florida 33716, or at the offices of the
Fund's custodian, Investors Bank & Trust Company, 200 Clarendon
Street, 16th Floor, Boston, MA 02111.
Item 29. Management Services.
Not applicable
Item 30. Undertakings.
Not applicable
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, WRL Series Fund, Inc., certifies that it meets
all of the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities and Exchange Act of 1933 and has
duly caused this Post-Effective Amendment No. 38 to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of St. Petersburg, State of Florida, on the 27th day of April 2000.
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. 38 to its Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated:
Signature and Title Date
- - ------------------- ----
/s/ John R. Kenney April 27, 2000
- - -----------------------------------------
Chairman of the Board and President
John R. Kenney
/s/ Patrick S. Baird April 27, 2000
- - -----------------------------------------
Executive Vice President and Director
Patrick S. Baird
/s/ Peter R. Brown April 27, 2000
- - ---------------------------------------
Director - Peter R. Brown *
/s/ Charles C. Harris April 27, 2000
- - ----------------------------------------
Director - Charles C. Harris*
/s/ Russell A. Kimball, Jr. April 27, 2000
- - -------------------------------------
Director - Russell A. Kimball, Jr. *
/s/ Allan J. Hamilton April 27, 2000
- - -------------------------------------------
Treasurer and Principal Financial Officer
Allan J. Hamilton
/s/ Kim D. Day April 27, 2000
- - ---------------------------------------------
Vice President and
Principal Accounting Officer
Kim D. Day
/s/ John K. Carter
- - -----------------------------------------------
* Signed by John K. Carter
as Attorney-in-fact
<PAGE>
WASHINGTON, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
EXHIBITS FILED WITH
POST-EFFECTIVE AMENDMENT NO. 38 TO
REGISTRATION STATEMENT ON
FORM N-1A
WRL SERIES FUND, INC.
REGISTRATION NO. 33-507
<PAGE>
Exhibit Index
Exhibit Description
No. of Exhibit
--- ----------
23(a)1.(N) Articles Supplementary to Articles of Incorporation
of the WRL Series Fund, Inc.
23(i) Opinion and Consent of John Carter as to the legality
of the securities being registered.
23(j) Consent of PricewaterhouseCoopers
23(p)(17)(18)(19) Code of Ethics for Van Kampen Asset Management, Inc.,
EQSF Advisers, Inc., and The Dreyfus Corporation
EXHIBIT 23(A)(1)(N)
ARTICLES SUPPLEMENTARY TO ARTICLES OF INCORPORATION
WRL SERIES FUND, INC.
<PAGE>
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
WRL SERIES FUND, INC.
WRL SERIES FUND, INC., a Maryland corporation ("Corporation"), on
behalf of its Board of Directors ("Directors"), hereby certifies to the Maryland
Department of Assessments and Taxation as follows:
FIRST: The Corporation is registered as an open-end investment company
under the Investment Company Act of 1940, as amended.
SECOND: Pursuant to Article V, Paragraph 1 of the Corporation's
Articles of Incorporation, the Corporation is authorized to issue One Billion
(1,000,000,000) shares of Common Stock having a par value of one cent ($0.01)
per share and the aggregate par value of $10,000,000 ("Shares") which are
classified in the Corporation's Articles of Incorporation as follows: Three
Hundred Million (300,000,000) of the Shares are designated as Money Market
Portfolio Common Stock; Twenty-Five Million (25,000,000) of the Shares are
designated as Bond Portfolio Common Stock; and Six Hundred Seventy-five Million
(675,000,000) of the Shares are designated as Growth Portfolio Common Stock.
THIRD: Pursuant to the Corporation's Articles Supplementary to Articles
of Incorporation filed on November 25, 1992, the Shares were reclassified as
follows: Three Hundred Million (300,000,000) of the Shares are designated as
Money Market Portfolio Common Stock; Twenty-Five Million (25,000,000) of the
Shares are designated as Bond Portfolio Common Stock; and Two Hundred
Seventy-five Million (275,000,000) of the Shares are designated as Growth
Portfolio Common Stock; One Hundred Million (100,000,000) of the Shares are
designated as Global Portfolio Common Stock; One Hundred Million (100,000,000)
of the Shares are designated as Short-to-Intermediate Government Portfolio
Common Stock; One Hundred Million (100,000,000) of the Shares are designated as
Emerging Growth Portfolio Common Stock; and One Hundred Million (100,000,000) of
the Shares are designated as Equity-Income Portfolio Common Stock.
FOURTH: Pursuant to the Corporation's Articles Supplementary to
Articles of Incorporation filed on March 1, 1994, Shares were reclassified as
follows: One Hundred Fifty Million (150,000,000) of the authorized but unissued
Shares of the Growth Portfolio Common Stock were reclassified and designated as
follows: Seventy-five Million (75,000,000) were designated as Balanced Portfolio
Common Stock; and Seventy-five Million (75,000,000) were designated as Utility
Portfolio Common Stock. Seventy-five Million (75,000,000) of the authorized but
unissued Shares of the Money Market Portfolio Common Stock were reclassified and
designated as Aggressive Growth Portfolio Common Stock.
FIFTH: Pursuant to the Corporation's Articles Supplementary to Articles
of Incorporation filed on September 2, 1994, Shares were reclassified as
follows: Seventy-five Million (75,000,000) of the authorized but unissued Shares
of the Money Market Portfolio Common Stock were reclassified and designated as
follows: Seventy-five Million (75,000,000) were designated as Tactical Asset
Allocation Portfolio Common Stock.
SIXTH: Pursuant to the Corporation's Articles Supplementary to Articles
of Incorporation filed on April 6, 1995, the Corporation increased the aggregate
number of shares of capital (common) stock which the Fund has
<PAGE>
authority to issue from One Billion (1,000,000,000) Shares of the par value of
one cent ($0.01) per share and the aggregate par value of $10,000,000, to Two
Billion (2,000,000,000) Shares of the par value of one cent ($0.01) per share
and the aggregate par value of $20,000,000. Of the One Billion (1,000,000,000)
shares newly authorized by the Corporation, the Shares were classified as
follows: Seventy-five Million (75,000,000) of the Shares were designated as
C.A.S.E. Quality Growth Portfolio Common Stock; Seventy-five Million
(75,000,000) of the Shares were designated as C.A.S.E. Growth & Income Portfolio
Common Stock; and Seventy-five Million (75,000,000) of the Shares were
designated as C.A.S.E. Growth Portfolio Common Stock.
SEVENTH: Pursuant to the Corporation's Articles Supplementary to
Articles of Incorporation filed on July 14, 1995, shares of the authorized
capital (common) stock were classified as follows: Seventy-five Million
(75,000,000) of the Shares were designated as T. Rowe Price-WRL Equity Income
Portfolio Common Stock; Seventy-five Million (75,000,000) of the Shares were
designated as Leisure Portfolio Common Stock; Seventy-five Million (75,000,000)
of the Shares were designated as International Equity Portfolio Common Stock;
and Seventy-five Million (75,000,000) of the Shares were designated as Janus
Balanced Portfolio Common Stock.
EIGHTH: Pursuant to the Corporation's Articles Supplementary to
Articles of Incorporation filed on January 4, 1996, shares of the authorized
capital (common) stock were classified as follows: Seventy-five Million
(75,000,000) of the Shares were designated as Value Equity Portfolio Common
Stock; Seventy-five Million (75,000,000) of the Shares were designated as
Meridian/INVESCO Global Sector Portfolio Common Stock; Seventy-five Million
(75,000,000) of the Shares were designated as Meridian/INVESCO US Sector
Portfolio Common Stock; and Seventy-five Million (75,000,000) of the Shares were
designated as Meridian/INVESCO Foreign Sector Portfolio Common Stock.
NINTH: Pursuant to the Corporation's Articles Supplementary to Articles
of Incorporation filed on October 23, 1996, shares of the authorized capital
(common) stock were classified as follows: Seventy-five Million (75,000,000) of
the Shares were designated as U.S. Equity Portfolio Common Stock.
TENTH: Pursuant to the Corporation's Articles Supplementary to Articles
of Incorporation filed on December 6, 1996, the authorized but unissued shares
of the Meridian/INVESCO Global Sector Portfolio Common Stock were designated as
Global Sector Portfolio Common Stock; the authorized capital (common) stock of
the Meridian/INVESCO US Sector Portfolio were designated as US Sector Portfolio
Common Stock; and the authorized capital (common) stock of the Meridian/INVESCO
Foreign Sector Portfolio Common Stock were designated as Foreign Sector Common
Stock.
ELEVENTH: Pursuant to the Corporation's Articles Supplementary to
Articles of Incorporation filed on April 18, 1997, the authorized but unissued
shares of the Equity-Income Portfolio Common Stock were designated as Strategic
Total Return Portfolio Common Stock and the authorized but unissued shares of
the Utility Portfolio were designated as Growth & Income Portfolio Common Stock.
TWELFTH: Pursuant to the Corporation's Articles Supplementary to
Articles of Incorporation filed on September 19, 1997, shares of the authorized
capital (common) stock were classified as follows: Seventy-five Million
(75,000,000) of the Shares were designated as Third Avenue Value Portfolio
Common Stock.
THIRTEENTH: Pursuant to the Corporation's Articles Supplementary to
Articles of Incorporation filed on February 27, 1998, shares of the authorized
capital (common) stock were classified as follows: Seventy-five Million
<PAGE>
(75,000,000) of the Shares were designated as Real Estate Securities Portfolio
Common Stock.
FOURTEENTH: Pursuant to the Corporation's Articles Supplementary to
Articles of Incorporation filed on November 20, 1998, the Shares were
reclassified as follows: Seventy-five Million (75,000,000) of the authorized but
unissued Shares of the T. Rowe Price-WRL Equity Income Portfolio Common Stock
were reclassified and designated as Money Market Portfolio Common Stock;
Seventy-five Million (75,000,000) of the authorized but unissued Shares of the
Leisure Portfolio Common Stock were reclassified and designated as Money Market
Portfolio Common Stock; and One Hundred Fifty Million (150,000,000) Shares of
the authorized capital (common) stock were classified as Money Market Portfolio
Common Stock.
FIFTEENTH: Pursuant to the Corporation's Articles Supplementary to
Articles of Incorporation filed on February 18, 1999, the shares were
reclassified as follows: Twenty-five Million (25,000,000) shares of the Growth
Portfolio Common Stock were designated as Bond Portfolio Common Stock;
Twenty-five Million (25,000,000) shares of the Strategic Total Return Portfolio
Common Stock and Twenty-five Million (25,000,000) shares of the Emerging Growth
Portfolio Common Stock were designated as WRL Goldman Sachs Growth Portfolio
Common Stock; Twenty-five Million (25,000,000) shares of the Balanced Portfolio
Common Stock and Twenty-five Million (25,000,000) shares of Growth & Income
Portfolio Common Stock were designated as WRL Dreyfus Mid Cap Portfolio Common
Stock; Twenty-five Million (25,000,000) shares the C.A.S.E. Growth Portfolio
Common Stock and Twenty-five Million (25,000,000) shares of the Global Sector
Portfolio Common Stock were designated as WRL Goldman Sachs Small Cap Portfolio
Common Stock; Twenty-five Million (25,000,000) shares of the Value Equity
Portfolio Common Stock and Twenty-five Million (25,000,000) shares of the
International Equity Portfolio were designated as WRL T. Rowe Price Dividend
Growth Portfolio Common Stock; Twenty-five Million (25,000,000) shares of the
U.S. Equity Portfolio Common Stock and Twenty-five Million (25,000,000) shares
of the Third Avenue Value Portfolio Common Stock were designated as WRL T. Rowe
Price Small Cap Portfolio Common Stock; and Twenty-five Million (25,000,000)
shares of the Real Estate Securities Portfolio Common Stock were designated as
WRL Salomon All Cap Portfolio Common Stock. Twenty-five Million (25,000,000)
Shares of the authorized capital (common) stock was classified as WRL Salomon
All Cap Portfolio Common Stock; and Fifty Million (50,000,000) Shares of the
authorized capital (common) stock was classified as WRL Pilgrim Baxter Mid Cap
Growth Portfolio Common Stock. The authorized but unissued shares of the Money
Market Portfolio Common Stock were designated as WRL J. P. Morgan Money Market
Portfolio Common Stock; the authorized but unissued shares of the Bond Portfolio
Common Stock were designated as the WRL AEGON Bond Portfolio Common Stock; the
authorized but unissued shares of the Tactical Asset Allocation Portfolio Common
Stock were designated as the WRL DEAN Asset Allocation Portfolio Common Stock;
the authorized but unissued shares of the Growth Portfolio Common Stock were
designated as the WRL Janus Growth Portfolio Common Stock; the authorized but
unissued shares of the Global Portfolio Common Stock were designated as the WRL
Janus Global Portfolio Common Stock; the authorized but unissued shares of the
Strategic Total Return Portfolio Common Stock were designated as the WRL LKCM
Strategic Total Return Portfolio Common Stock; the authorized but unissued
shares of the Emerging Growth Portfolio Common Stock were designated as the WRL
VKAC Emerging Growth Portfolio Common Stock; the authorized but unissued shares
of the Aggressive Growth Portfolio Common Stock were designated as the WRL Alger
Aggressive Growth Portfolio Common Stock; the authorized but unissued shares of
<PAGE>
the Balanced Portfolio Common Stock were designated as the WRL AEGON Balanced
Portfolio Common Stock; the authorized but unissued shares of the Growth &
Income Portfolio Common Stock were designated as the WRL Federated Growth &
Income Portfolio Common Stock; the authorized but unissued shares of the Value
Equity Portfolio Common Stock were designated as the WRL NWQ Value Equity
Portfolio Common Stock; the authorized but unissued shares of the International
Equity Portfolio Common Stock were designated as the WRL GE/Scottish Equitable
International Equity Portfolio Common Stock; the authorized but unissued shares
of the U.S. Equity Portfolio Common Stock were designated as the WRL GE U.S.
Equity Portfolio Common Stock; the authorized but unissued shares of the Real
Estate Securities Portfolio Common Stock were designated as the WRL J.P. Morgan
Real Estate Securities Portfolio Common Stock, and the authorized but unissued
shares of the Third Avenue Value Portfolio were designated as the WRL Third
Avenue Value Portfolio.
SIXTEENTH: The Board of Directors of the Corporation, at a meeting duly
convened and held on January 24, 2000, adopted resolutions reclassifying
authorized but unissued shares as follows: fifty million (50,000,000) of the
authorized but unissued shares of the Short to Intermediate Government Portfolio
Common Stock were designated as the WRL Great Companies - America(sm) portfolio
Common Stock; fifty million (50,000,000) of the authorized but unissued shares
of the Short to Intermediate Government portfolio Common Stock were designated
as WRL Great Companies - Technology(sm); fifty million (50,000,000) of the
authorized but unissued shares of the Meridian Global Sector portfolio were
designated as WRL Value Line Leveraged Growth portfolio; fifty million shares
(50,000,000) designated but unissued shares of the C.A.S.E. Quality Growth
Portfolio became undesignated and unissued shares; the authorized but unissued
shares of the WRL GE/Scottish Equitable International Equity Common Stock were
designated as the WRL GE International Equity Common Stock; and seventy five
million (75,000,000) designated but unissued shares of the C.A.S.E. Growth &
Income Portfolio became undesignated and unissued shares.
SEVENTEENTH: The Shares of Common Stock as so authorized and
reclassified by the Directors of the Corporation shall have the powers,
preferences, and rights, and qualifications, restrictions and limitations,
specified in Article V, Paragraph 4 of the Articles of Incorporation of the
Corporation and shall be subject to all its provisions relating to the stock of
the Corporation.
EIGHTEENTH: The aforesaid Shares of Common Stock have been duly
authorized and reclassified by the Directors pursuant to authority and power
contained in the Articles of Incorporation of the Corporation and in accordance
with Section 2-105(c) of the Maryland General Corporation Law.
<PAGE>
IN WITNESS WHEREOF, the undersigned Chairman of the Board of Directors
of WRL Series Fund, Inc., hereby executes these Articles Supplementary on behalf
of the Corporation, acknowledges that these Articles Supplementary are the act
of the Corporation, and certifies that, to the best of his knowledge,
information and belief, all matters and facts set forth herein are true in all
material respects, under the penalties of perjury.
Date: April 18, 2000 WRL SERIES FUND, INC.
/s/ John R. Kenney
------------------
John R. Kenney
Chairman of the Board of Directors
ATTEST: and President
/s/ John K. Carter
- - ------------------
John K. Carter, Esq.
Vice President, Secretary
and Counsel
Jan2000sup
EXHIBIT 23(I)
CONSENT OF JOHN CARTER AS TO THE
LEGALITY OF SECURITIES BEING REGISTERED
<PAGE>
April 27, 2000
WRL Series Fund, Inc.
P.O. Box 5068
Clearwater, Florida 33758-5068
Dear Gentlemen:
This opinion is furnished in connection with the proposed registration of the
WRL Series Fund, Inc.
1. The WRL Series Fund, Inc. has been duly organized,
is existing in good standing and is authorized to
issue shares of its stock.
2. The shares of WRL Series Fund, Inc. to be issued
in connection with the Registration Statement have
been duly authorized and when issued and delivered as
provided in the Registration Statement will be
validly issued, fully paid and nonassessable.
I as legal counsel to the WRL Series Fund, Inc., hereby consent to the filing of
this opinion with the Registration Statement.
Very truly yours,
/s/ John K. Carter
John K. Carter
Vice President, Counsel
and Assistant Secretary
EXHIBIT 23(J)(1)
CONSENT OF PRICEWATERHOUSECOOPERS
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
We hereby consent to the incorporation by reference in this Registration
Statement on Form N-1A of our report dated January 28, 2000, relating to the
financial statements and financial highlights which appears in the December 31,
1999 Annual Report of the WRL Series Fund, Inc. which is also incorporated by
reference into the Registration Statement. We also consent to the references to
us under the headings "Financial Highlights" and "Independent Accountants" in
such Registration Statement.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Tampa, Florida
April 24, 2000
EXHIBIT 23(P)(17)(18)(19)
CODES OF ETHICS
<PAGE>
Confidential: Attorney-Client Privileged
Code of Ethics Supplement for
VAN KAMPEN INVESTMENTS, INC.
I. INTRODUCTION
Van Kampen Investments Inc. (the "Company"), a subsidiary of Morgan
Stanley Dean Witter & Co., (the "Firm"), is a fiduciary that provides investment
advisory services to investment companies and private investment management
accounts (the "Clients").
This Code of Ethics is adopted by the Company in keeping with the
general principles and objectives set forth in Sections II and III below, and to
enforce the highest legal and ethical standards in light of its fiduciary
obligations to its Clients.
The policies and procedures described herein are supplemental to the
Firm's Code of Conduct (The Van Kampen Investments Inc. Code of Ethics
Supplement and the Firm's Code of Conduct are collectively referred to as the
"Code".) The Code of Ethics is applicable to all employees of the Company,
including temporary employees or consultants who have provided services for the
Company for a period of at least six months.
II. GENERAL PRINCIPLES
A. Shareholder and Client Interests Come First
Every officer, director or employee involved in providing
investment management services of the Company (collectively referred to
as "Company Employees") owes a fiduciary duty to Clients. This means
that in every decision relating to investments, employees and
affiliates of the Company must recognize the needs and interests of
Clients and be certain that at all times their interests are placed
ahead of any interest of the Company's, its employee or its affiliates.
B. Avoid Actual and Potential Conflicts of Interest
The restrictions and requirements of this Code of Ethics are
designed to prevent behavior which conflicts, potentially conflicts or
raises the appearance of an actual or potential conflict with the
interests of Clients. It is of the utmost importance that the personal
securities transactions of Company Employees and affiliates of the
Company be conducted in a manner consistent with both the letter and
spirit of the Code, including these principles. Only then can Company
Employees, and the Company as a whole, be certain to avoid any actual
or potential conflict of interest or any abuse of an individual's
position of trust and responsibility.
C. Avoiding Personal Benefit
Company Employees and affiliates should ensure that they do
not acquire personal benefit or advantage as a result of the
performance of their normal duties as they relate to Clients.
Consistent with the principle that the interests of Clients must always
come first is the fundamental standard that personal advantage deriving
from the Company's management of Clients' money is to be avoided.
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III. OBJECTIVE
The Code of Ethics' provisions contained in the Investment
Company Act of 1940, as amended, (the "Investment Company Act"), make
it unlawful for certain persons associated with investment advisers or
principal underwriters of investment companies to engage in conduct
which is deceitful, fraudulent, or manipulative, or which involves
false or misleading statements, in connection with the purchase or sale
of a security held or proposed to be acquired by an investment company.
In addition, Section 204A of the Investment Advisers Act of 1940, as
amended, (the "Investment Advisers Act"), requires investment advisers
to establish, maintain and enforce written policies and procedures
designed to prevent misuse of material non-public information. The
objective of this Code of Ethics is to require Company Employees to
conduct themselves in accordance with the general principles set forth
above, as well as to prevent Company Employees from engaging in conduct
prohibited by the Investment Company Act and the Investment Advisers
Act.
IV. DEFINITIONS
A. "Access Person" means any Employee who, in connection with
regular functions or duties, makes, participates in, or has the
ability to obtain information regarding the purchase or sale of a
Security by a Client, or whose functions relate to the making of
any recommendations with respect to such purchases or sales. In
the event that any individual or company should be in a control
relationship to a Client or the Company, the term "Access Person"
would include such an individual or Company to the same extent as
an employee of the client or the Company.
B. "Advertising Principals" are the individuals set forth in Exhibit
A.
C. "Advisers" mean all subsidiaries of the Company that are
registered with the Securities and Exchange Commission (the
"Commission") as investment advisers pursuant to the Investment
Advisers Act.
D. "Chief Compliance Officer" is the individual set forth in Exhibit
A.
E. "Client" means any person or institution advised by Van Kampen
Investments Inc. and its subsidiaries.
F. "Code of Ethics Review Committee" consists of the Company's Chief
Compliance Officer and General Counsel.
G. "Company" means Van Kampen Investments Inc. and its subsidiaries.
H. "Control Group" means the individuals employed by Morgan Stanley
who are responsible for monitoring the Morgan Stanley Restricted
List.
I. "Disinterested Trustee/Director" means a trustee or director of
an investment company managed by the Company who is not an
"interested person" of the investment company within the meaning
of Section 2(a)(19) of the Investment Company Act.
J. "Employee" or "Company Employee" means any person employed by the
Company. Employees include consultants and temporary employees
who are paid directly by the Company.
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<PAGE>
K. "Employee Account" means any brokerage account or unit investment
trust account in which the Employee has any direct or indirect
beneficial ownership. The term "beneficial ownership" as used
herein shall have the same meaning as that term is defined by
rules of the Commission. Generally, under the such rules, a
person is regarded as having beneficial ownership of securities
held in the name of any of the following:
1. A husband, wife or a minor child;
2. A relative sharing the same house; and
3. Anyone else if the Employee:
a. obtains benefits substantially equivalent to ownership of
the Securities; or
b. can obtain ownership of the securities immediately or at
some future time.
L. "Firm" means Morgan Stanley Dean Witter & Co. and its affiliates.
M. "General Counsel" is the individual set forth in Exhibit A.
N. "Investment Personnel" means Portfolio Managers, Security
Analysts, Traders and other individuals who provide information
and advice to a portfolio manager or who assist in the execution
of a portfolio manager's decision.
O. "Manager of Public and News Media Relations" is the individual
set forth in Exhibit A.
P. "Portfolio Manager" means any person who exercises investment
discretion on behalf of the Company for a Client.
Q. "Restricted List" means a document which contains a list of
Securities which are restricted from purchase or sale by the
Firm's affiliated companies, employees and client portfolios.
R. "Security" refers not only to the instruments set forth in
Section 2(a)(36) of the Investment Company Act but to any
instrument into which such instrument may be converted, any
warrant of any issuer that has issued the instrument, and any
option, such as a put, call, straddle or spread (whether or not
such option is "covered") relating to an instrument. It does not
include: (a) any instrument issued directly to the Employee by an
open end investment company; (b) certificates of deposit; (c)
banker's acceptances; (d) commercial paper; or (e) any instrument
representing a direct obligation of the United States Government.
S. "Security Analyst" means any person who analyzes securities for
potential purchase or sale by a Client.
T. "Trader" means any Company Employee who places trades on behalf
of a Client.
U. "Watch List" means a list of Securities that do not carry
restrictions, but whose trading is subject to close scrutiny by
the Company's Legal Department.
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<PAGE>
V. STANDARDS OF CONDUCT FOR PERSONAL SECURITIES TRANSACTIONS
A. Employees
The following procedures are applicable to all Employees:
1. All Employee Accounts must be maintained through Morgan
Stanley Dean Witter & Co. ("MSDW" and/or Discover Brokerage
Direct ("DBD"). No other brokerage accounts are permitted
unless permission is granted by the Company's Legal
Department.
If a new Employee maintains accounts outside MSDW or DBD, the
Employee must transfer such accounts to a MSDW branch or DBD
within 120 days from their date of hire. Existing employees
must transfer accounts to MSDW or DBD on or before January 31,
2000.
a. The Employee must inform the Compliance Department, in
writing, of their MSDW and DBD brokerage accounts, or, if
applicable, their outside brokerage accounts. The Legal
Department shall direct the brokerage firm to provide
duplicate confirmations and account statements to the
Legal Department.
1) Employees shall notify the appropriate Compliance
Department Employee as set forth in Exhibit A when
opening a brokerage account.
b. Temporary employees or consultants who have provided
services to the Company for a period of six months or more
may maintain brokerage accounts at brokers other than MSDW
or DBD.
2. Except as set forth below, all Employees must pre-clear
purchases or sales of Securities in the Employee Accounts with
the Compliance Department.
a. Exceptions from the Pre-Clearance Requirement.
1) Employees are not required to pre-clear the acquisition
of the following Securities:
a) Securities acquired through automatic reinvestment
plans.
b) Securities acquired through employee purchase plans.
c) Securities acquired through the exercise of rights
issued by an issuer pro-rata to all holders of a
class of its securities, to the extent such rights
were acquired from such issuer, and sales of such
rights so acquired.
d) Morgan Stanley Dean Witter & Co. common stock
(including exercise of stock option grants),
(i) The restrictions imposed by the Firm on senior
management and other persons in connection with
transactions in such stock are not affected by
this exemption.
e) Units in Unit Investment Trusts.
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<PAGE>
2) An Independent Trustee or Director need only obtain
prior approval from the Legal Department before
purchasing or selling a Security in any account over
which the Independent Trustee exercises Beneficial
Ownership if he or she has actual knowledge at the time
of the purchase or sale that such security is being
considered for purchase or sale by the Company or is
being purchase or sold by the Company. A Security is
"being considered for purchase or sale" when a
recommendation to purchase or sell a Security has been
made and communicated to a Company Employee or, with
respect to the person making the recommendation, when
such person considers making such a recommendation.
b. Pre-cleared securities transactions must be effected
timely.
1) All approved Securities transactions must take place on
the same day that the authorization is obtained. If the
transaction is not completed on the date of clearance,
a new clearance must be obtained.
2) Purchases through an issuer direct purchase plan must
be pre-cleared on the date the Employee [mails] the
check to the issuer's agent.
a) Authorization for purchases through an issuer direct
purchase plan are effective until the issuer's agent
purchases the Securities.
c. Pre-clearance Procedure
1) Employees shall pre-clear their transactions by
submitting a Trade Authorization Form (a copy of which
is attached as Exhibit C) to the appropriate Compliance
Officer as set forth in Exhibit A.
2) The Compliance Officer shall pre-clear the purchase or
sale of a Security if the transaction does not violate
the Company's Code of Ethics.
a) The Compliance Officer shall verify that the
transaction is in compliance with this Code of
Ethics.
b) The Compliance Officer shall sign the Trade
Authorization Form.
c) The Compliance Officer shall communicate
authorization of the trade to the Employee.
d) The time at which trade authorization is
communicated to the Employee shall be documented on
the Trade Authorization Form.
e) The Legal Department shall maintain the originally
executed Trade Authorization Form. A copy of the
executed Trade Authorization Form will be forwarded
to the Employee.
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<PAGE>
f) A Compliance Officer shall review Employee duplicate
confirmations and statements to verify that all
personal transactions have been properly
pre-cleared.
3. Employee trades for which pre-clearance has been obtained,
including short sales and permissible option trades, are
subject to 30-day holding period from the trade date.
4. Employees are prohibited from trading in futures, options on
futures, and forward contracts. Employees may trade listed
equity and index options and equity warrants, however, there
is a 30-day holding period from the trade date. In addition,
Employees are also prohibited from trading in warrants or
options (with the exception of listed warrants or options) on
physical commodities and currencies.
5. Employees shall not purchase Securities during an initial or
secondary public offering.
6. Employees shall not enter into Limit Orders which extend
beyond one day.
7. Employees shall not participate in an investment club.
8. Employees shall not purchase shares of an investment company
that is managed by the Company if such investment company is
not generally available to the public.
9. Employees shall not purchase shares of an open end investment
company that is managed by the Company if as a result of such
purchase the Employee shall own 1% or more of the assets of
such investment company.
10. Employees are prohibited from the following activities unless
they have obtained prior written approval from the Code of
Ethics Review Committee:
a. Employees may not purchase a Security in a private
placement.
b. Employees may not serve on the boards of directors of a
public or private company. Requests to serve on the board
of a religious, charitable or educational organization as
set forth in Section 503(c) of the IRS Code will generally
be approved.
B. Access Persons
In addition to the prohibitions set forth above for Employees,
the following prohibitions are applicable to Access Persons.
1. All Access Persons shall report all Security transactions in
their Employee Accounts to the Legal Department within ten
calendar days after the end of each quarter. Reports shall be
made on forms sent to the Access Person each quarter.
2. Access Persons shall not purchase or sell a Security on a day
during which a Client has a pending purchase or sale order in
that same Security.
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<PAGE>
C. Investment Personnel
In addition to the prohibitions set forth above Employees and
Access Persons, the following prohibitions are applicable to
Investment Personnel.
1. Investment Personnel shall not sell a Security purchased
within the previous 60 calendar days from the trade date,
except that a Security held for at least 30 days from the
trade date may be sold at a loss or no gain. In addition,
securities sold may not be purchased at a lower price until at
least 60 days from the sale trade date. Any profits realized
on trades executed within the 60-day holding period shall be
disgorged to the Fund or a charitable organization as
determined by the Chief Compliance Officer.
2. All Investment Personnel shall disclose all personal and
beneficial Securities holdings upon the commencement of
employment and thereafter on an annual basis to the Legal
Department.
D. Portfolio Managers
In addition to the prohibitions set forth above for Employees,
Access Persons and Investment Personnel, the following
prohibitions are applicable to Portfolio Managers.
1. A Portfolio Manager may not buy or sell a Security within 7
calendar days before or after any Client, over which such
Portfolio Manager exercises investment discretion, trades in
such Security.
2. A Portfolio Manager may not purchase shares of a closed end
investment company over which such Portfolio Manager exercises
investment discretion.
E. Insiders
No Employee who is required to file a statement of ownership
pursuant to Section 16 of the Securities Exchange Act of 1934 may
purchase or sell and purchase a company-sponsored closed end
investment company within a six month period and realize a profit
on such transaction.
F. Exceptions
1. Notwithstanding the foregoing, the Chief Compliance Officer or
his or her delegee, in keeping with the general principles and
objectives of this Code of Ethics, may refuse to grant
clearance of a personal transaction in their sole discretion
without being required to specify any reason for the refusal.
2. Upon proper request by an Employee, a Code of Ethics Review
Committee (the "Committee") will consider for relief or
exemption from any restriction, limitation or procedure
contained herein, which restriction, limitation or procedure
is claimed to cause a hardship for such Employee. The Chief
Compliance Officer will in his sole discretion determine
whether the request is appropriate for consideration by the
Committee. The Committee shall meet on an ad hoc basis, as
deemed necessary upon the Employee's written request outlining
the basis for his
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<PAGE>
or her request for relief. The decision is within the sole
discretion of the Committee.
VI. INSIDER TRADING
A. Procedures applicable to Employees that assist in the management
of the portfolios managed by the Company that invest in senior
loans (the "Senior Loan Portfolios"), the current list of such
portfolios is attached hereto as Exhibit B.
1. No Employee who receives nonpublic information pertaining to
the issuer of a senior loan may trade in the Securities of
that issuer or disclose such nonpublic information to others.
2. In order to manage the nonpublic information received by
Employees who assist in the management of the Senior Loan
Portfolios, an information barrier or a "Chinese Wall"; shall
be maintained as follows to prevent the dissemination of such
information to other areas of the Company:
a. The portfolio manager, related analysts and applicable
support staff who assist in the management of the Senior
Loan Portfolios (the "Senior Loan Department") shall be
located in an area segregated from other portfolio
managers and analysts.
b. All senior loan files shall be located in a segregated
locked room with access restricted to Employees who assist
in the management of the Senior Loan Portfolios,
designated internal accountants, outside public
accountants and Legal Department personnel.
1) A list of all Employees who have access to the senior
loan credit files shall be maintained by the Senior
Loan Department and the Legal Department.
2) A log of individuals given access to the senior loan
credit files should be maintained by the Senior Loan
Department. A copy shall be forwarded to the Legal
Department. The log shall document the individual given
access to the files, the time the files were taken from
the file room and the time the files were returned to
the file room.
3) All senior loan credit files shall be returned to the
file room at the end of the work day.
3. In the event an Employee who does not assist in the management
of the Senior Loan Portfolios is asked to review the senior
loans of an issuer, the following procedures shall be
followed.
a. Before reviewing any information of an issuer of a senior
loan, the Employee must first determine whether or not
other Securities of the issuer are presently owned or are
under consideration for purchase by a Client for which the
Employee performs credit research.
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<PAGE>
b. If other Securities of a senior loan issuer are presently
held by or are under consideration for purchase by a
Client for which the Employee performs credit research,
the Employee may not review the issuer or purchase any
securities of the issuer. If no other Securities of a
senior debt issuer under consideration are held or are not
under consideration for purchase by a Client for which the
Employee performs credit research, the Employee may review
the issuer. In such cases, while in possession of
nonpublic information and during the period the senior
loan remains in the portfolio, the Employee may not
analyze any other Securities of that issuer, purchase any
securities of the issuer or disclose any nonpublic
information concerning that issuer to others.
B. In order to determine whether the Chinese Walls erected around
the Senior Loan Portfolios' operations are effective in
preventing the flow and misuse of confidential information, a
Watch List and the following related procedures shall be
followed.
1. The Chief Compliance Officer or his or her designee shall
maintain the Watch List.
2. Issuers of securities in which the Senior Loan Department has
received non-public information shall be placed on the Watch
List noting the date each issuer was added.
3. The Portfolio Manager of the Senior Loan Portfolios, or his or
her designee, shall promptly notify the Chief Compliance
Officer or his designee in writing upon receipt of non-public
information regarding a security.
a. The Chief Compliance Officer or his or her designee shall
add the issuer to the Watch List.
4. Issuers shall remain on the Watch List as long as the
information initially received continues to be non-public
and/or the Company receives additional non-public information
even after the security has been sold from a Senior Loan
Portfolio.
5. The Portfolio Manager or his or her designee shall inform the
Chief Compliance Officer or his designee when: 1) an issue is
removed from a Senior Loan Portfolio; and/or 2) when
previously non-public information becomes public.
a) The determination of whether the Issuer may be
removed from the Watch List will be made jointly by
the Senior Loan Department and the Legal Department.
1) Reasons for removing the Issuer shall be
documented.
C. Procedures applicable to all Employees that assist in the
Company's management of Client portfolios.
1. The Morgan Stanley Dean Witter Control Group (the "Control
Group") shall forward to the Chief Compliance Officer or his
or her designee the most recent Restricted List.
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<PAGE>
2. Upon receipt of the Restricted List, the Chief Compliance
Officer or his or her designee shall forward the Restricted
List to the appropriate individuals.
3. Prior to each purchase or sale of a portfolio security the
portfolio manager or his or her designee shall determine
whether or not the security appears on the Restricted List.
a. In the event the security appears on the Restricted List,
the Portfolio Manager or his or her designee must request
authorization from the Control Group to purchase the
security.
1) If the Control Group grants authorization to purchase
the security, the Control Group will assign an
authorization number to the purchase authorization. The
Portfolio Manager or his of her designee must maintain
documentation of the control number and may purchase
the security.
2) If the Control Group does not authorize the purchase,
the purchase of the security is prohibited.
3) The Legal Department and the Company's portfolio
trading areas shall monitor a list of control numbers
for all exceptions granted by the Control Group for the
purchase of a restricted issuer.
b. In the event the security is not documented on the
Restricted List the security may be purchased.
VII. GIFTS, GRATUTITES AND CONTRIBUTIONS
A. The Company prohibits all Employees from giving or accepting any
gratuity with a value in excess of $100 per year other than an
occasional meal, a ticket to a sporting event or the theater, or
comparable entertainment with is neither so frequent nor so
extensive as to raise question of propriety, to or from persons
associated with securities or financial organizations, including
exchanges, other member organizations, commodity firms, news
media, and non-member broker/dealers, or Clients of the Company.
A gift of any kind is considered a gratuity.
B. All gifts made to a Client for any purpose, other than the usual
and customary tickets to sporting or cultural events and
occasional meals, should be documented. Gifts may not exceed $100
per year per Client. All gifts made to employees or relatives of
a customer will be aggregated for purposes of such limit.
C. Any questions regarding gifts should be bought to the attention
of the Chief Compliance Officer who will assist the Employee in
adherence to regulatory rules and requirements.
VIII. PRESS POLICY
A. Company Employees may not speak to the press prior to receiving
approval from the Manager of Public and News Media Relations or
his or her designee.
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<PAGE>
B. Company Employees may not discuss specific holdings in a Client's
account.
IX. MARKETING AND PUBLIC RELATIONS
A. Advertising
1. All advertising and marketing material, including
"broker-only" material, must be approved by an Advertising
Principal prior to use and retained in the Company's
central files. Unit investment trust and investment
company advertising and/or sales literature must be filed
with the NASD for review within 10 days after use.
Employees are strictly prohibited from using with, or
sending "broker use only" marketing material, to the
public.
B. Seminars
1. The Company's Manager of Public and News Media Relations or
his or her designee shall be responsible for the following
areas of any seminar conducted by Employees:
a. Preparation of any advertising.
b. Distribution of any available brochures or literature
requested.
2. All scripts, advertising, brochures and literature must be
approved by an Advertising Principal prior to use. Copies will
be maintained in the Company's Legal Department.
C. Writing for Publications
1. Employees may not engage in writing articles for any
publications without the prior approval of the Company's
Director of Marketing Communications. This requirement
includes articles to be "published" on electronic media.
X. LEGAL AND REGULATORY MATTERS
A. Bankruptcy/Criminal Offenses
1. The Company is required to notify regulatory organizations
when certain events occur regarding its Employees.
Accordingly, the Company's General Counsel, or his delegee,
must be notified immediately if any of the following occur:
a. An Employee is indicted, or convicted of, or pleads guilty
to, or pleads no contest, any criminal offense (other than
minor traffic violations).
b. An Employee files for personal bankruptcy.
c. A corporation in which any Employee owns 10% or more of
the securities files for bankruptcy.
11
<PAGE>
2. Pursuant to the terms of the Investment Company Act, no
officer or Employee of the Company may become, or continue to
remain, an officer, director or employee, without an exemptive
order issued by the Commission if such officer, director or
employee is, or becomes convicted or enjoined of the following
activities. It is the Employee's obligation to report
immediately any conviction or injunction to the General
Counsel.
1) Within the past ten years convicted of any felony or
misdemeanor involving the purchase or sale of any
security or arising out of the officer's, director's or
employee's conduct as an affiliated person, salesman,
or employee of any investment company, bank, insurance
company or entity or person required to be registered
under the Commodity Exchange Act.
3. Permanently or temporarily enjoined by any court from acting
as an affiliated person, salesman or employee or any
investment company, bank, insurance company or entity or
person required to be registered under the Commodity Exchange
Act, or from engaging in or continuing any conduct or practice
in connection with any such activity or in connection with the
purchase or sale of any security.
B. Expert Witness
Any requests of an Employee to be an "expert witness" must be
approved by the appropriate Division Head and the Company's
General Counsel, or his or her delegate.
C. Receipt of Legal Documents
Upon receipt of legal documents, the Company's General Counsel,
or his or her delegee, are to be notified immediately.
D. Contact with Industry Regulators or State, County or Federal
Prospectors
If an Employee is contacted by an agent of the government or a
regulatory body in connection with a regulatory inquiry, the
Employee shall contact the Company's General Counsel, or his or
her delegee, for instructions.
XI. SANCTIONS
Upon discovering a violation of this Code of Ethics, the
Company may impose such sanctions as it deems appropriate, including,
but not limited to, a reprimand (orally or in writing), demotion, and
suspension or termination of employment. The General Counsel of the
Company, in his sole discretion, is authorized to determine the choice
of sanctions to be imposed in specific cases, including termination of
employment of any employee.
XII. EFFECTIVE DATE
All Employees of the Company are required to sign a copy of
this Code of Ethics indicating their agreement to abide by the terms of
this Code of Ethics. In signing this Code of Ethics, the Employee
acknowledges and agrees to the Firm's distribution of certain
information provided to the Firm by the Employee, including but not
limited to, the Employee's name, social security number and address to
outside vendors chosen by the Firm to assist in the enforcement of this
Code of Ethics.
12
<PAGE>
In addition, all Employees of the Company will be required to
certify annually that (i) they have read and understand the terms of
this Code of Ethics and recognize the responsibilities and obligations
incurred by their being subject to this Code of Ethics, and (ii) they
are in compliance with the requirements of the Code of Ethics.
Approved this ____________ day of ___________________.
13
<PAGE>
Exhibit "A"
I. "Advertising Principal" is Anne Kochevar.
II. "Chief Compliance Officer" is [__________].
III. "Manager - Public and News Media Relations" is Eileen Davis.
IV. "General Counsel" is A. Thomas Smith.
V. The persons in the Compliance Department to pre-clear securities in an
Employee Account are:
Houston and Kansas City: Pam Robertson - 713-438-4210
All other Locations: Sue Pittner - 630-684-6393
Theresa Renn - 630-684-6849
VI. The persons in the Compliance Department to notify the brokerage
accounts are:
Houston and Kansas City: Pam Robertson - 713-438-4210
All other locations: [ ]
14
<PAGE>
Exhibit "B"
Senior Loan Portfolios
Van Kampen Prime Rate Income Trust
Van Kampen Senior Income Trust
Van Kampen Senior Floating Rate Trust
Van Kampen CLO I
Van Kampen CLO II
15
<PAGE>
Exhibit "C"
Pre-Clearance, When Given, is Valid Only on Date of Request.
PERSONAL SECURITIES TRANSACTION TRADE AUTHORIZATION FORM
Employee Name: _____________________ Social Security No. __________
Name(s) of Account Holder(s): __________________________________________________
Brokerage Firm: ________________________________ Buy or Sell: _______________
Name/Description Symbol or
of Security: ______________________________ CUSIP: _____________________________
For All Company Employees:
<TABLE>
<CAPTION>
<S> <C>
1. If you are seeking pre-clearance for the purchase of a
Security, is the Security being purchased part of a private
placement or part of an initial or secondary public offering? Yes ___ No ___
2. Are you seeking pre-clearance for the purchase of shares of
a closed-end investment company distributed by Van
Kampen Funds Inc.? Yes ___ No ___
3. Is your proposed trade a "limit order" that extends beyond
this date? Yes ___ No ___
4. Have you instructed your broker to provide the Legal Dept.
with copies of your confirmations and statements? Yes ___ No ___
5. Are you aware of any Morgan Stanley interest in this Security
through its merchant banking or principal investing activities? Yes ___ No ___
6. Are you trading in futures, options on futures, forward contracts,
warrants, options on physical commodities and currencies? Yes ___ No ___
7. Are you aware of any research recommendation on the Security
issuer by any Morgan Stanley research analyst within the last
two business days? Yes ___ No ___
8. If you are trading in the Securities of Morgan Stanley:
a. Are you selling the security short or are you trading on margin? Yes ___ No ___ NA ___
b. Are you dealing in derivatives involving Morgan Stanley
securities? Yes ___ No ___ NA ___
9. If you are seeking a pre-clearance for a sale, have you held the
Security in your possession for more than 30 days? Yes ___ No ___ NA ___
</TABLE>
Over, please
16
<PAGE>
For Access Persons Only:
<TABLE>
<CAPTION>
<S> <C>
10. Are you aware of any pending purchase or sale by any of the
Van Kampen managed funds in this Security? Yes ___ No ___
For Investment Personnel, Associate Portfolio Managers and Portfolio Managers
Only:
11. Have you had any personal trades, including options transactions
in this Security, for the last 60 calendar days such that this trade
is a reverse of the previous trade (i.e., a buy followed by a sale or
a sale followed by a buy)? Yes ___ No ___
Note: By signing and submitting this pre-clearance request, you agree
that any profits you realize on a purchase and sale or sale and
purchase of this Security within the 60-day period, will be
disgorged.
For Portfolio Managers and Associate Portfolio Managers Only:
12. Have you purchased or sold this Security within the last
seven calendar days before this date in any of the fund(s) under
your primary responsibility? Yes ___ No ___
13. Do you have any plans to purchase or sell this Security within the
next seven calendar days after this date in any of the fund(s) under
your primary responsibility? Yes ___ No ___
</TABLE>
I request pre-clearance for the proposed transaction described above. I
understand that this pre-clearance is valid only on the date shown below. I
affirm that this transaction is not based on any material, non-public
information, and I am not aware of any facts suggesting that this transaction
represents potential conflict of interest.
- - ------------------------------- ------------------ -----------------
(Signature) (Extension) (Date)
<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
The following section is for Compliance Department use only.
Morgan Stanley Control Group Approval Code ______________
Examination of the trading activity of the investment companies of Van Kampen
reveals a record of an authorization or execution completed or pending in the
above-named Security (or underlying Security) during the required period, nor is
the undersigned aware of any facts suggesting that this transaction represents a
potential conflict of interest.
- - --------------------------------- ---------------------------------
(Compliance Department Signature) (Date and Time Employee Notified)
17
<PAGE>
AMENDED AND RESTATED
CODE OF ETHICS
OF
THIRD AVENUE TRUST
AND
EQSF ADVISERS, INC.
This Code of Ethics ("Code") establishes rules of conduct for persons who are
associated with Third Avenue Trust, a registered investment company (the
"Trust") and each series of the Trust (each a "Fund" and, collectively, the
"Funds") and EQSF Advisers, Inc., a registered investment adviser (the
"Adviser"), that provides investment advisory services to the Funds
(collectively, the "Companies").
The basic rule is very simple, put the Funds shareholders' interests first. The
rest of the rules elaborate this principle. Some of the rules are imposed
specifically by law. For example, the laws that govern investment advisers
specifically prohibit fraudulent activity, making statements that are not true
or that are misleading or omit something that is significant in the context and
engaging in manipulative practices. These are general words, of course, and over
the years the courts, the regulators and investment advisers have interpreted
these words and established codes of conduct for their employees and other who
have access to their investment decisions and trading activities. Indeed, the
rules obligate investment advisers to adopt written rules that are reasonably
designed to prevent the illegal activities described above and to follow
procedures that will enable them to prevent such activities.
This Code is intended to assist the Companies in fulfilling their obligations
under the law. The first part lays out who the Code applies to, the second part
deals with personal investment activities, the third part deals with other
sensitive business practices, and subsequent parts deal with reporting and
administrative procedures.
The Code is very important to the Companies and their employees. Violations can
not only cause the Companies embarrassment, loss of business, legal
restrictions, fines and other punishments but for employees can lead to
demotion, suspension, firing, ejection from the securities business and very
large fines.
1
<PAGE>
I. Applicability
(A) The Code applies to each of the following:
1. Third Avenue Value Trust (the "Trust"), each series of the
Trust (each a "Fund" and, collectively, the "Funds"), and EQSF
Advisers, Inc. (the "Adviser") and all entities that are under
common management with the Companies ("Affiliates"). A listing
of the Affiliates is attached as Exhibit A.
2. Any officer, director, trustee or employee of the Companies or
Affiliates whose job regularly involves him in the investment
process of the Companies. This includes the formulation and
making of investment recommendations and decisions, the
purchase and sale of securities for clients and the
utilization of information about investment recommendations,
decisions and trades. Due to the manner in which the Companies
and Affiliates conduct their business, every employee should
assume that he is subject to the Code unless the Compliance
Officer specifies otherwise.
3. With respect to the Companies and Affiliates, any natural
person who controls any of the Companies or Affiliates and who
obtains information regarding the Companies' investment
recommendations or decisions. However, a person whose control
arises only as a result of his official position with such
entity is excluded. Disinterested trustees of a Fund, for
example, are excluded from coverage under this item.
4. With respect to the Companies, any trustee, director, officer,
or person performing a similar function even if he has no
knowledge of and is not involved in the investment process.
Disinterested trustees of a Fund are covered under this item.
5. As an exception, the Code does not apply to any director,
officer or employee of the Companies' affiliated
broker-dealer, M.J. Whitman, Inc., whose duties do not involve
the formulation or making of investment recommendations or
decisions or the execution of portfolio transactions. These
2
<PAGE>
individuals are covered by the code of ethics or supervisory
procedures adopted by such entity.
(B) Definitions
1. Access Persons. The Companies, the Affiliates and the persons
described in items (A) 2 and (A) 3 above other than those
excluded by item (A) 5 above.
2. Access Persons Account. Includes all advisory, brokerage,
trust or other accounts or forms of direct beneficial
ownership in which one or more Access Persons and/or one or
more members of an Access Person's immediate family have a
substantial proportionate economic interest. Immediate family
includes an Access Person's spouse and minor children living
with the Access Person. A substantial proportionate economic
interest will generally be 10% of the equity in the account,
in the case of an account in which only one Access Person has
an interest and 25% of the equity in the account, in the case
of an account in which more than one Access Person has an
interest, whichever is first applicable. Investment
partnerships and similar indirect means of ownership other
than registered open-end investment companies are also treated
as accounts.
As an exception, accounts in which one or more Access Persons
and/or their immediate family have a substantial proportionate
interest which are maintained with persons who have no
affiliation with the Companies and with respect to which no
Access Person has, in the judgment of the Compliance Officer
after reviewing the terms and circumstances, any direct or
indirect influence or control over the investment or portfolio
execution process are not Access Person Accounts.
3. Associate Portfolio Managers. Access Persons who are engaged
in securities research and analysis for the Companies or are
responsible for investment recommendations for other clients
but who are not principally responsible for investment
decisions with respect to any client accounts.
3
<PAGE>
4. Portfolio Managers. Access Persons who are principally
responsible for investment decisions with respect to any
client account.
5. Companies. Third Avenue Trust, each series of the Trust, and
EQSF Advisers, Inc.
6. Compliance Officer. The persons designated as the compliance
officer(s) of the Companies.
7. Covered Persons. The Companies, the Access Persons and the
persons described in item (A) 4.
8. Security. Any financial instrument treated as a security for
investment purposes and any related instrument such as a
futures, forward or swap contract entered into with respect to
one or more securities, a basket of or an index of securities
or components of securities. However, the term security does
not include securities issued by the Government of the United
States, bankers' acceptances, bank certificates of deposit, or
shares of registered open-end investment companies.
II. Restrictions on Personal Investing Activities
(A) Basic Restriction on Investing Activities
If a purchase or sale order is pending or under active
consideration by the Adviser, neither the same Security nor any
related Security (such as an option, warrant or convertible
security) may be bought or sold for any Access Person Account.
(B) Initial Public Offerings
No Security or related Security may be acquired in an initial
public offering for any Access Person Account.
(C) Blackout Period
No Security or related Security may be bought or sold for the
account of any Portfolio Manager or Associate Portfolio Manager
during the period commencing seven (7) days prior to and ending
seven (7) calendar days after the purchase or sale (or entry of
any
4
<PAGE>
order for the purchase or sale) of that Security or any related
Security for the account of any client with respect to which such
person has been designated a Portfolio Manager or Associate
Portfolio Manager.
(D) Exempt Transactions
Participation on an ongoing basis in an issuer's dividend
reinvestment or stock purchase plan, participation in any
transaction over which no Access Person had any direct or
indirect influence or control and involuntary transactions (such
as mergers, inheritances, gifts, etc.) are exempt from the
restrictions set forth in paragraphs (A) and (C) above without
case by case preclearance under paragraph (G) below.
(E) Permitted Exceptions
Purchases and sales of the following Securities for Access Person
Accounts are exempt from the restrictions set forth in paragraphs
A, C and D above if such purchases and sales comply with the
preclearance requirements of paragraph (F) below:
1. Non-convertible fixed income Securities rated at least "A";
2. Equity Securities of a class having a market capitalization in
excess of $1 billion;
3. Equity Securities of a class having a market capitalization in
excess of $500 million if the transaction in question and the
aggregate amount of such Securities and any related Securities
purchased and sold for the Access Person Account in question
during the preceding 60 days does not exceed 100 shares;
4. Municipal Securities; and
5. Securities transactions effected for federal, state or local
income tax purposes that are identified to the Compliance
Officer at the time as being effected for such purpose.
5
<PAGE>
In addition, the exercise of rights that were received pro
rata with other security holders is exempt if the preclearance
procedures are satisfied.
(F) Pre-Clearance of Personal Securities Transactions
1. Except as set forth in paragraph (F) 2. below, no Security may
be bought or sold for an Access Person Account unless; (i) the
Access Person obtains prior approval from the Compliance
Officer or, in the absence of the Compliance Officer, from the
general counsel of the Fund; (ii) the approved transaction is
completed on the same day approval is received; and (iii) Mr.
Whitman, the Compliance Officer or the Fund's general counsel
does not rescind such approval prior to execution of the
transaction (See paragraph H below for details of the
Pre-Clearance Process).
2. Notwithstanding the foregoing, if the transaction is being
executed through M.J. Whitman, Inc., on the basis of the head
trader's assessment that the security is either not currently
in the Fund's portfolio or the Fund has no current interest in
the acquisition of the security and there is no current
interest in the sale of the security, prior approval will be
deemed to have been obtained subject to the authority of the
Compliance Department to rescind such transaction for any
reason.
(G) Private Placements
The Compliance Officer will not approve purchases or sales of
Securities that are not publicly traded, unless the Access Person
provides full details of the proposed transaction (including
written certification that the investment opportunity did not
arise by virtue of such person's activities on behalf of a Fund
or Adviser) and the Compliance Officer concludes, after
consultation with one or more of the relevant Portfolio Managers,
that the Fund would have no foreseeable interest in investing in
such Security or any related Security.
(H) Pre-Clearance Process
1. Except as set forth in paragraph (F) above, no Securities may
be purchased or sold for any Access Person Account unless
6
<PAGE>
the particular transaction has been approved in writing by the
Compliance Officer. The Compliance Department shall review
weekly to the extent practicable and in any event not less
often than monthly, reports from the trading desk (or, if
applicable, confirmations from brokers) to assure that all
transactions effected for Access Person Accounts are effected
in compliance with this Code.
2. No Securities may be purchased or sold for any Access Person
Account other than through the trading desk of the Adviser's
affiliated broker-dealer, M.J. Whitman, Inc., (MJW) unless
express permission is granted by the Compliance Officer of MJW
and filed with the Companies. Access Persons granted
permission to maintain trading accounts with outside
broker-dealers must arrange for the mailing of duplicate
copies of confirmations of all personal Securities
transactions and copies of periodic statements for all such
accounts.
3. A Trading Approval Form, attached as Exhibit B, must be
completed and submitted to the Compliance Officer for approval
prior to entry of an order.
4. After reviewing the proposed trade, the level of potential
investment interest on behalf of a Fund in the Security in
question and any trading restrictions currently in effect on
the Security by a Fund and/or MJW, the Fund's Portfolio
Manager and the Compliance Officer shall approve (or
disapprove) a trading order on behalf of an Access Person as
expeditiously as possible. They will generally approve
transactions described in paragraph (E) above unless the
Security in question or a related security is on the
Restricted List or they believe for any other reason that the
Access Person Account should not trade in such Security at
such time.
5. Once an Access Person's Trading Approval Form is approved, the
form must be forwarded to the trading desk (or, if a third
party broker is permitted, to the Compliance Officer) for
execution on the same
7
<PAGE>
day. If the Access Person's trading order request is not
approved, or is not executed on the same day it is approved,
the clearance lapses although such trading order request may
be resubmitted at a later date.
6. In the absence of the Portfolio Manager and Compliance
Officer, an Access Person may submit his Trading Approval Form
to the Companies' general counsel. Trading approval for the
Compliance Officer must be obtained from the Companies'
general counsel. In no case will the Trading Desk accept an
order for an Access Person Account unless it is accompanied by
a signed Trading Approval Form.
7. The Compliance Officer shall review all Trading Approval
Forms, all initial, quarterly and annual disclosure
certifications and all trading activities of the Fund and with
a view to ensure that all Covered Persons are complying with
the spirit as well as the detailed requirements of this Code.
III. Other Investment Related Restrictions
(A) Gifts
No Access Person shall accept any gift or other item of more than
$100 in value from any person or entity that does business with
or on behalf of a Fund or Adviser.
(B) Service As a Director
No Access Person shall commence service on the Board of Directors
of a publicly traded company or any company in which the Fund has
an interest without prior authorization from the Compliance
Committee based upon a determination that the Board service would
not be inconsistent with the interest of the Funds. The
Compliance Committee shall include the Compliance Officer,
general counsel of the Companies and at least two of the senior
executives of the Trust and/or Adviser.
IV. Report and Additional Compliance Procedures
(A) Every Covered Person, including disinterested trustees of the
Funds, must submit a report (a form of which is attached as
Exhibit C) containing the information set forth in paragraph (B)
below with respect to transactions in any Security in which such
Covered Person has or by reason of such transaction acquires, any
direct or indirect
8
<PAGE>
beneficial ownership (as defined in Exhibit D) in the Security;
provided, however, that:
1. A Covered Person who is required to make reports only because
he is a trustee of a Fund and who is a "disinterested"
director thereof need not make a report with respect to any
transactions other than those where he knew or should have
known in the course of his duties as a trustee that a Fund has
made or is considering making a purchase or sale of the same
or a related Security within 15 days before or after the
purchase or sale of such Security or related Security by such
trustee.
2. A Covered Person need not make a report with respect to any
transaction effected for any account over which such person
does not have any direct or indirect influence or control; and
3. A Covered Person will be deemed to have complied with this
Article IV insofar as the Compliance Officer receives in a
timely fashion duplicate monthly or quarterly brokerage
statements or transaction confirmation on which all
transactions required to be reported thereunder are described.
(B) A Covered Person must submit the report required by this Article
IV to the Compliance Officer no later than 10 days after the end
of the calendar quarter in with the transaction to which the
report relates was effected. A report must contain the following
information:
1. The date of the transaction, the title and number of shares
and the principal amount of each Security involved:
2. The nature of the transactions (i.e., purchase, sale or any
other type of acquisition or deposition):
3. The price at which the transaction was effected; and
4. The name of the broker, dealer or bank with or through whom
the transaction was effected.
(C) Any report submitted to comply with the requirements of this
Article IV may contain a statement that the report shall not be
construed as an admission by the person making such report that
he has any direct
9
<PAGE>
or indirect beneficial ownership in the Security to which the
report relates.
(D) Upon commencement of employment with the Companies or Affiliates,
each Access Person shall be required to disclose all current
personal Securities holdings contained in any Access Person
Account in which such Access Person has an interest.
(E) Annually each Covered Person must certify that he has read and
understood the Code and recognizes that he is subject to such
Code. In addition, annually each Covered Person must certify that
he has disclosed or reported all personal Securities transactions
required to be disclosed or reported under the Code and that he
is not subject to any regulatory disability. The form of such
certification is attached as Exhibit E.
(F) At least annually (or quarterly in the case of Items 3 and 4
below), the Adviser shall report to the Board of Directors:
1. All existing procedures concerning Covered Persons' personal
trading activities and reporting requirements and any
procedural changes made during the past year;
2. Any recommended changes to this Code or procedures;
3. A summary of any violations of this Code which occurred during
the past quarter and the nature of any remedial action taken;
and
4. Any exceptions to any provision of this Code of Ethics as
determined under Article VI below.
V. Sanctions
Upon discovering that a Covered Person has not complied with the
requirements of the Code, the Compliance Committee may impose on such
person whatever sanctions the Board deems appropriate, including, among
other things, disgorgement of profit, censure, suspension or
termination of employment. Material violations of the requirements of
this Code by Access Persons and any sanctions imposed in connection
therewith shall be reported not less frequently than quarterly to the
Board of Directors of the Fund.
10
<PAGE>
VI. Exceptions
The Compliance Committee of the Funds reserves the right to decide, on
a case-by-case basis, exceptions to any provision under this Code. Any
exceptions made hereunder will be maintained in writing by the
Compliance Committee and presented to the applicable Fund's Board of
Trustees at their next scheduled meeting of the Board.
VII. Preservation of Documents
This Code, a copy of each report by a Covered Person, any written
report made hereunder by a Fund, Adviser or Compliance Officer, and
lists of all persons required to make reports, shall be preserved with
the records of the Fund for the period required by Rule 17j-1.
VIII. Other Laws, Rules and Statements of Policy
Nothing contained in this Code shall be interpreted as relieving any
Covered Person from acting in accordance with the provision of any
applicable law, rule or regulation or any other statement of policy or
procedure governing the conduct of such person adopted by the Trust, a
Fund, Adviser or Affiliates.
IX. Further Information
If any person has any question with regard to the applicability of the
provisions of this Code or with regard to any Securities transaction or
transactions, they should consult the Compliance Officer.
11
<PAGE>
Exhibit A
AFFILIATES
o Danielson Holding Corporation, a holding company
o M.J. Whitman Holding Corp., (a holding company) and subsidiaries,
o M.J. Whitman, Inc.
o M.J. Whitman Advisers, Inc.
o M.J. Whitman Senior Debt Corp.
o M.J. Whitman Realty Debt Corp.
o Martin J. Whitman & Co., Inc. a private investment company
12
<PAGE>
Exhibit B
PRE-CLEARANCE TRADING APPROVAL FORM
I, _________________________________________________________,
am an Access Person and seek pre-clearance to engage in the transaction
described below for the benefit of myself of another Access Person:
[ ] Acquisition or [ ] Disposition (check one)
Name of Account: __________________________________________
Account Number: __________________________________________
Date of Request: __________________________________________
Security: __________________________________________
Amount (or # of) Shares: __________________________________________
Broker: __________________________________________
If the transaction involves a Security that is not publicly traded,
provide (on the reverse side of this form) a description of the proposed
transaction, source of investment opportunity and any potential conflicts of
interest:
I hereby certify that, to the best of my knowledge, the
transaction described herein is not prohibited by the Code of Ethics
and that the opportunity to engage in the transaction did not arise by
virtue of my activities on a Fund or Adviser.
Signature: _________________________________________
Print Name: _________________________________________
[ ] Approved or [ ] Disapproved
(check one)
Date of Approval: ____________________
Signature: __________________________________________
Print Name: __________________________________________
13
<PAGE>
Exhibit C
TRANSACTION REPORT
Page 1 of 2
Report Submitted by: _____________________________________
Print your name
This transaction report (the "Report) is submitted pursuant to
Section IV (B) of the Code of Ethics of the Companies and supplies information
with respect to transactions in any Security in which you may be deemed to have,
or by reason of such transaction acquire, any direct or indirect beneficial
ownership interest for the period specified below.
Unless the context otherwise requires, all terms used in the
Report shall have the same meaning as set forth in the Code of Ethics.
If you have no reportable transactions, sign and return this
page only. If you have reportable transactions, complete, sign and return page 2
and any attachments.
................................................................................
I HAD NO REPORTABLE SECURITIES TRANSACTIONS DURING THE PERIOD
________________, 1995 THROUGH ________, _______199__. I CERTIFY THAT I AM FULLY
FAMILIAR WITH THE CODE OF ETHICS AND THAT TO THE BEST OF MY KNOWLEDGE THE
INFORMATION FURNISHED IN THIS REPORT IS TRUE AND CORRECT.
Signature: ______________________________________________
Position: ______________________________________________
Date: ______________________________________________
14
<PAGE>
EXHIBIT C
TRANSACTION REPORT
Page 2 of 2
Report Submitted by: ______________________________________
Print your name
The following table supplies the information required by
Section IV (B) of the Code of Ethics for the period specified below.
Transactions reported on brokerage statements or duplicate confirmation actually
received by the Compliance Officer do not have to be listed although it is your
responsibility to make sure that such statements or confirmations are completed
and have been received in a timely fashion.
<TABLE>
<CAPTION>
<S> <C>
Price Per Name of
Transaction Type of Amount of Share or Unit Broker / Nature of
Securities Date Transactions Securities Dealer Ownership
- - ----------------- -------------- --------------- -------------- --------------- -------------- --------------
</TABLE>
To the extent specified above, I hereby disclaim beneficial
ownership of any security listed in this Report or in brokerage statements or
transaction confirmations provided by you.
................................................................................
I CERTIFY THAT I AM FULLY FAMILIAR WITH THE CODE OF ETHICS AND
THAT TO THE BEST OF MY KNOWLEDGE THE INFORMATION FURNISHED IN THIS REPORT IS
TRUE AND CORRECT FOR THE PERIOD OF ______________, 1995 THROUGH ____________,
199__.
Signature: _____________________________________________
Position: _____________________________________________
15
<PAGE>
Date: _____________________________________________
Exhibit D
BENEFICIAL OWNERSHIP
For purposes of the attached Code of Ethics, "beneficial ownership"
shall be interpreted in the same manner as it would be in determining whether a
person is subject to the provisions of Section 16 of the Securities Exchange Act
of 1934 and the rules and regulations thereunder, except the determination of
direct or indirect beneficial ownership shall apply to all securities that a
Covered Person has or acquires. The term "beneficial ownership" of securities
would include not only ownership of securities held by a Covered Person for his
own benefit, whether in bearer form or registered in his name or otherwise, but
also ownership of securities held for his benefit by other (regardless of
whether or how they are registered) such as custodians, brokers, executors,
administrators, or trustees (including trusts in which he has only a remainder
interest), and securities held for his account by pledges, securities owned by a
partnership in which he is a member if he may exercise a controlling influence
over the purchase, sale of voting of such securities, and securities owned by
any corporation or similar entry in which he owns securities if the shareholder
is a controlling shareholder of the entity and has or shares investment control
over the entity's portfolio.
Ordinarily, this term would not include securities held by executors or
administrators in estates in which a Covered Person is a legatee or beneficiary
unless there is a specified legacy to such person of such securities or such
person is the sole legatee or beneficiary and there are other assets in the
estate sufficient to pay debts ranking ahead of such legacy, or the securities
are held in the estate more than a year after the decedent's death.
Securities held in the name of another should be considered as
"beneficially" owned by a Covered Person where such person enjoys "financial
benefits substantially equivalent to ownership." The Securities and Exchange
Commission has said that although the final determination of beneficial
ownership is a question to be determined in the light of the facts of the
particular case, generally a person is regarded as the beneficial owner of
securities held in the name of his or her spouse and their minor children.
Absent of special circumstances such relationship ordinarily results in such
person obtaining financial benefits substantially equivalent to ownership, e.g.,
application of the income derived from such securities to maintain a common
home, or to meet expenses that such person otherwise would meet from other
sources, or the ability
16
<PAGE>
to exercise a controlling influence over the purchase, sale or voting of such
securities.
A Covered Person also may be regarded as the beneficial owner of
securities held in the name of another person, if by reason of any contract,
understanding, relationship, agreement, or other agreement, he obtains therefrom
financial benefits substantially equivalent to those of ownership.
A Covered Person also is regarded as the beneficial owner of securities
held in the name of a spouse, minor children or other person, even though he
does not obtain therefrom the aforementioned benefits of ownership, if he can
vest or revest title in himself at one or at some future time.
17
<PAGE>
Exhibit E
ANNUAL CERTIFICATION OF CODE OF ETHICS
A. I (a Covered Person) hereby certify that I have read and understood the
Code of Ethics and recognize that I am subject to its provisions. In
addition, I hereby certify that I have disclosed or reported all
personal Securities transactions required to be disclosed or reported
under the Code of Ethics;
B. Within the last ten years there have been no complaints or disciplinary
actions filed against me by any regulated securities or commodities
exchanges, any self-regulatory securities or commodities organization,
any attorney general, or any governmental office or agency regulating
insurance, securities, commodities or financial transactions in the
United States, in any state of the United States, or in any other
country.
C. I have not within the last ten years been convicted of or acknowledged
commission of any felony or misdemeanor arising out of my conduct as an
employee, salesperson, officer, director, insurance agent, broker,
dealer, underwriter, investment manager or investment adviser.
D. I have not been denied permission or otherwise enjoined by order,
judgment or decree of court of competent jurisdiction, regulated
securities or commodities exchange, self-regulatory securities or
commodities organization or other federal or state regulatory authority
from acting as an investment advisor, securities or commodities broker
or dealer, commodity pool operator or trading adviser or as an
affiliated person or employee of any investment company, bank,
insurance company or commodity broker, dealer, pool operator or trading
adviser, or from engaging in or continuing any conduct or practice in
connection with any such activity or the purchase or sale of any
security.
Print Name: _________________________________
Signature: _________________________________
Date: _________________________________
18
<PAGE>
CONFIDENTIAL INFORMATION AND
SECURITIES TRADING POLICY
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
CONTENTS
Page
- - ------------------------------
INTRODUCTION .................................................... 1
PART I
APPLICABLE TO ALL ASSOCIATES
SECTION ONE
CONFIDENTIAL INFORMATION............................ 2
-Types of Confidential Information.................. 2
-Rules for Protecting Confidential Information...... 3
-Supplemental Procedures............................ 4
SECTION TWO
INSIDER TRADING AND TIPPING......................... 5
-Legal Prohibitions................................. 5
-Mellon's Policy.................................... 6
SECTION THREE
RESTRICTIONS ON THE FLOW OF INFORMATION
WITHIN MELLON (THE "CHINESE WALL").................. 7
-Rules for Maintaining the Chinese Wall............. 7
-Reporting Receipt of Material Nonpublic
Information........................................ 8
-Functions "Above the Wall"......................... 9
-Supplemental Procedures............................ 9
SECTION FOUR
RESTRICTIONS ON TRANSACTIONS IN MELLON
SECURITIES..........................................10
-Beneficial Ownership...............................11
SECTION FIVE
RESTRICTIONS ON TRANSACTIONS IN OTHER
SECURITIES..........................................12
SECTION SIX
CLASSIFICATION OF ASSOCIATES........................14
-Insider Risk Associate.............................14
-Investment Associate...............................15
-Other Associate....................................15
PART II
APPLICABLE TO INSIDER
RISK ASSOCIATES ONLY ....................................................16
-Prohibition on Investments in Securities of
Financial Services Organizations...................16
-Conflict of Interest...............................17
-Preclearance for Personal Securities
Transactions.......................................17
-Personal Securities Transactions Reports...........19
-Confidential Treatment.............................19
<PAGE>
PART III
APPLICABLE TO INVESTMENT
ASSOCIATES ONLY ....................................................20
-Special Standards of Conduct for
Investment Associates..............................20
-Preclearance for Personal Securities
Transactions.......................................21
-Personal Securities Transactions Reports...........23
-Confidential Treatment.............................24
PART IV
APPLICABLE TO OTHER
ASSOCIATES ONLY ....................................................25
-Preclearance for Personal Securities
Transactions.......................................25
-Personal Securities Transactions Reports...........25
-Restrictions on Transactions in Other
Securities.........................................25
-Confidential Treatment.............................26
PART V
APPLICABLE TO NONMANAGEMENT
BOARD MEMBERS ....................................................27
-Nonmanagement Board Member.........................27
-Standards of Conduct for Nonmanagement
Board Member.......................................27
-Preclearance for Personal Securities
Transactions.......................................28
-Personal Securities Transactions Reports...........29
-Confidential Treatment.............................29
GLOSSARY Definitions.........................................30
INDEX OF EXHIBITS ....................................................33
</TABLE>
<PAGE>
INTRODUCTION
- - ------------------------------
Mellon Bank Corporation ("Mellon") and its associates, and
the registered investment companies for which The Dreyfus
Corporation ("Dreyfus") and/or Mellon serves as investment
adviser, sub-investment adviser or administrator, are
subject to certain laws and regulations governing the use
of confidential information and personal securities
trading. Mellon has developed this Confidential Information
and Securities Trading Policy (the "Policy") to establish
specific standards to promote compliance with applicable
laws. Further, the Policy is intended to protect Mellon's
business secrets and proprietary information as well as
that of its customers and any entity for which it acts in a
fiduciary capacity.
The Policy set forth procedures and limitations which
govern the personal securities transactions of every Mellon
associate and certain other individuals associated with the
registered investment companies for which Dreyfus and/or
Mellon serves as investment adviser, sub-investment adviser
or administrator. The Policy is designed to reinforce
Mellon's reputation for integrity by avoiding even the
appearance of impropriety in the conduct of Mellon's
business.
Associates should be aware that they may be held personally
liable for any improper or illegal acts committed during
the course of their employment, and that "ignorance of the
law" is not a defense. Associates may be subject to civil
penalties such as fines, regulatory sanctions including
suspensions, as well as criminal penalties.
Associates outside the United States are also subject to
applicable laws of foreign jurisdictions, which may differ
substantially from U.S. law and which may subject such
associates to additional requirements. Such associates must
comply with applicable requirements of pertinent foreign
laws as well as with the provisions of the Policy. To the
extent any particular portion of the Policy is inconsistent
with foreign law, associates should consult the General
Counsel or the Manager of Corporate Compliance.
Any provision of this Policy may be waived or exempted at
the discretion of the Manager of Corporate Compliance. Any
such waiver or exemption will be evidenced in writing and
maintained in the Risk Management and Compliance
Department.
Associates must read the Policies and MUST COMPLY
with them. Failure to comply with the provisions
of the Policies may result in the imposition of
serious sanctions, including but not limited to
disgorgement of profits, dismissal, substantial
personal liability and referral to law enforcement
agencies or other regulatory agencies. Associates
should retain the Policies in their records for
future reference. Any questions regarding the
Policies should be referred to the Manager of
Corporate Compliance or his/her designee.
1
<PAGE>
PART I - APPLICABLE TO ALL ASSOCIATES
- - ------------------------------
SECTION ONE
CONFIDENTIAL INFORMATION
As an associate you may receive information about Mellon,
its customers and other parties that, for various reasons,
should be treated as confidential. All associates are
expected to strictly comply with measures necessary to
preserve the confidentiality of information.
TYPES OF CONFIDENTIAL INFORMATION - Although it is
impossible to provide an exhaustive list of information
that should remain confidential, the following are examples
of the general types of confidential information that
associates might receive in the ordinary course of carrying
out their job responsibilities.
o Information Obtained from Business Relations - An associate
might receive confidential information regarding customers
or other parties with whom Mellon has business
relationships. If released, such information could have a
significant effect on their operations, their business
reputations or the market price of their securities.
Disclosing such information could expose both the associate
and Mellon to liability for damages.
o Mellon Financial Information - An associate might receive
financial information regarding Mellon before such
information has been disclosed to the public. It is the
policy of Mellon to disclose all material corporate
information to the public in such a manner that all those
who are interested in Mellon and its securities have equal
access to the information. Disclosing such information to
unauthorized persons could subject both the associate and
Mellon to liability under the federal securities laws.
o Mellon Proprietary Information - Certain nonfinancial
information developed by Mellon - such as business plans,
customer lists, methods of doing business, computer
software, source codes, databases and related documentation
- constitutes valuable Mellon proprietary information.
Disclosure of such information to unauthorized persons
could harm, or reduce a benefit to, Mellon and could result
in liability for both the associate and Mellon.
o Mellon Examination Information - Banks and certain other
Mellon subsidiaries are periodically examined by regulatory
agencies. Certain reports made by those regulatory agencies
are the property of those agencies and are strictly
confidential. Giving information from these reports to
anyone not officially connected with Mellon is a criminal
offense.
o Portfolio Management Information - Portfolio management
information relating to investment accounts or funds
managed by Mellon or Dreyfus, including investment
decisions or strategies developed for the benefit of
investment companies advised by Dreyfus, is for the benefit
of such account or fund. Disclosure or exploitation of such
information by an associate in an unauthorized manner may
cause detriment to such accounts or funds and may subject
the associate to liability under the federal securities
laws.
2
<PAGE>
RULES FOR PROTECTING CONFIDENTIAL INFORMATION - The
following are some basic rules to follow to protect
confidential information.
o Limited Communication to Outsiders - Confidential
information should not be communicated to anyone outside
Mellon, except to the extent they need to know the
information in order to provide necessary services to
Mellon.
o Limited Communication to Insiders - Confidential
information should not be communicated to other associates,
except to the extent they need to know the information to
fulfill their job responsibilities and their knowledge of
the information is not likely to result in misuse or a
conflict of interest. In this regard, Mellon has
established specific restrictions with respect to material
nonpublic information in order to separate and insulate
different functional areas and personnel within Mellon.
Please refer to Section Three, "Restrictions on The Flow of
Information Within Mellon" (The "Chinese Wall").
o Corporate Use Only - Confidential information should be
used only for Corporate purposes. Under no circumstances
may an associate use it, directly or indirectly, for
personal gain or for the benefit of any outside party who
is not entitled to such information.
o Other Customers - Where appropriate, customers should be
made aware that associates will not disclose to them other
customers' confidential information or use the confidential
information of one customer for the benefit of another.
o Notification of Confidentiality - When confidential
information is communicated to any person, either inside or
outside Mellon, they should be informed of the
information's confidential nature and the limitations on
its further communication.
o Prevention of Eavesdropping - Confidential matters should
not be discussed in public or in places, such as in
building lobbies, restaurants or elevators, where
unauthorized persons may overhear. Precautions, such as
locking materials in desk drawers overnight, stamping
material "Confidential" and delivering materials in sealed
envelopes, should be taken with written materials to ensure
they are not read by unauthorized persons.
o Data Protection - Data stored on personal computers and
diskettes should be properly secured to ensure they are not
accessed by unauthorized persons. Access to computer files
should be granted only on a need-to-know basis. At a
minimum, associates should comply with applicable Mellon
policies on electronic data security.
3
<PAGE>
o Confidentiality Agreements - Confidentiality agreements to
which Mellon is a party must be complied with in addition
to, but not in lieu of, this Policy. Confidentiality
agreements that deviate from commonly used forms should be
reviewed in advance by the Legal Department.
o Contact with the Public - All contacts with institutional
shareholders or securities analysts about Mellon must be
made through the Investor Relations Division of the Finance
Department. All contacts with the media and all speeches or
other public statements made on behalf of Mellon or about
Mellon's businesses must be cleared in advance by Corporate
Affairs. In speeches and statements not made on behalf of
Mellon, care should be taken to avoid any implication that
Mellon endorses the views expressed.
SUPPLEMENTAL PROCEDURES - Mellon entities, departments,
divisions and groups should establish their own
supplemental procedures for protecting confidential
information, as appropriate. These procedures may include:
o establishing records retention and destruction policies;
o using code names;
o limiting the staffing of confidential matters (for example,
limiting the size of working groups and the use of
temporary employees, messengers and word processors); and
o requiring written confidentiality agreements from certain
associates.
Any supplemental procedures should be used only to protect
confidential information and not to circumvent appropriate
reporting and recordkeeping requirements.
4
<PAGE>
SECTION TWO
INSIDER TRADING AND TIPPING
LEGAL PROHIBITIONS - Federal securities laws generally
prohibit the trading of securities while in possession of
"material nonpublic" information regarding the issuer of
those securities (insider trading). Any person who passes
along the material nonpublic information upon which a trade
is based (tipping) may also be liable.
"Material" - Information is material if there is a
substantial likelihood that a reasonable investor would
consider it important in deciding whether to buy, sell or
hold securities. Obviously, information that would affect
the market price of a security would be material. Examples
of information that might be material include:
o a proposal or agreement for a merger, acquisition or
divestiture, or for the sale or purchase of substantial
assets;
o tender offers, which are often material for the party
making the tender offer as well as for the issuer of the
securities for which the tender offer is made;
o dividend declarations or changes;
o extraordinary borrowings or liquidity problems;
o defaults under agreements or actions by creditors,
customers or suppliers relating to a company's credit
standing;
o earnings and other financial information, such as large
or unusual write-offs, write-downs, profits or losses;
o pending discoveries or developments, such as new products,
sources of materials, patents, processes, inventions or
discoveries of mineral deposits;
o a proposal or agreement concerning a financial
restructuring;
o a proposal to issue or redeem securities, or a
development with respect to a pending issuance or
redemption of securities;
o a significant expansion or contraction of operations;
o information about major contracts or increases or
decreases in orders;
o the institution of, or a development in, litigation or a
regulatory proceeding;
o developments regarding a company's senior management;
o information about a company received from a director of
that company; and
o information regarding a company's possible noncompliance
with environmental protection laws.
This list is not exhaustive. All relevant circumstances
must be considered when determining whether an item of
information is material.
5
<PAGE>
"Nonpublic" - Information about a company is nonpublic if
it is not generally available to the investing public.
Information received under circumstances indicating that it
is not yet in general circulation and which may be
attributable, directly or indirectly, to the company or its
insiders is likely to be deemed nonpublic information.
If an associate can refer to some public source to show
that the information is generally available (that is,
available not from inside sources only) and that enough
time has passed to allow wide dissemination of the
information, the information is likely to be deemed public.
While information appearing in widely accessible sources -
such as newspapers - becomes public very soon after
publication, information appearing in less accessible
sources - such as regulatory filings - may take up to
several days to be deemed public. Similarly, highly complex
information might take longer to become public than would
information that is easily understood by the average
investor.
MELLON'S POLICY - Associates who possess material nonpublic
information about a company - whether that company is
Mellon, another Mellon entity, a Mellon customer or
supplier, or other company - may not trade in that
company's securities, either for their own accounts or for
any account over which they exercise investment discretion.
In addition, associates may not recommend trading in those
securities and may not pass the information along to
others, except to associates who need to know the
information in order to perform their job responsibilities
with Mellon. These prohibitions remain in effect until the
information has become public.
Associates who have investment responsibilities should take
appropriate steps to avoid receiving material nonpublic
information. Receiving such information could create severe
limitations on their ability to carry out their
responsibilities to Mellon's fiduciary customers.
Associates managing the work of consultants and temporary
employees who have access to the types of confidential
information described in this Policy are responsible for
ensuring that consultants and temporary employees are aware
of Mellon's policy and the consequences of noncompliance.
Questions regarding Mellon's policy on material nonpublic
information, or specific information that might be subject
to it, should be referred to the General Counsel.
6
<PAGE>
SECTION THREE
RESTRICTIONS ON THE FLOW OF
INFORMATION WITHIN MELLON
(THE "CHINESE WALL")
As a diversified financial services organization, Mellon
faces unique challenges in complying with the prohibitions
on insider trading and tipping of material nonpublic
information and misuse of confidential information. This is
because one Mellon unit might have material nonpublic
information about a company while other Mellon units may
have a desire, or even a fiduciary duty, to buy or sell
that company's securities or recommend such purchases or
sales to customers. To engage in such broad-ranging
financial services activities without violating laws or
breaching Mellon's fiduciary duties, Mellon has established
a "Chinese Wall" policy applicable to all associates. The
"Chinese Wall" separates the Mellon units or individuals
that are likely to receive material nonpublic information
(Potential Insider Functions) from the Mellon units or
individuals that either trade in securities - for Mellon's
account or for the accounts of others - or provide
investment advice (Investment Functions).
Examples of Potential Insider Functions - Potential Insider
Functions include, among others, certain commercial
lending, corporate finance, and credit policy areas.
Insider Risk Associates (see Section Six, "Insider Risk
Associates") should consider themselves to be in Potential
Insider Functions unless their particular job
responsibilities clearly indicate otherwise.
Examples of Investment Functions - Investment Functions
include, among others, securities sales and trading,
investment management and advisory services, investment
research and various trust or fiduciary functions.
RULES FOR MAINTAINING THE "CHINESE WALL" - Without the
prior approval of the General Counsel, material nonpublic
information obtained by anyone in a Potential Insider
Function should not be communicated to anyone in an
Investment Function. To reduce the risk of material
nonpublic information being communicated, communications
between these associates in these functions must be limited
to the maximum extent consistent with valid business needs.
Particular rules -
o File Restrictions - Associates in Investment Functions must
not have access to commercial credit files, corporate
finance files, or any other Potential Insider Function
files that might contain material nonpublic information.
All such files that contain material nonpublic information
should be marked as "Confidential" and, if feasible,
segregated from nonconfidential files.
o Electronic Data - Associates in Investment Functions must
not have access to personal computer or word processing
files of associates in Potential Insider Functions.
o Meetings - Associates in Investment Functions must not
attend meetings between customers and associates in
Potential Insider Functions unless appropriate steps have
been taken to ensure that material nonpublic information
will not be disclosed or discussed.
o Committee Service - Without the prior approval of the
General Counsel, associates other than those "Above the
Wall" (see page 9) must not serve simultaneously on a
committee having responsibility for any Investment Function
and a committee having responsibility for any Potential
Insider Function.
o Information Requests - Requests for nonmaterial information
or public information across the "Chinese Wall" should be
made in writing to an appropriate associate in the
applicable area. Associates sending or receiving such a
request should resolve any questions regarding the
7
<PAGE>
materiality or nonpublic nature of the requested
information by consulting their department head, who will
contact the General Counsel, as appropriate.
o Information Backflow - Associates should take care to avoid
inadvertent backflow of information that may be interpreted
as the prohibited communication of material nonpublic
information. For example, the mere fact that someone in a
Potential Insider Function, such as a mergers and
acquisitions specialist, requests information from an
associate in an Investment Function could give the latter
person a clue as to possible material developments
affecting a customer.
o Customers - Associates in Investment Functions must not
state or imply to customers that associates making
decisions or recommendations will have the benefit of
information from Mellon's Potential Insider Functions. When
appropriate, associates should inform customers of Mellon's
"Chinese Wall" policy.
o Conflicts of Interest - Associates should not receive or
pass on any information that would create an undue risk of
Mellon or any associate having a conflict of interest or
breaching a fiduciary obligation.
REPORTING RECEIPT OF MATERIAL NONPUBLIC INFORMATION -
Associates in Investment Functions who receive any
suspected material nonpublic information must report such
receipt promptly to their department or entity head. A
department or entity head who receives information believed
to be material and nonpublic should report the matter
promptly to the General Counsel. If the General Counsel
determines that the information is material and nonpublic,
the affected department or entity will:
o immediately suspend all trading in the securities of the
issuer to which the information applies, as well as all
recommendations with respect to such securities. The
suspension will remain in effect as long as the information
remains both material and nonpublic.
o notify the General Counsel before resuming transactions or
recommendations in the affected securities. The General
Counsel will advise as to possible further steps, including
ascertaining the validity and nonpublic nature of the
information with the issuer of the securities; requesting
the issuer of the securities, or other appropriate parties,
to disseminate the information promptly to the public if
the information is valid and nonpublic; and publishing the
information.
In certain circumstances, the department or entity head may
be able to demonstrate conclusively that the receipt of the
material nonpublic information has been confined to an
individual or small group of individuals and that measures
other than those described above will comparably reduce the
likelihood of trading on the basis of the information.
These measures might include temporarily relieving
individuals of responsibility for any Investment Functions
and preventing any contact between those individuals and
associates in Investment Functions. In these circumstances,
the department head, with the approval of the General
Counsel, may take those measures rather than the measures
described above.
8
<PAGE>
FUNCTIONS "ABOVE THE WALL" - Some functions at Mellon are
deemed to be "Above the Wall." For example, members of
senior management, Auditing, Risk Management and
Compliance, and the Legal Department will typically need to
have access to information on both sides of the "Chinese
Wall" to carry out their job responsibilities. These
individuals cannot rely on the procedural safeguards of the
"Chinese Wall" and, therefore, need to be particularly
careful to avoid any improper use or dissemination of
material nonpublic information.
SUPPLEMENTAL PROCEDURES - As appropriate, certain Mellon
departments or areas, such as Mellon Trust, should
establish their own procedures to reduce the possibility of
information being communicated to associates who should not
have access to that information.
9
<PAGE>
SECTION FOUR
RESTRICTIONS ON TRANSACTIONS
IN MELLON SECURITIES
Associates who engage in transactions involving Mellon
securities should be aware of their unique responsibilities
with respect to such transactions arising from the
employment relationship and should be sensitive to even the
appearance of impropriety.
The following restrictions apply to all transactions in
Mellon's publicly traded securities occurring in the
associate's own account and in all other accounts over
which the associate could be expected to exercise influence
or control (see provisions under "Beneficial Ownership"
below for a more complete discussion of the accounts to
which these restrictions apply). These restrictions are to
be followed in addition to any restrictions that apply to
particular officers or directors (such as restrictions
under Section 16 of the Securities Exchange Act of 1934).
o Short Sales - Short sales of Mellon securities by
associates are prohibited.
o Sales Within 60 Days of Purchase - Sales of Mellon
securities within 60 days of acquisition are prohibited.
For purposes of the 60-day holding period, securities will
be deemed to be equivalent if one is convertible into the
other, if one entails a right to purchase or sell the
other, or if the value of one is expressly dependent on the
value of the other (e.g., derivative securities).
In cases of extreme hardship, associates (other than senior
management) may obtain permission to dispose of Mellon
securities acquired within 60 days of the proposed
transaction, provided the transaction is pre-cleared with
the Manager of Corporate Compliance and any profits earned
are disgorged in accordance with procedures established by
senior management. The Manager of Corporate Compliance
reserves the right to suspend the 60-day holding period
restriction in the event of severe market disruption.
o Margin Transactions - Purchases on margin of Mellon's
publicly traded securities by associates is prohibited.
Margining Mellon securities in connection with a cashless
exercise of an employee stock option through the Human
Resources Department is exempt from this restriction.
Further, Mellon securities may be used to collateralize
loans or the acquisition of securities other than those
issued by Mellon.
o Option Transactions - Option transactions involving
Mellon's publicly traded securities are prohibited.
Transactions under Mellon's Long-Term Incentive Plan or
other associate option plans are exempt from this
restriction.
o Major Mellon Events - Associates who have knowledge of
major Mellon events that have not yet been announced are
prohibited from buying and selling Mellon's publicly traded
securities before such public announcements, even if the
associate believes the event does not constitute material
nonpublic information.
o Mellon Blackout Period - Associates are prohibited from
buying or selling Mellon's publicly traded securities
during a blackout period, which begins the 16th day of the
last month of each calendar quarter and ends three business
days after Mellon publicly announces the financial results
for that quarter. In cases of extreme hardship, associates
(other than senior management) may request permission from
the Manager of Corporate Compliance to dispose of Mellon
securities during the blackout period.
10
<PAGE>
BENEFICIAL OWNERSHIP - The provisions discussed above apply
to transactions in the associate's own name and to all
other accounts over which the associate could be expected
to exercise influence or control, including:
o accounts of a spouse, minor children or relatives to whom
substantial support is contributed;
o accounts of any other member of the associate's household
(e.g., a relative living in the same home);
o trust accounts for which the associate acts as trustee or
otherwise exercises any type of guidance or influence;
o Corporate accounts controlled, directly or indirectly, by
the associate;
o arrangements similar to trust accounts that are established
for bona fide financial purposes and benefit the associate;
and
o any other account for which the associate is the beneficial
owner (see Glossary for a more complete legal definition of
"beneficial owner").
11
<PAGE>
SECTION FIVE
RESTRICTIONS ON TRANSACTIONS
IN OTHER SECURITIES
Purchases or sales by an associate of the securities of
issuers with which Mellon does business, or other third
party issuers, could result in liability on the part of
such associate. Associates should be sensitive to even the
appearance of impropriety in connection with their personal
securities transactions. Associates should refer to the
provisions under "Beneficial Ownership" (Section Four,
"Restrictions on Transactions in Mellon Securities"), which
are equally applicable to the following provisions.
The Mellon Code of Conduct contains certain restrictions on
investments in parties that do business with Mellon.
Associates should refer to the Code of Conduct and comply
with such restrictions in addition to the restrictions and
reporting requirements set forth below.
The following restrictions apply to all securities
transactions by associates:
o Credit or Advisory Relationship - Associate may not buy or
sell securities of a company if they are considering
granting, renewing or denying any credit facility to that
company or acting as an adviser to that company with
respect to its securities. In addition, lending associates
who have assigned responsibilities in a specific industry
group are not permitted to trade securities in that
industry. This prohibition does not apply to transactions
in securities issued by open-end investment companies.
o Customer Transactions - Trading for customers and Mellon
accounts should always take precedence over associates'
transactions for their own or related accounts.
o Front Running - Associates may not engage in "front
running," that is, the purchase or sale of securities for
their own accounts on the basis of their knowledge of
Mellon's trading positions or plans.
o Initial Public Offerings - Mellon prohibits its associates
from acquiring any securities in an initial public offering
("IPO").
o Margin Transactions - Margin trading is a highly leveraged
and relatively risky method of investing that can create
particular problems for financial services employees. For
this reason, all associates are urged to avoid margin
trading.
Prior to establishing a margin account, the associate must
obtain the written permission of the Manager of Corporate
Compliance. Any associate having a margin account prior to
the effective date of this Policy must notify the Manager
of Corporate Compliance of the existence of such account.
12
<PAGE>
All associates having margin accounts, other than described
below, must designate the Manager of Corporate Compliance
as an interested party on that account. Associates must
ensure that the Manager of Corporate Compliance promptly
receives copies of all trade confirmations and statements
relating to the account directly from the broker. If
requested by a brokerage firm, please contact the Manager
of Corporate Compliance to obtain a letter (sometimes
referred to as a "407 letter") granting permission to
maintain a margin account. Trade confirmations and
statements are not required on margin accounts established
at Dreyfus Investment Services Corporation for the sole
purpose of cashless exercises of employee stock options. In
addition, products may be offered by a broker/dealer that,
because of their characteristics, are considered margin
accounts but have been determined by the Manager of
Corporate Compliance to be outside the scope of this Policy
(e.g., a Cash Management Account which provides overdraft
protection for the customer). Any questions regarding the
establishment, use and reporting of margin accounts should
be directed to the Manager of Corporate Compliance.
Examples of an instruction letter to a broker are shown in
Exhibits B1 and B2.
o Material Nonpublic Information - Associates possessing
material nonpublic information regarding any issuer of
securities must refrain from purchasing or selling
securities of that issuer until the information becomes
public or is no longer considered material.
o Naked Options, Excessive Trading - Mellon discourages all
associates from engaging in short-term or speculative
trading, in trading naked options, in trading that could be
deemed excessive or in trading that could interfere with an
associate's job responsibilities.
o Private Placements - Associates are prohibited from
acquiring any security in a private placement unless they
obtain the prior written approval of the Preclearance
Compliance Officer (applicable only to Investment
Associates), the Manager of Corporate Compliance and the
associate's department head. Approval must be given by all
appropriate aforementioned persons for the acquisition to
be considered approved. After receipt of the necessary
approvals and the acquisition, associates are required to
disclose that investment when they participate in any
subsequent consideration of an investment in the issuer for
an advised account. Final decision to acquire such
securities for an advised account will be subject to
independent review.
o Scalping - Associates may not engage in "scalping," that
is, the purchase or sale of securities for their own or
Mellon's accounts on the basis of knowledge of customers'
trading positions or plans or Mellon's forthcoming
investment recommendations.
o Short-Term Trading - Associates are discouraged from
purchasing and selling, or from selling and purchasing, the
same (or equivalent) securities within 60 calendar days.
With respect to Investment Associates only, any profits
realized on such short-term trades must be disgorged in
accordance with procedures established by senior
management.
13
<PAGE>
SECTION SIX
CLASSIFICATION OF ASSOCIATES
Associates are engaged in a wide variety of activities for
Mellon. In light of the nature of their activities and the
impact of federal and state laws and the regulations
thereunder, the Policy imposes different requirements and
limitations on associates based on the nature of their
activities for Mellon. To assist the associates in
complying with the requirements and limitations imposed on
them in light of their activities, associates are
classified into one of three categories: Insider Risk
Associate, Investment Associate and Other Associate.
Appropriate requirements and limitations are specified in
the Policy based upon the associate's classification.
INSIDER RISK ASSOCIATE -
You are considered to be an Insider Risk Associate if you
are:
o employed in any of the following departments or functional
areas, however named, of a Mellon entity other than Dreyfus
(see Glossary for definition of "Dreyfus"):
<TABLE>
<CAPTION>
<S> <C>
- Auditing - International
- Capital Markets - Leasing
- Corporate Affairs - Legal
- Credit Policy - Mellon Business Credit
- Credit Recovery - Middle Market
- Credit Review - Portfolio and Funds Management
- Domestic Corporate Banking - Risk Management and Compliance
- Finance - Strategic Planning
- Institutional Banking - Wholesale, Administration and
Operations
</TABLE>
o a member of the Mellon Senior Management Committee,
provided that those members of the Mellon Senior Management
Committee who have management responsibility for fiduciary
activities or who routinely have access to information
about customers' securities transactions are considered to
be Investment Associates and are subject to those
provisions of the Policy pertaining to Investment
Associates;
o employed by a broker/dealer subsidiary of a Mellon
entity other than Dreyfus;
o an associate in the Stock Transfer business unit and have
been specifically designated as an Insider Risk Associate
by the Manager of Corporate Compliance; or
o an associate specifically designated as an Insider Risk
Associate by the Manager of Corporate Compliance.
14
<PAGE>
INVESTMENT ASSOCIATE -
You are considered to be an Investment Associate if you
are:
o a member of Mellon's Senior Management Committee who, as
part of his/her usual duties, has management responsibility
for fiduciary activities or routinely has access to
information about customers' securities transactions;
o a Dreyfus associate;
o an associate of a Mellon entity registered under the
Investment Advisers Act of 1940;
o employed in the trust area of Mellon and:
- have the title of Vice President, First Vice President
or Senior Vice President; or
- have access to material, confidential information
regarding securities transactions by or on behalf of
Mellon customers; or
o an associate specifically designated as an Investment
Associate by the Manager of Corporate Compliance.
OTHER ASSOCIATE -
You are considered to be an Other Associate if you are an
associate of Mellon Bank Corporation or any of its direct
or indirect subsidiaries who is not either an Insider Risk
Associate or an Investment Associate.
15
<PAGE>
PART II - APPLICABLE TO INSIDER
RISK ASSOCIATES ONLY
- - ------------------------------
PROHIBITION ON INVESTMENTS IN SECURITIES OF FINANCIAL
SERVICES ORGANIZATIONS
You are prohibited from acquiring any security issued by a
financial services organization if you are:
o a member of the Mellon Senior Management Committee. For
purposes of this restriction only, this prohibition also
applies to those members of the Mellon Senior Management
Committee who are considered Investment Associates.
o employed in any of the following departments of a Mellon
entity other than Dreyfus (see Glossary for definition of
"Dreyfus"):
- Strategic Planning - Finance
- Institutional Banking - Legal
o an associate specifically designated by the Manager of
Corporate Compliance and informed that this prohibition is
applicable to you.
Financial Services Organizations - The term "security
issued by a financial services organization" includes any
security issued by:
<TABLE>
<CAPTION>
<S> <C>
- Commercial Banks - Bank Holding Companies
(other than Mellon) (other than Mellon)
- Thrifts - Savings and Loan Associations
- Insurance Companies - Broker/Dealers
- Investment Advisory Companies - Transfer Agents
- Shareholder Servicing - Other Depository
Companies Institutions
</TABLE>
The term "securities issued by a financial services
organization" DOES NOT INCLUDE securities issued by mutual
funds, variable annuities or insurance policies. Further,
for purposes of determining whether a company is a
financial services organization, subsidiaries and parent
companies are treated as separate issuers.
Effective Date - The foregoing restrictions will be
effective upon adoption of this Policy. Securities of
financial services organizations properly acquired before
the later of the effective date of this Policy or the date
of hire may be maintained or disposed of at the owner's
discretion.
Additional securities of a financial services organization
acquired through the reinvestment of the dividends paid by
such financial services organization through a dividend
reinvestment program (DRIP) are not subject to this
prohibition, provided your election to participate in the
DRIP predates the later of the effective date of this
Policy or date of hire. Optional cash purchases through a
DRIP are subject to this prohibition.
Within 30 days of the later of the effective date of this
Policy or date of becoming subject to this prohibition, all
holdings of securities of financial services organizations
must be disclosed in writing to the Manager of Corporate
Compliance. Periodically, you will be asked to file an
updated disclosure of all your holdings of securities of
financial services organizations.
16
<PAGE>
CONFLICT OF INTEREST - No Insider Risk Associate may engage
in or recommend any securities transaction that places, or
appears to place, his or her own interests above those of
any customer to whom investment services are rendered,
including mutual funds and managed accounts, or above the
interests of Mellon.
PRECLEARANCE FOR PERSONAL SECURITIES TRANSACTIONS - All
Insider Risk Associates must notify the Manager of
Corporate Compliance in writing and receive preclearance
before they engage in any purchase or sale of a security.
Insider Risk Associates should refer to the provisions
under "Beneficial Ownership" (Section Four, "Restrictions
on Transactions in Mellon Securities"), which are equally
applicable to these provisions.
Exemptions from Requirement to Preclear - Preclearance is
not required for the following transactions:
o purchases or sales of Exempt Securities (see Glossary);
o purchases or sales of municipal bonds;
o purchases or sales effected in any account over which an
associate has no direct or indirect control over the
investment decision-making process (e.g., nondiscretionary
trading accounts). Nondiscretionary trading accounts may
only be maintained, without being subject to preclearance
procedures, when the Manager of Corporate Compliance, after
a thorough review, is satisfied that the account is truly
nondiscretionary;
o transactions that are non-volitional on the part of an
associate (such as stock dividends);
o the sale of stock received upon the exercise of an
associate stock option if the sale is part of a "netting of
shares" or "cashless exercise" administered by the Human
Resources Department (for which the Human Resources
Department will forward information to the Manager of
Corporate Compliance);
o the automatic reinvestment of dividends under a DRIP
(preclearance is required for optional cash purchases under
a DRIP);
o purchases effected upon the exercise of rights issued by an
issuer pro rata to all holders of a class of securities, to
the extent such rights were acquired from such issuer;
o sales of rights acquired from an issuer, as described
above; and/or
O those situations where the Manager of Corporate Compliance
determines, after taking into consideration the particular
facts and circumstances, that prior approval is not
necessary.
Requests for Preclearance - All requests for preclearance
for a securities transaction shall be submitted to the
Manager of Corporate Compliance by completing a
Preclearance Request Form (see Exhibit C1).
The Manager of Corporate Compliance will notify the Insider
Risk Associate whether the request is approved or denied,
without disclosing the reason for such approval or denial.
17
<PAGE>
Notifications may be given in writing or verbally by the
Manager of Corporate Compliance to the Insider Risk
Associate. A record of such notification will be maintained
by the Manager of Corporate Compliance. However, it shall
be the responsibility of the Insider Risk Associate to
obtain a written record of the Manager of Corporate
Compliance's notification within 24 hours of such
notification. The Insider Risk Associate should retain a
copy of this written record.
As there could be many reasons for preclearance being
granted or denied, Insider Risk Associates should not infer
from the preclearance response anything regarding the
security for which preclearance was requested.
Although making a preclearance request does not obligate an
Insider Risk Associate to do the transaction, it should be
noted that:
o preclearance authorization will expire at the end of the
third business day after it is received (the day
authorization is granted is considered the first business
day);
o preclearance requests should not be made for a
transaction that the Insider Risk Associate does not
intend to make; and
o Insider Risk Associates should not discuss with anyone
else, inside or outside Mellon, the response they received
to a preclearance request.
Every Insider Risk Associate must follow these procedures
or risk serious sanctions, including dismissal. If you have
any questions about these procedures you should consult the
Manager of Corporate Compliance. Interpretive issues that
arise under these procedures shall be decided by, and are
subject to the discretion of, the Manager of Corporate
Compliance.
Restricted List - The Manager of Corporate Compliance will
maintain a list (the "Restricted List") of companies whose
securities are deemed appropriate for implementation of
trading restrictions for Insider Risk Associates.
Restricted List(s) will not be distributed outside of the
Risk Management and Compliance Department. From time to
time, such trading restrictions may be appropriate to
protect Mellon and its Insider Risk Associates from
potential violations, or the appearance of violations, of
securities laws. The inclusion of a company on the
Restricted List provides no indication of the advisability
of an investment in the company's securities or the
existence of material nonpublic information on the company.
Nevertheless, the contents of the Restricted List will be
treated as confidential information to avoid unwarranted
inferences.
To assist the Manager of Corporate Compliance in
identifying companies that may be appropriate for inclusion
on the Restricted List, the department heads of sections in
which Insider Risk Associates are employed will inform the
Manager of Corporate Compliance in writing of any companies
they believe should be included on the Restricted List,
based upon facts known or readily available to such
department heads. Although the reasons for inclusion on the
Restricted List may vary, they could typically include the
following:
o Mellon is involved as a lender, investor or adviser in a
merger, acquisition or financial restructuring involving
the company;
o Mellon is involved as a selling shareholder in a public
distribution of the company's securities;
18
<PAGE>
o Mellon is involved as an agent in the distribution of the
company's securities;
o Mellon has received material nonpublic information on the
company;
o Mellon is considering the exercise of significant
creditors' rights against the company; or
o The company is a Mellon borrower in Credit Recovery.
Department heads of sections in which Insider Risk
Associates are employed are also responsible for notifying
the Manager of Corporate Compliance in writing of any
change in circumstances making it appropriate to remove a
company from the Restricted List.
PERSONAL SECURITIES TRANSACTIONS REPORTS
o Brokerage Accounts - All Insider Risk Associates are
required to instruct their brokers to submit directly to
the Manager of Corporate Compliance copies of all trade
confirmations and statements relating to their account. An
example of an instruction letter to a broker is contained
in Exhibit B1.
o Report of Transactions in Mellon Securities - Insider Risk
Associates must also report in writing to the Manager of
Corporate Compliance within ten calendar days whenever they
purchase or sell Mellon securities if the transaction was
not through a brokerage account as described above.
Purchases and sales of Mellon securities include the
following:
DRIP Optional Cash Purchases - Optional cash purchases
under Mellon's Dividend Reinvestment and Common Stock
Purchase Plan (the "Mellon DRIP").
Stock Options - The sale of stock received upon the
exercise of an associate stock option unless the sale is
part of a "netting of shares" or "cashless exercise"
administered by the Human Resources Department (for which
the Human Resources Department will forward information to
the Manager of Corporate Compliance).
It should be noted that the reinvestment of dividends under
the DRIP, changes in elections under Mellon's Retirement
Savings Plan, the receipt of stock under Mellon's
Restricted Stock Award Plan and the receipt or exercise of
options under Mellon's Long-Term Profit Incentive Plan are
not considered purchases or sales for the purpose of this
reporting requirement.
An example of a written report to the Manager of Corporate
Compliance is contained in Exhibit A.
CONFIDENTIAL TREATMENT
THE MANAGER OF CORPORATE COMPLIANCE WILL USE HIS OR HER
BEST EFFORTS TO ASSURE THAT ALL REQUESTS FOR PRECLEARANCE,
ALL PERSONAL SECURITIES TRANSACTION REPORTS AND ALL REPORTS
OF SECURITIES HOLDINGS ARE TREATED AS "PERSONAL AND
CONFIDENTIAL." HOWEVER, SUCH DOCUMENTS WILL BE AVAILABLE
FOR INSPECTION BY APPROPRIATE REGULATORY AGENCIES AND BY
OTHER PARTIES WITHIN AND OUTSIDE MELLON AS ARE NECESSARY TO
EVALUATE COMPLIANCE WITH OR SANCTIONS UNDER THIS POLICY.
19
<PAGE>
PART III - APPLICABLE TO
INVESTMENT ASSOCIATES ONLY
- - ------------------------------
Because of their particular responsibilities, Investment
Associates are subject to different preclearance and
personal securities reporting requirements as discussed
below.
SPECIAL STANDARDS OF CONDUCT FOR INVESTMENT ASSOCIATES
Conflict of Interest - No Investment Associate may
recommend a securities transaction for a Mellon customer to
whom a fiduciary duty is owed, or for Mellon, without
disclosing any interest he or she has in such securities or
issuer (other than an interest in publicly traded
securities where the total investment is equal to or less
than $25,000), including:
o any direct or indirect beneficial ownership of any
securities of such issuer;
o any contemplated transaction by the Investment Associate in
such securities;
o any position with such issuer or its affiliates; and
o any present or proposed business relationship between such
issuer or its affiliates and the Investment Associate or
any party in which the Investment Associate has a
beneficial ownership interest (see "Beneficial Ownership"
in Section Four, "Restrictions On Transactions in Mellon
Securities").
Portfolio Information - No Investment Associate may divulge
the current portfolio positions, or current or anticipated
portfolio transactions, programs or studies, of Mellon or
any Mellon customer to anyone unless it is properly within
his or her job responsibilities to do so.
Material Nonpublic Information - No Investment Associate
may engage in or recommend a securities transaction, for
his or her own benefit or for the benefit of others,
including Mellon or its customers, while in possession of
material nonpublic information regarding such securities.
No Investment Associate may communicate material nonpublic
information to others unless it is properly within his or
her job responsibilities to do so.
Short-Term Trading - Any Investment Associate who purchases
and sells, or sells and purchases, the same (or equivalent)
securities within any 60-calendar-day period is required to
disgorge all profits realized on such transaction in
accordance with procedures established by senior
management. For this purpose, securities will be deemed to
be equivalent if one is convertible into the other, if one
entails a right to purchase or sell the other, or if the
value of one is expressly dependent on the value of the
other (e.g., derivative securities).
Additional Restrictions For Dreyfus Associates and
Associates of Mellon Entities Registered Under The
Investment Advisers Act of 1940 ONLY ("40 Act
Associates")
o Outside Activities - No 40 Act associate may serve on the
board of directors/trustees or as a general partner of any
publicly traded company (other than Mellon) without the
prior approval of the Manager of Corporate Compliance.
20
<PAGE>
o Gifts - All 40 Act associates are prohibited from accepting
gifts from outside companies, or their representatives,
with an exception for gifts of (1) a de minimis value and
(2) an occasional meal, a ticket to a sporting event or the
theater, or comparable entertainment for the 40 Act
associate and, if appropriate, a guest, which is neither so
frequent nor extensive as to raise any question of
impropriety. A gift shall be considered de minimis if it
does not exceed an annual amount per person fixed
periodically by the National Association of Securities
Dealers, which is currently $100 per person.
o Blackout Period - 40 Act associates will not be given
clearance to execute a transaction in any security that is
being considered for purchase or sale by an affiliated
investment company, managed account or trust, for which a
pending buy or sell order for such affiliated account is
pending, and for two business days after the transaction in
such security for such affiliated account has been
effected. This provision does not apply to transactions
effected or contemplated by index funds.
In addition, portfolio managers for the investment
companies are prohibited from buying or selling a security
within seven calendar days before and after such investment
company trades in that security. Any violation of the
foregoing will require the violator to disgorge all profit
realized with respect to such transaction.
PRECLEARANCE FOR PERSONAL SECURITIES TRANSACTIONS - All
Investment Associates must notify the Preclearance
Compliance Officer (see Glossary) in writing and receive
preclearance before they engage in any purchase or sale of
a security.
Exemptions from Requirement to Preclear - Preclearance is
not required for the following transactions:
o purchases or sales of "Exempt Securities" (see Glossary);
o purchases or sales effected in any account over which an
associate has no direct or indirect control over the
investment decision-making process (i.e., nondiscretionary
trading accounts). Nondiscretionary trading accounts may
only be maintained, without being subject to preclearance
procedures, when the Preclearance Compliance Officer, after
a thorough review, is satisfied that the account is truly
nondiscretionary;
o transactions which are non-volitional on the part of an
associate (such as stock dividends);
o the sale of stock received upon the exercise of an
associate stock option if the sale is part of a "netting of
shares" or "cashless exercise" administered by the Human
Resources Department (for which the Human Resources
Department will forward information to the manager of
Corporate Compliance);
o purchases which are part of an automatic reinvestment of
dividends under a DRIP (Preclearance is required for
optional cash purchases under a DRIP);
o purchases effected upon the exercise of rights issued by an
issuer pro rata to all holders of a class of securities, to
the extent such rights were acquired from such issuer;
o sales of rights acquired from an issuer, as described
above; and/or
o those situations where the Preclearance Compliance Officer
determines, after taking into consideration the particular
facts and circumstances, that prior approval is not
necessary.
21
<PAGE>
Requests for Preclearance - All requests for preclearance
for a securities transaction shall be submitted to the
Preclearance Compliance Officer by completing a
Preclearance Request Form. (Investment Associates other
than Dreyfus associates are to use the Preclearance Request
Form shown as Exhibit C1. Dreyfus associates are to use the
Preclearance Request Form shown as Exhibit C2.)
The Preclearance Compliance Officer will notify the
Investment Associate whether the request is approved or
denied without disclosing the reason for such approval or
denial.
Notifications may be given in writing or verbally by the
Preclearance Compliance Officer to the Investment
Associate. A record of such notification will be maintained
by the Preclearance Compliance Officer. However, it shall
be the responsibility of the Investment Associate to obtain
a written record of the Preclearance Compliance Officer's
notification within 24 hours of such notification. The
Investment Associate should retain a copy of this written
record.
As there could be many reasons for preclearance being
granted or denied, Investment Associates should not infer
from the preclearance response anything regarding the
security for which preclearance was requested.
Although making a preclearance request does not obligate an
Investment Associate to do the transaction, it should be
noted that:
o preclearance authorization will expire at the end of the
day on which preclearance is given;
o preclearance requests should not be made for a transaction
that the Investment Associate does not intend to make; and
o Investment Associates should not discuss with anyone else,
inside or outside Mellon, the response the Investment
Associate received to a preclearance request.
Every Investment Associate must follow these procedures or
risk serious sanctions, including dismissal. If you have
any questions about these procedures, consult the
Preclearance Compliance Officer. Interpretive issues that
arise under these procedures shall be decided by, and are
subject to the discretion of, the Manager of Corporate
Compliance.
Restricted List - Each Preclearance Compliance Officer will
maintain a list (the "Restricted List") of companies whose
securities are deemed appropriate for implementation of
trading restrictions for Investment Associates in their
area. From time to time, such trading restrictions may be
appropriate to protect Mellon and its Investment Associates
from potential violations, or the appearance of violations,
of securities laws. The inclusion of a company on the
Restricted List provides no indication of the advisability
of an investment in the company's securities or the
existence of material nonpublic information on the company.
Nevertheless, the contents of the Restricted List will be
treated as confidential information in order to avoid
unwarranted inferences.
In order to assist the Preclearance Compliance Officer in
identifying companies that may be appropriate for inclusion
on the Restricted List, the head of the
entity/department/area in which Investment Associates are
employed will inform the appropriate Preclearance
Compliance Officer in writing of any companies that they
believe should be included on the Restricted List based
upon facts known or readily available to such department
heads.
22
<PAGE>
PERSONAL SECURITIES TRANSACTIONS REPORTS
o Brokerage Accounts - All Investment Associates are required
to instruct their brokers to submit directly to the Manager
of Corporate Compliance copies of all trade confirmations
and statements relating to their account. Examples of
instruction letters to a broker are contained in Exhibits
B1 and B2.
o Report of Transactions in Mellon Securities - Investment
Associates must also report in writing to the Manager of
Corporate Compliance within ten calendar days whenever they
purchase or sell Mellon securities if the transaction was
not through a brokerage account as described above.
Purchases and sales of Mellon securities include the
following:
DRIP Optional Cash Purchases - Optional cash purchases
under Mellon's Dividend Reinvestment and Common Stock
Purchase Plan (the "Mellon DRIP").
Stock Options - The sale of stock received upon the
exercise of an associate stock option unless the sale is
part of a "netting of shares" or "cashless exercise"
administered by the Human Resources Department (for which
the Human Resources Department will forward information to
the Manager of Corporate Compliance).
It should be noted that the reinvestment of dividends under
the DRIP, changes in elections under Mellon's Retirement
Savings Plan, the receipt of stock under Mellon's
Restricted Stock Award Plan, and the receipt or exercise of
options under Mellon's Long-Term Profit Incentive Plan are
not considered purchases or sales for the purpose of this
reporting requirement.
An example of a written report to the Manager of Corporate
Compliance is contained in Exhibit A.
o Statement of Securities Holdings - Within ten days of
receiving this Policy and on an annual basis thereafter,
all Investment Associates must submit to the Manager of
Corporate Compliance a statement of all securities in which
they presently have any direct or indirect beneficial
ownership other than Exempt Securities, as defined in the
Glossary. Investment Associates should refer to "Beneficial
Ownership" in Section Four, "Restrictions on Transactions
in Mellon Securities," which is also applicable to
Investment Associates. Such statements should be in the
format shown in Exhibit D. The annual report must be
submitted by January 31 and must report all securities
holdings other than Exempt Securities. The annual statement
of securities holdings contains an acknowledgment that the
Investment Associate has read and complied with this
Policy.
o Special Requirement with Respect to Affiliated Investment
Companies - The portfolio managers, research analysts and
other Investment Associates specifically designated by the
Manager of Corporate Compliance are required within ten
calendar days of receiving this Policy (and by no later
than ten calendar days after the end of each calendar
quarter) to report every transaction in the securities
issued by an affiliated investment company occurring in an
account in which the Investment Associate has a beneficial
ownership interest. The quarterly reporting requirement may
be satisfied by notifying the Manager of Corporate
Compliance of the name of the investment company, account
name and account number for which such quarterly reports
must be submitted.
23
<PAGE>
CONFIDENTIAL TREATMENT
THE PRECLEARANCE COMPLIANCE OFFICER WILL USE HIS OR HER
BEST EFFORTS TO ASSURE THAT ALL REQUESTS FOR PRECLEARANCE,
ALL PERSONAL SECURITIES TRANSACTION REPORTS AND ALL REPORTS
OF SECURITIES HOLDINGS ARE TREATED AS "PERSONAL AND
CONFIDENTIAL." HOWEVER, SUCH DOCUMENTS WILL BE AVAILABLE
FOR INSPECTION BY APPROPRIATE REGULATORY AGENCIES, AND BY
OTHER PARTIES WITHIN AND OUTSIDE MELLON AS ARE NECESSARY TO
EVALUATE COMPLIANCE WITH OR SANCTIONS UNDER THIS POLICY.
DOCUMENTS RECEIVED FROM DREYFUS ASSOCIATES ARE ALSO
AVAILABLE FOR INSPECTION BY THE BOARDS OF DIRECTORS OF
DREYFUS AND BY THE BOARDS OF DIRECTORS (OR TRUSTEES OR
MANAGING GENERAL PARTNERS, AS APPLICABLE) OF THE INVESTMENT
COMPANIES MANAGED OR ADMINISTERED BY DREYFUS.
24
<PAGE>
PART IV - APPLICABLE TO
OTHER ASSOCIATES ONLY
- - ------------------------------
PRECLEARANCE FOR PERSONAL SECURITIES TRANSACTIONS - Except
for private placements, Other Associates are permitted to
engage in personal securities transactions without
obtaining prior approval from the Manager of Corporate
Compliance (for preclearance of private placements, use the
Preclearance Request Form shown as Exhibit C1.)
PERSONAL SECURITIES TRANSACTIONS REPORTS - Other Associates
are not required to report their personal securities
transactions other than margin transactions and
transactions involving Mellon securities as discussed
below. Other Associates are required to instruct their
brokers to submit directly to the Manager of Corporate
Compliance copies of all confirmations and statements
pertaining to margin accounts. Examples of an instruction
letter to a broker are shown in Exhibit B1.
Report of Transactions in Mellon Securities - Other
Associates must report in writing to the Manager of
Corporate Compliance within ten calendar days whenever they
purchase or sell Mellon securities. Purchases and sales of
Mellon securities include the following:
o DRIP Optional Cash Purchases - Optional cash purchases
under Mellon's Dividend Reinvestment and Common Stock
Purchase Plan (the "Mellon DRIP").
o Stock Options - The sale of stock received upon the
exercise of an associate stock option unless the sale is
part of a "netting of shares" or "cashless exercise"
administered by the Human Resources Department (for which
the Human Resources Department will forward information to
the Manager of Corporate Compliance).
It should be noted that the reinvestment of dividends under
the DRIP, changes in elections under Mellon's Retirement
Savings Plan, the receipt of stock under Mellon's
Restricted Stock Award Plan and the receipt or exercise of
options under Mellon's Long-Term Profit Incentive Plan are
not considered purchases or sales for the purpose of this
reporting requirement.
An example of a written report to the Manager of Corporate
Compliance is contained in Exhibit A.
RESTRICTIONS ON TRANSACTIONS IN OTHER SECURITIES
Margin Transactions - Prior to establishing a margin
account, Other Associates must obtain the written
permission of the Manager of Corporate Compliance. Other
Associates having a margin account prior to the effective
date of this Policy must notify the Manager of Corporate
Compliance of the existence of such account.
25
<PAGE>
All associates having margin accounts, other than described
below, must designate the Manager of Corporate Compliance
as an interested party on each account. Associates must
ensure that the Manager of Corporate Compliance promptly
receives copies of all trade confirmations and statements
relating to the accounts directly from the broker. If
requested by a brokerage firm, please contact the Manager
of Corporate Compliance to obtain a letter (sometimes
referred to as a "407 letter") granting permission to
maintain a margin account. Trade confirmations and
statements are not required on margin accounts established
at Dreyfus Investment Services Corporation for the sole
purpose of cashless exercises of Mellon employee stock
options. In addition, products may be offered by a
broker/dealer that, because of their characteristics, are
considered margin accounts but have been determined by the
Manager of Corporate Compliance to be outside the scope of
this Policy (e.g., a Cash Management account which provides
overdraft protection for the customer). Any questions
regarding the establishment, use and reporting of margin
accounts should be directed to the Manager of Corporate
Compliance. An example of an instruction letter to a broker
is shown in Exhibit B1.
Private Placements - Other Associates are prohibited from
acquiring any security in a private placement unless they
obtain the prior written approval of the Manager of
Corporate Compliance and the Associate's department head.
Approval must be given by both of the aforementioned
persons for the acquisition to be considered approved.
As there could be many reasons for preclearance being
granted or denied, Other Associates should not infer from
the preclearance response anything regarding the security
for which preclearance was requested.
Although making a preclearance request does not obligate an
Other Associate to do the transaction, it should be noted
that:
o preclearance authorization will expire at the end of the
third business day after it is received (the day
authorization is granted is considered the first business
day);
o preclearance requests should not be made for a transaction
that the Other Associate does not intend to make; and
o Other Associates should not discuss with anyone else,
inside or outside Mellon, the response they received to a
preclearance request.
Every Other Associate must follow these procedures or risk
serious sanctions, including dismissal. If you have any
questions about these procedures you should consult the
Manager of Corporate Compliance. Interpretive issues that
arise under these procedures shall be decided by, and are
subject to the discretion of, the Manager of Corporate
Compliance.
CONFIDENTIAL TREATMENT
THE MANAGER OF CORPORATE COMPLIANCE WILL USE HIS OR HER
BEST EFFORTS TO ASSURE THAT ALL REQUESTS FOR PRECLEARANCE,
ALL PERSONAL SECURITIES TRANSACTION REPORTS AND ALL REPORTS
OF SECURITIES HOLDINGS ARE TREATED AS "PERSONAL AND
CONFIDENTIAL." HOWEVER, SUCH DOCUMENTS WILL BE AVAILABLE
FOR INSPECTION BY APPROPRIATE REGULATORY AGENCIES AND OTHER
PARTIES WITHIN AND OUTSIDE MELLON AS ARE NECESSARY TO
EVALUATE COMPLIANCE WITH OR SANCTIONS UNDER THIS POLICY.
26
<PAGE>
PART V - APPLICABLE TO
NONMANAGEMENT BOARD MEMBER
- - ------------------------------
NONMANAGEMENT BOARD MEMBER -
You are considered to be a Nonmanagement Board Member if
you are:
o a director of Dreyfus who is not also an officer or
employee of Dreyfus ("Dreyfus Board Member"); or
o a director, trustee or managing general partner of any
investment company who is not also an officer or employee
of Dreyfus ("Mutual Fund Board Member").
The term "Independent" Mutual Fund Board Member means those
Mutual Fund Board Members who are not deemed "interested
persons" of an investment company, as defined by the
Investment Company Act of 1940, as amended.
STANDARDS OF CONDUCT FOR NONMANAGEMENT BOARD MEMBER
Outside Activities - Nonmanagement Board Members are
prohibited from:
o accepting nomination or serving as a director, trustee or
managing general partner of an investment company not
advised by Dreyfus, without the express prior approval of
the board of directors of Dreyfus and the board of
directors/trustees or managing general partners of the
pertinent Dreyfus-managed fund(s) for which a Nonmanagement
Board Member serves as a director, trustee or managing
general partner;
o accepting employment with or acting as a consultant to any
person acting as a registered investment adviser to an
investment company without the express prior approval of
the board of directors of Dreyfus;
o owning Mellon securities if the Nonmanagement Board Member
is an "Independent" Mutual Fund Board Member, (since that
would destroy his or her "independent" status); and/or
o buying or selling Mellon's publicly traded securities
during a blackout period, which begins the 16th day of the
last month of each calendar quarter and ends three business
days after Mellon publicly announces the financial results
for that quarter.
Insider Trading and Tipping - The provisions set forth in
Section Two, "Insider Trading and Tipping," are applicable
to Nonmanagement Board Members.
27
<PAGE>
Conflict of Interest - No Nonmanagement Board Member may
recommend a securities transaction for Mellon, Dreyfus or
any Dreyfus-managed fund without disclosing any interest he
or she has in such securities or issuer thereof (other than
an interest in publicly traded securities where the total
investment is less than or equal to $25,000), including:
o any direct or indirect beneficial ownership of any
securities of such issuer;
o any contemplated transaction by the Nonmanagement Board
Member in such securities;
o any position with such issuer or its affiliates; and
o any present or proposed business relationship between such
issuer or its affiliates and the Nonmanagement Board Member
or any party in which the Nonmanagement Board Member has a
beneficial ownership interest (see "Beneficial Ownership",
Section Four, "Restrictions on Transaction in Mellon
Securities").
Portfolio Information - No Nonmanagement Board Member may
divulge the current portfolio positions, or current or
anticipated portfolio transactions, programs or studies, of
Mellon, Dreyfus or any Dreyfus-managed fund, to anyone
unless it is properly within his or her responsibilities as
a Nonmanagement Board Member to do so.
Material Nonpublic Information - No Nonmanagement Board
Member may engage in or recommend any securities
transaction, for his or her own benefit or for the benefit
of others, including Mellon, Dreyfus or any Dreyfus-managed
fund, while in possession of material nonpublic
information. No Nonmanagement Board Member may communicate
material nonpublic information to others unless it is
properly within his or her responsibilities as a
Nonmanagement Board Member to do so.
PRECLEARANCE FOR PERSONAL SECURITIES TRANSACTIONS -
Nonmanagement Board Members are permitted to engage in
personal securities transactions without obtaining prior
approval from the Preclearance Compliance Officer.
28
<PAGE>
PERSONAL SECURITY TRANSACTIONS REPORTS -
o "Independent" Mutual Fund Board Members - Any "Independent"
Mutual Fund Board Members, as defined above, who effects a
securities transaction where he or she knew, or in the
ordinary course of fulfilling his or her official duties
should have known, that during the 15-day period
immediately preceding or after the date of such
transaction, the same security was purchased or sold, or
was being considered for purchase or sale by Dreyfus
(including any investment company or other account managed
by Dreyfus), are required to report such personal
securities transaction. In the event a personal securities
transaction report is required, it must be submitted to the
Preclearance Compliance Officer not later than ten days
after the end of the calendar quarter in which the
transaction to which the report relates was effected. The
report must include the date of the transaction, the title
and number of shares or principal amount of the security,
the nature of the transaction (e.g., purchase, sale or any
other type of acquisition or disposition), the price at
which the transaction was effected and the name of the
broker or other entity with or through whom the transaction
was effected. This reporting requirement can be satisfied
by sending a copy of the confirmation statement regarding
such transactions to the Preclearance Compliance Officer
within the time period specified. Notwithstanding the
foregoing, personal securities transaction reports are not
required with respect to any securities transaction
described in "Exemption from the Requirement to Preclear"
in Part III.
o Dreyfus Board Members and "Interested" Mutual Fund Board
Members - Dreyfus Board Members and Mutual Fund Board
Members who are "interested persons" of an investment
company, as defined by the Investment Company Act of 1940,
are required to report their personal securities
transactions. Personal securities transaction reports are
required with respect to any securities transaction other
than those described in "Exemptions from Requirement to
Preclear" on Page 21. Personal securities transaction
reports are required to be submitted to the Preclearance
Compliance Officer not later than ten days after the end of
the calendar quarter in which the transaction to which the
report relates was effected. The report must include the
date of the transaction, the title and number of shares or
principal amount of the security, the nature of the
transaction (e.g., purchase, sale or any other type of
acquisition or disposition), the price at which the
transaction was effected and the name of the broker or
other entity with or through whom the transaction was
effected. This reporting requirement can be satisfied by
sending a copy of the confirmation statement regarding such
transactions to the Preclearance Compliance Officer within
the time period specified.
CONFIDENTIAL TREATMENT
THE PRECLEARANCE COMPLIANCE OFFICER WILL USE HIS OR HER
BEST EFFORTS TO ASSURE THAT ALL PERSONAL SECURITIES
TRANSACTION REPORTS ARE TREATED AS "PERSONAL AND
CONFIDENTIAL." HOWEVER, SUCH DOCUMENTS WILL BE AVAILABLE
FOR INSPECTION BY APPROPRIATE REGULATORY AGENCIES AND OTHER
PARTIES WITHIN AND OUTSIDE MELLON AS ARE NECESSARY TO
EVALUATE COMPLIANCE WITH OR SANCTIONS UNDER THIS POLICY.
29
<PAGE>
GLOSSARY
- - ------------------------------
DEFINITIONS
o APPROVAL - written consent or written notice of
nonobjection.
o ASSOCIATE - any employee of Mellon Bank Corporation or its
direct or indirect subsidiaries; does not include outside
consultants or temporary help.
o BENEFICIAL OWNERSHIP - securities owned of record or held
in the associate's name are generally considered to be
beneficially owned by the associate.
Securities held in the name of any other person are deemed
to be beneficially owned by the associate if by reason of
any contract, understanding, relationship, agreement or
other arrangement, the associate obtains therefrom benefits
substantially equivalent to those of ownership, including
the power to vote, or to direct the disposition of, such
securities. Beneficial ownership includes securities held
by others for the associate's benefit (regardless of record
ownership), e.g. securities held for the associate or
members of the associate's immediate family, defined below,
by agents, custodians, brokers, trustees, executors or
other administrators; securities owned by the associate,
but which have not been transferred into the associate's
name on the books of the company; securities which the
associate has pledged; or securities owned by a corporation
that should be regarded as the associate's personal holding
corporation. As a natural person, beneficial ownership is
deemed to include securities held in the name or for the
benefit of the associate's immediate family, which includes
the associate's spouse, the associate's minor children and
stepchildren and the associate's relatives or the relatives
of the associate's spouse who are sharing the associate's
home, unless because of countervailing circumstances, the
associate does not enjoy benefits substantially equivalent
to those of ownership. Benefits substantially equivalent to
ownership include, for example, application of the income
derived from such securities to maintain a common home,
meeting expenses that such person otherwise would meet from
other sources, and the ability to exercise a controlling
influence over the purchase, sale or voting of such
securities. An associate is also deemed the beneficial
owner of securities held in the name of some other person,
even though the associate does not obtain benefits of
ownership, if the associate can vest or revest title in
himself at once, or at some future time.
In addition, a person will be deemed the beneficial owner
of a security if he has the right to acquire beneficial
ownership of such security at any time (within 60 days)
including but not limited to any right to acquire: (1)
through the exercise of any option, warrant or right; (2)
through the conversion of a security; or (3) pursuant to
the power to revoke a trust, nondiscretionary account or
similar arrangement.
30
<PAGE>
With respect to ownership of securities held in trust,
beneficial ownership includes ownership of securities as a
trustee in instances where either the associate as trustee
or a member of the associate's "immediate family" has a
vested interest in the income or corpus of the trust, the
ownership by the associate of a vested beneficial interest
in the trust and the ownership of securities as a settlor
of a trust in which the associate as the settlor has the
power to revoke the trust without obtaining the consent of
the beneficiaries. Certain exemptions to these trust
beneficial ownership rules exist, including an exemption
for instances where beneficial ownership is imposed solely
by reason of the associate being settlor or beneficiary of
the securities held in trust and the ownership, acquisition
and disposition of such securities by the trust is made
without the associate's prior approval as settlor or
beneficiary. "Immediate family" of an associate as trustee
means the associate's son or daughter (including any
legally adopted children) or any descendant of either, the
associate's stepson or stepdaughter, the associate's father
or mother or any ancestor of either, the associate's
stepfather or stepmother and his spouse.
To the extent that stockholders of a company use it as a
personal trading or investment medium and the company has
no other substantial business, stockholders are regarded as
beneficial owners, to the extent of their respective
interests, of the stock thus invested or traded in. A
general partner in a partnership is considered to have
indirect beneficial ownership in the securities held by the
partnership to the extent of his pro rata interest in the
partnership. Indirect beneficial ownership is not, however,
considered to exist solely by reason of an indirect
interest in portfolio securities held by any holding
company registered under the Public Utility Holding Company
Act of 1935, a pension or retirement plan holding
securities of an issuer whose employees generally are
beneficiaries of the plan and a business trust with over 25
beneficiaries.
Any person who, directly or indirectly, creates or uses a
trust, proxy, power of attorney, pooling arrangement or any
other contract, arrangement or device with the purpose or
effect of divesting such person of beneficial ownership as
part of a plan or scheme to evade the reporting
requirements of the Securities Exchange Act of 1934 shall
be deemed the beneficial owner of such security.
The final determination of beneficial ownership is a
question to be determined in light of the facts of a
particular case. Thus, while the associate may include
security holdings of other members of his family, the
associate may nonetheless disclaim beneficial ownership of
such securities.
o "CHINESE WALL" POLICY - procedures designed to restrict the
flow of information within Mellon from units or individuals
who are likely to receive material nonpublic information to
units or individuals who trade in securities or provide
investment advice. (see pages 12-14).
o CORPORATION - Mellon Bank Corporation.
o DREYFUS - The Dreyfus Corporation and its subsidiaries.
o DREYFUS ASSOCIATE - any employee of Dreyfus; does not
include outside consultants or temporary help.
31
<PAGE>
o EXEMPT SECURITIES - Exempt Securities are defined as:
- securities issued or guaranteed by the United States
government or agencies or instrumentalities;
- bankers' acceptances;
- bank certificates of deposit and time deposits;
- commercial paper;
- repurchase agreements; and
- securities issued by open-end investment companies.
o GENERAL COUNSEL - General Counsel of Mellon Bank
Corporation or any person to whom relevant authority is
delegated by the General Counsel.
o INDEX FUND - an investment company which seeks to mirror
the performance of the general market by investing in the
same stocks (and in the same proportion) as a broad-based
market index.
o INITIAL PUBLIC OFFERING (IPO) - the first offering of a
company's securities to the public.
o INVESTMENT COMPANY - a company that issues securities that
represent an undivided interest in the net assets held by
the company. Mutual funds are investment companies that
issue and sell redeemable securities representing an
undivided interest in the net assets of the company.
o MANAGER OF CORPORATE COMPLIANCE - - the associate within
the Risk Management and Compliance Department of Mellon
Bank Corporation who is responsible for administering the
Confidential Information and Securities Trading Policy, or
any person to whom relevant authority is delegated by the
Manager of Corporate Compliance.
o MELLON - Mellon Bank Corporation and all of its direct and
indirect subsidiaries.
o NAKED OPTION - an option sold by the investor which
obligates him or her to sell a security which he or she
does not own.
o NONDISCRETIONARY TRADING ACCOUNT - an account over which
the associated person has no direct or indirect control
over the investment decision-making process.
o OPTION - a security which gives the investor the right but
not the obligation to buy or sell a specific security at a
specified price within a specified time.
o PRECLEARANCE COMPLIANCE OFFICER - a person designated by
the Manager of Corporate Compliance, to administer, among
other things, associates' preclearance request for a
specific business unit.
o PRIVATE PLACEMENT - an offering of securities that is
exempt from registration under the Securities Act of 1933
because it does not constitute a public offering.
o SENIOR MANAGEMENT COMMITTEE - the Senior Management
Committee of Mellon Bank Corporation.
o SHORT SALE - the sale of a security that is not owned by
the seller at the time of the trade.
32
<PAGE>
INDEX OF EXHIBITS
- - ------------------------------
EXHIBIT A SAMPLE REPORT TO MANAGER OF CORPORATE COMPLIANCE
EXHIBIT B SAMPLE INSTRUCTION LETTER TO BROKER
EXHIBIT C PRECLEARANCE REQUEST FORM
EXHIBIT D PERSONAL SECURITIES HOLDINGS FORM
33
<PAGE>
EXHIBIT A
- - ------------------------------
SAMPLE REPORT TO MANAGER OF CORPORATE COMPLIANCE
- - --------------------------------------------------------------------------------
MELLON INTEROFFICE
MEMORANDUM
Date: From: Associate
To: Manager, Corporate Compliance Dept:
Aim #:
Aim #: 151-4342 Phone:
Fax:
- - --------------------------------------------------------------------------------
RE: REPORT OF SECURITIES TRADE
Type of Associate: ____________ Insider Risk
____________ Investment
____________ Other
Type of Security: ____________ Mellon Bank Corporation
____________ Mellon Bank Corporation - optional
cash purchases under Dividend
Reinvestment and Common Stock
Purchase Plan
____________ Mellon Bank Corporation - exercise
of an employee stock option
Attached is a copy of the confirmation slip for a securities trade I
engaged in on _____________________, 19xx.
or
On _____________________, 19xx, I (purchased/sold)__________________
shares of ___________________________ through (broker). I will
arrange to have a copy of the confirmation slip for this trade
delivered to you as soon as possible.
34
<PAGE>
EXHIBIT B1
- - ------------------------------
FOR NON-DREYFUS ASSOCIATES
Date
Broker ABC
Street Address
City, State ZIP
Re: John Smith & Mary Smith
Account No. xxxxxxxxxxxxx
In connection with my existing brokerage accounts at your firm
noted above, please be advised that the Risk Management and
Compliance Department of Mellon Bank should be noted as an
"Interested Party" with respect to my accounts. They should,
therefore, be sent copies of all trade confirmations and account
statements relating to my account.
Please send the requested documentation ensuring the account
holder's name appears on all correspondence to:
Manager, Corporate Compliance
Mellon Bank
P.O. Box 3130
Pittsburgh, PA 15230-3130
Thank you for your cooperation in this request.
Sincerely yours,
Associate
cc: Manager, Corporate Compliance (151-4342)
35
<PAGE>
EXHIBIT B2
- - ------------------------------
FOR DREYFUS ASSOCIATES
Date
Broker ABC
Street Address
City, State ZIP
Re: John Smith & Mary Smith
Account No. xxxxxxxxxxxxx
In connection with my existing brokerage accounts at your firm
noted above, please be advised that the Risk Management and
Compliance Department of Dreyfus Corporation should be noted as an
"Interested Party" with respect to my accounts. They should,
therefore, be sent copies of all trade confirmations and account
statements relating to my account.
Please send the requested documentation ensuring the account
holder's name appears on all correspondence to:
Compliance Officer at The Dreyfus Corporation
200 Park Avenue
Legal Department
New York, NY 10166
Thank you for your cooperation in this request.
Sincerely yours,
Associate
cc: Dreyfus Compliance
36
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
EXHIBIT C1
- - ------------------------------
PRECLEARANCE REQUEST FORM Non Dreyfus Associates
====================================================================================================
To: Manager, Corporate Compliance 151-4342 (All Insider and Other Associates)
Designated Preclearance Compliance Officer (All Investment Associates excluding Dreyfus)
- - ----------------------------------------------------------------------------------------------------
Associate Name: Title: Date:
- - ----------------------------------------------------------------------------------------------------
Phone #: AIM #: Social Security #: Department:
- - ----------------------------------------------------------------------------------------------------
====================================================================================================
ACCOUNT INFORMATION
- - ----------------------------------------------------------------------------------------------------
Account Name: Account Number: Name of Broker/Bank:
- - ----------------------------------------------------------------------------------------------------
Relationship to registered owner(s) (if other than associate)
- - ----------------------------------------------------------------------------------------------------
I hereby request approval to execute the following trade in the above account:
====================================================================================================
TRANSACTION DETAIL
- - ----------------------------------------------------------------------------------------------------
Buy: Sell: Security/Contract: No. of Shares:
- - ----------------------------------------------------------------------------------------------------
If sale, date acquired: Margin Transaction: Initial Public Offering: Private Placement:
/ / Yes / / Yes / / Yes
- - ----------------------------------------------------------------------------------------------------
====================================================================================================
DISCLOSURE STATEMENT
- - ----------------------------------------------------------------------------------------------------
I hereby represent that, to the best of my knowledge, neither I nor the registered account holder is
(1) attempting to benefit personally from any existing business relationship between the issuer and
Mellon or any Mellon-related fund or affiliate; (2) engaging in any manipulative or deceptive
trading activity; (3) in possession of any material non-public information concerning the security
to which is request relates.
- - ----------------------------------------------------------------------------------------------------
Associate Signature: Date:
- - ----------------------------------------------------------------------------------------------------
====================================================================================================
COMPLIANCE OFFICER USE ONLY
- - ----------------------------------------------------------------------------------------------------
Approved: Disapproved: Authorized Signatory: Date:
- - ----------------------------------------------------------------------------------------------------
Comments:
- - ----------------------------------------------------------------------------------------------------
Note: This preclearance will lapse at the end of the day on __________________, 19__.
If you decide not to effect the trade, please notify me.
- - ----------------------------------------------------------------------------------------------------
Date: By:
- - ----------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
EXHIBIT C2
- - ------------------------------
PRECLEARANCE REQUEST FORM Dreyfus Associates Only
====================================================================================================
To: Dreyfus Compliance Officer
- - ----------------------------------------------------------------------------------------------------
Associate Name: Title: Date:
- - ----------------------------------------------------------------------------------------------------
Phone #: AIM #: Social Security #: Department:
- - ----------------------------------------------------------------------------------------------------
====================================================================================================
ACCOUNT INFORMATION
- - ----------------------------------------------------------------------------------------------------
Account Name: Account Number: Name of Broker/Bank:
- - ----------------------------------------------------------------------------------------------------
Relationship to registered owner(s) (if other than associate)
- - ----------------------------------------------------------------------------------------------------
I hereby request approval to execute the following trade in the above account:
====================================================================================================
TRANSACTION DETAIL
- - ----------------------------------------------------------------------------------------------------
Buy: Sell: Security/Contract: Symbol:
- - ----------------------------------------------------------------------------------------------------
Amount: Current Market Price: If sale, date acquired: Margin Transaction:
- - ----------------------------------------------------------------------------------------------------
Is this a New Issue? Is this a Private Placement?
/ / Yes / / No / / Yes / / No
- - ----------------------------------------------------------------------------------------------------
Reason for Transaction, identify source:
- - ----------------------------------------------------------------------------------------------------
====================================================================================================
DISCLOSURE STATEMENT
- - ----------------------------------------------------------------------------------------------------
I hereby represent that, to the best of my knowledge, neither I nor the registered account holder is
(1) attempting to benefit personally from any existing business relationship between the issuer and
Mellon or any Mellon-related fund or affiliate; (2) engaging in any manipulative or deceptive
trading activity; (3) in possession of any material non-public information concerning the security
to which is request relates.
- - ----------------------------------------------------------------------------------------------------
Associate Signature: Date:
- - ----------------------------------------------------------------------------------------------------
====================================================================================================
COMPLIANCE OFFICER USE ONLY
- - ----------------------------------------------------------------------------------------------------
Approved: Disapproved: Authorized Signatory: Date:
- - ----------------------------------------------------------------------------------------------------
Comments:
- - ----------------------------------------------------------------------------------------------------
Note: This preclearance will lapse at the end of the day on __________________, 19__.
If you decide not to effect the trade, please notify me.
- - ----------------------------------------------------------------------------------------------------
Date: By:
- - ----------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
EXHIBIT D1
- - ------------------------------
Return to: Manager, Corporate Compliance
Mellon Bank
P.O. Box 3130
Pittsburgh, PA 15230-3130
STATEMENT OF SECURITY HOLDINGS
As of __________________________
1. List of all securities in which you, your immediate family, any other
member of your immediate household, or any trust or estate of which you
or your spouse is a trustee or fiduciary or beneficiary, or of which your
minor child is a beneficiary, or any person for whom you direct or effect
transactions under a power of attorney or otherwise, maintain a
beneficial ownership - (see Glossary in Policy). If none, write NONE.
Securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities, bankers' acceptances, bank certificates of deposit and
time deposits, commercial paper, repurchase agreements and shares of
registered investment companies need not be listed. IF YOUR LIST IS
EXTENSIVE, PLEASE ATTACH A COPY OF THE MOST RECENT STATEMENT FROM YOUR
BROKER(S), RATHER THAN LIST THEM ON THIS FORM.
-----------------------------------------------------------------------------
NAME OF SECURITY TYPE OF SECURITY AMOUNT OF SHARES
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
2. List the names and addresses of any broker/dealers holding accounts in
which you have a beneficial interest, including the name of your
registered representative (if applicable), the account registration and
the relevant account numbers. If none, write NONE.
-----------------------------------------------------------------------------
BROKER/ ADDRESS NAME OF ACCOUNT ACCOUNT
DEALER REGISTERED REGISTRATION NUMBER(S)
REPRESENTATIVE
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
I certify that the statements made by me on this form are true, complete and
correct to the best of my knowledge and belief, and are made in good faith. I
acknowledge I have read, understood and complied with the Confidential
Information and Securities Trading Policy.
-----------------------------------------------------------------------------
Date: Printed Name:
-----------------------------------------------------------------------------
Signature:
-----------------------------------------------------------------------------
39
<PAGE>
EXHIBIT D2
- - ------------------------------
Return to: Compliance Officer at the Dreyfus Corporation
200 Park Avenue
Legal Department
New York, NY 10166
STATEMENT OF SECURITY HOLDINGS
As of __________________________
1. List of all securities in which you, your immediate family, any other
member of your immediate household, or any trust or estate of which you
or your spouse is a trustee or fiduciary or beneficiary, or of which your
minor child is a beneficiary, or any person for whom you direct or effect
transactions under a power of attorney or otherwise, maintain a
beneficial interest. If none, write NONE. Securities issued or guaranteed
by the U.S. government or its agencies or instrumentalities, bankers'
acceptances, bank certificates of deposit and time deposits, commercial
paper, repurchase agreements and shares of registered investment
companies need not be listed. IF YOUR LIST IS EXTENSIVE, PLEASE ATTACH A
COPY OF THE MOST RECENT STATEMENT FROM YOUR BROKER(S), RATHER THAN LIST
THEM ON THIS FORM.
-----------------------------------------------------------------------------
NAME OF SECURITY TYPE OF SECURITY AMOUNT OF SHARES
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
2. List the names and addresses of any broker/dealers holding accounts in
which you have a beneficial interest, including the name of your
registered representative (if applicable), the account registration and
the relevant account numbers. If none, write NONE.
-----------------------------------------------------------------------------
BROKER/ ADDRESS NAME OF ACCOUNT ACCOUNT
DEALER REGISTERED REGISTRATION NUMBER(S)
REPRESENTATIVE
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
I certify that the statements made by me on this form are true, complete and
correct to the best of my knowledge and belief, and are made in good faith. I
acknowledge I have read, understood and complied with the Confidential
Information and Securities Trading Policy.
-----------------------------------------------------------------------------
Date: Printed Name:
-----------------------------------------------------------------------------
Signature:
-----------------------------------------------------------------------------
40
