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[Fortis Logo] FORTIS SERIES FUND, INC. PROSPECTUS DATED
(A series fund with three available May 1, 1995
MAILING ADDRESS: series, each with different goals and STREET ADDRESS:
P.O. BOX 64582 investment policies) 500 BIELENBERG
ST. PAUL DRIVE
MINNESOTA 55164 WOODBURY
MINNESOTA 55125
Fortis Series Fund, Inc. ("Fortis Series") is an open-end management investment
company (commonly known as a "mutual fund") that is intended to provide a range
of investment alternatives through its separate series (the "Series"), each of
which is, for investment purposes, in effect a separate fund with its own
separate goals and investment policies. All of the Series are diversified series
of Fortis Series.
Shares of Fortis Series are currently sold to separate accounts (the "Separate
Accounts") of Fortis Benefits Insurance Company ("Fortis Benefits") and First
Fortis Life Insurance Company ("First Fortis"), which are the funding vehicles
for benefits under variable life insurance policies (the "Policies") and
variable annuity contracts (the "Annuities") (collectively, the "Contracts")
issued by Fortis Benefits and First Fortis. The Separate Accounts invest in
shares of Fortis Series through subaccounts that correspond to the different
Series. The Separate Accounts will redeem shares of Fortis Series to the extent
necessary to provide benefits under the Contracts or for such other purposes as
may be consistent with the Contracts.
The investment objectives of the Series, which can be changed at any time
without the approval of Contract owners, are as follows:
- - The objectives of the "Money Market Series" are high levels of capital
stability and liquidity and, to the extent consistent with these primary
objectives, a high level of current income. Money Market Series will invest in
a diversified portfolio of investment grade bonds and other debt securities.
AN INVESTMENT IN MONEY MARKET SERIES IS NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT.
- - The primary objective of the "Growth Stock Series" is short and long-term
capital appreciation. Current income through the receipt of interest and
dividends will merely be incidental to the efforts of Growth Stock Series in
pursuing its primary objective. Growth Stock Series will seek to meet these
objectives by investing primarily in common stocks and securities convertible
into common stocks.
- - The primary objective of the "Global Growth Series" is long-term capital
appreciation, which it seeks primarily by investing in a global portfolio of
equity securities, allocated among diverse international markets. Current
income through the receipt of income such as interest or dividends from
investments is a secondary objective.
This Prospectus concisely sets forth the information a prospective investor
should know about Fortis Series before investing. Investors should retain this
Prospectus for future reference. Fortis Series has filed a Statement of
Additional Information (also dated May 1, 1995) with the Securities and Exchange
Commission. The Statement of Additional Information is available free of charge
from Fortis Series at the above mailing address, and is incorporated by
reference into this Prospectus in accordance with the Commission's rules. SHARES
IN THE FORTIS SERIES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK; ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY; AND
INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
No broker-dealer, sales representative, or other person has been authorized to
give any information or to make any representations other than those contained
in this Prospectus, and if given or made, such information or representations
must not be relied upon as having been authorized by Fortis Benefits, First
Fortis, Fortis Series, or Fortis Investors, Inc. ("Investors"). This Prospectus
does not constitute an offer or solicitation by anyone in any state in which
such offer or solicitation is not authorized, or in which the person making such
offer or solicitation is not qualified to do so, or to any person to whom it is
unlawful to make such offer or solicitation.
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TABLE OF CONTENTS
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Financial Highlights.............................. 2
Organization and Classification................... 3
The Separate Accounts and the Contracts........... 3
Investment Objectives and Policies................ 3
- Money Market Series......................... 3
- Growth Stock Series......................... 4
- Global Growth Series........................ 4
- Investment Policies and Restrictions
Applicable to More Than One Series........ 7
Management........................................ 8
- Board of Directors.......................... 8
- The Investment Adviser/Transfer
Agent/Dividend Agent........................ 8
- Expenses and Allocations Among Series....... 9
- Brokerage Allocation........................ 9
- Periodic Reports............................ 9
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Capital Stock..................................... 9
- Voting Privileges........................... 9
Dividends and Capital Gains Distributions......... 9
Taxation.......................................... 9
Purchase and Redemption of Fortis Series Shares... 9
- Generally................................... 9
- Offering Price.............................. 9
- Transfers Among Subaccounts................. 10
- The Underwriter............................. 10
- Redemption.................................. 10
Appendix.......................................... 10
</TABLE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
The information below has been derived from audited financial statements, and
should be read in conjunction with the financial statements of Fortis Series
found in its 1994 Annual Report to Shareholders. The selected per share
historical data for each of the Series is presented based upon average shares
outstanding. Total return figures do not reflect charges pursuant to the terms
of the variable life insurance policies and variable annuity contracts funded by
separate accounts that invest in the Series shares.
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YEAR ENDED DECEMBER 31,
MONEY MARKET SERIES 1994 1993 1992 1991 1990 1989 1988 1987 1986*
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period..... $10.23 $10.21 $10.15 $10.19 $9.9 $9.65 $9.98 $10.09 $10.00
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Operations:
Investment income -- net.... .41 .28 .36 .62 .78 .77 .76 .70 .09
Net realized and unrealized gains
(losses) on investments............... (.01) .02 .06 (.02) .28 .27 (.29) (.07) --
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Total from operations.................... .40 .30 .42 .60 1.06 1.04 .47 .63 .09
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Distribution to shareholders:
From investment income -- net.......... -- (.28) (.36) (.64) (.79) (.77) (.80) (.74) --
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Net asset value, end of period........... $10.63 $10.23 $10.21 $10.15 $10.19 $9.92 $9.65 $9.98 $10.09
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Total Return(@).......................... 3.92% 2.77% 3.36% 5.91% 7.87% 9.42% 6.78% 5.80% .90%
Net assets end of period (000s omitted).. $44,833 $28,682 $27,528 $10,737 $8,897 $2,868 $1,939 $2,832 $2,119
Ratio of expenses to average daily net
assets.................................. .40% .44% .46% .55% .60% .60% .60% .60% .60%**
Ratio of net investment income to
average daily net assets................ 3.96% 2.74% 3.51% 5.74% 7.75% 8.03% 7.71% 6.92% 4.98%**
Portfolio turnover rate.................. N/A*** N/A*** N/A*** N/A*** 58% 19% 79% 72% --
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<FN>
***Pursuant to Rule 2a-7 under the Investment Company Act of 1940, under which
the Money Market Series qualified on May 1, 1991, the portfolio turnover rate
is not applicable.
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YEAR ENDED DECEMBER 31,
GROWTH STOCK SERIES 1994 1993 1992 1991 1990 1989 1988 1987 1986*
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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Net asset value, beginning of period.... $22.92 $21.15 $20.68 $13.57 $14.26 $10.5 $10.42 $9.53 $10.00
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Operations:
Investment income -- net.............. .18 .09 .18 .22 .38 .26 .29 .20 .02
Net realized and unrealized gains
(losses) on investments.............. (.81) 1.77 .47 7.11 (.69) 3.67 .16 .92 (.49)
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Total from operations................... (.63) 1.86 .65 7.33 (.31) 3.93 .45 1.12 (.47)
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Distribution to shareholders:
From investment income -- net......... (.18) (.09) (.18) (.22) (.38) (.26) (.28) (.21) --
From net realized gains............... -- -- -- -- -- -- -- (.02) --
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Total distributions to shareholders..... (.18) (.09) (.18) (.22) (.38) (.26) (.28) (.23) --
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Net asset value, end of period.......... $22.11 $22.92 $21.15 $20.68 $13.57 $14.26 $10.59 $10.42 $9.53
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Total Return(@)......................... (2.82%) 8.78% 2.94% 53.50% (3.10)% 36.46% 4.49% 11.31% (4.70)%
Net assets end of period (000s
omitted)............................... $377,483 $304,293 $188,172 $100,690 $25,623 $8,632 $3,023 $2,914 $1,716
Ratio of expenses to average daily net
assets................................. .68% .69% .76% .81% 1.01% 1.00% 1.00% 1.00% 1.00%**
Ratio of net investment income to
average daily net assets............... .81% .46% .92% 1.28% 2.72% 2.03% 2.76% 1.79% 1.44%**
Portfolio turnover rate................. 19% 26% 24% 31% 50% 40% 85% 64% 4%
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*Period from October 27, 1986 to December 31, 1986.
**Annualized
@These are the Series total returns during the period, including reinvestment
of all dividend and capital gains distributions.
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YEAR ENDED DECEMBER 31,
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GLOBAL GROWTH SERIES 1994 1993 1992*
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Net asset value, beginning of period................................................. $12.77 $10.86 $9.82
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Operations:
Investment income -- net........................................................... .10 .06 .05
Net realized and unrealized gains (losses) on investments.......................... (.46) 1.91 1.04
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Total from operations............................................................ (.36) 1.97 1.09
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Distribution to shareholders:
From investment income -- net...................................................... (.10) (.06) (.05)
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Net asset value, end of period....................................................... $12.31 $12.77 $10.86
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Total Return(@)...................................................................... (2.98)% 17.92% 10.88%
Net assets end of period (000s omitted).............................................. $144,647 $75,882 $11,091
Ratio of expenses to average daily net assets........................................ .81% 1.02% 1.22%**
Ratio of net investment income to average daily net assets........................... .82% .53% .73%**
Portfolio turnover rate.............................................................. 20% 19% 21%
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<FN>
*For the Period May 1, 1992 (commencement of operations) to December 31, 1992.
The Series' inception was April 13, 1992, when it was initially capitalized.
However, the Series' shares did not become effectively registered under the
Securities Act of 1933 until May 1, 1992. Supplementary information is not
presented for the period from April 13, 1992, through May 1, 1992, as the
Series' shares were not registered during that period.
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**Annualized.
@These are the Series total returns during the period, including reinvestment
of all dividend and capital gains distributions.
</TABLE>
The Series may advertise their "cumulative total return" and "average annual
total return" and may compare such figures to recognized indices. Money Market
Series may advertise its "yield" and "effective yield." Any advertisement of
Series performance will be accompanied by performance of the Separate Account
being advertised. (See "The Separate Accounts and the Contracts".) Fortis Series
may advertise its relative performance as compiled by outside organizations such
as Lipper Analytical or Wiesenberger, or refer to publications which have
mentioned Fortis Series, Fortis Advisers, Inc. ("Advisers"), or their personnel,
and also may advertise other performance items as set forth in the Statement of
Additional Information. The performance discussion required by the Securities
and Exchange Commission is found in Fortis Series' Annual Report to Shareholders
and will be made available without charge upon request.
ORGANIZATION AND CLASSIFICATION
Fortis Series was incorporated under Minnesota law in 1986, and is registered
with the Securities and Exchange Commission under the Investment Company Act of
1940 (the "1940 Act") as an "open-end diversified management investment
company". Each Series is, for investment purposes, in effect a separate
investment fund. A separate series of capital stock is issued for each Series.
Each share of capital stock issued with respect to a Series has a pro-rata
interest in the assets of that Series and has no interest in the assets of any
other Series. Each Series bears its own liabilities and also its proportionate
share of the general liabilities of Fortis Series. In other respects, Fortis
Series is treated as one entity.
THE SEPARATE ACCOUNTS AND THE CONTRACTS
Shares in Fortis Series are currently sold to separate accounts of Fortis
Benefits and First Fortis which fund benefits under variable life insurance
policies and variable annuity contracts issued by Fortis Benefits and First
Fortis. Each Contract owner allocates Contract value among the subaccounts of
the Separate Accounts, which in turn invest in the corresponding Series of
Fortis Series. The rights of the Separate Accounts as shareholders should be
distinguished from the rights of a Contract owner, which are described in the
Contract. The term "shareholder" or "shareholders" in this Prospectus refers to
Fortis Benefits, First Fortis, any of their affiliates, or any other insurance
company that owns Fortis Series shares. "Contract owner" means the owner,
annuitant, or beneficiary that is entitled to exercise the rights and privileges
under a Contract.
INVESTMENT OBJECTIVES AND POLICIES
Each Series has different investment objectives which it pursues through
different investment policies as described below. The investment objectives of
the Series and, except as otherwise noted, the policies by which the Series seek
to achieve their investment objectives, may be changed without the approval of
shareholders. While no such change is contemplated, such a change could result
in a Series' objectives differing from those deemed appropriate by an investor
at the time of investment.
Through careful selection, broad diversification and constant supervision,
Fortis Series' management aims to limit and counteract various types of risk
that are inherent in all securities, and advance the value of the Series'
assets. There is risk in all investments, and fulfillment of the Series'
objectives cannot be assured.
MONEY MARKET SERIES
The objectives of Money Market Series are high levels of capital stability and
liquidity and, to the extent consistent with these primary objectives, a high
level of current income. Money Market Series intends to achieve these objectives
through investment in a diversified portfolio of investment grade bonds and
other debt securities which management considers to be of similar quality.
Money Market Series is somewhat different from a "traditional" money market
mutual fund in that it does not attempt to maintain its net asset value at any
set price. It has a nonfundamental investment policy requiring that all of its
assets be invested in debt securities maturing in 13 months or less, except
United States "Government Securities" as defined in the 1940 Act, whose
portfolio maturities cannot be more than 25 months from the date of acquisition.
Money Market Series will maintain a dollar weighted average portfolio maturity
of 90 days or less.
Pursuant to Rule 2a-7 under the 1940 Act, Money Market Series will not invest
more than 5% of its total assets in: (1) securities of any one issuer (other
than cash or United States "Government Securities" as defined in the 1940 Act),
except that the Series may at any one time make a single investment of more than
5% of its assets in securities of an issuer in the highest rating category for
up to three business days (subject to the diversification requirements of the
1940 Act, as set forth under "Investment Policies and Restrictions Applicable to
More Than One Series"); or (2) securities rated in the second highest rating
category--with investments in the second highest category further limited with
respect to any particular issuer to the greater of 1% of total assets or
$1,000,000. Certain of the provisions of Rule 2a-7 are more restrictive than
Money Market Series' investment policies and restrictions described below; Money
Market Series' investments will be limited to the more restrictive provisions of
Rule 2a-7.
Money Market Series pursues its objectives by investing exclusively in the
following:
1. Obligations of other domestic issuers (which include, for example,
commercial paper and other debt obligations) which meet the quality and other
standards of Rule 2a-7 (or successors thereto) under the 1940 Act.
3
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2. Securities of, or guaranteed by, the United States Government, its
agencies or instrumentalities. For a discussion of this type of security and the
federal income tax diversification requirements applicable to investments in
this type of security, see "U.S. Government Securities Series," above.
3. Securities (payable in U.S. dollars) of, or guaranteed by, the
government of Canada or a province of Canada or any instrumentality or political
subdivision thereof, such securities not to exceed 25% of Money Market Series'
total assets, and securities of foreign companies (which do not include domestic
branches of foreign banks and foreign branches of domestic banks), such
securities not to exceed 15% of Money Market Series' total assets. See "Global
Growth Series--Risk Factors" for a discussion of certain risks connected with
investing in foreign securities.
4. Obligations of: (a) domestic or foreign banks having total assets
in excess of one billion dollars or of any branches of such banks, whether
domestic or foreign; or (b) in other foreign issuers; provided, that no more
than 49% of Money Market Series' total assets may be so invested in all such
securities. Such obligations of domestic and foreign banks may include, but are
not limited to, certificates of deposit, letters of credit, and bankers'
acceptances. For this purpose, "bank" includes commercial banks, savings banks
and savings and loan associations.
Overall, with respect to investments set forth in this paragraph and in
paragraph 3, above, Money Market Series may not invest more than 49% of the
value of its total assets collectively in: (i) securities of, or guaranteed by,
the government of Canada, a province of Canada, or any instrumentality or
political subdivision thereof; (ii) securities of foreign companies; and (iii)
securities of domestic branches of foreign banks and foreign branches of
domestic banks.
There are risks associated with investments in obligations of foreign branches
of domestic banks and domestic branches of foreign banks that do not accompany
investments in obligations of domestic banks generally. Domestic banks are
required to maintain specified levels of reserves, are limited in the amounts
they can loan to a single borrower, and are subject to other regulations
designed to promote financial soundness. Not all of such laws and regulations
apply to foreign branches of domestic banks. Money Market Series may also be
subject to additional investment risks from investing in the obligations of
foreign branches of domestic banks. Such risks include future political and
economic developments, the possible imposition of foreign withholding taxes on
interest income payable on securities, the possible seizure or nationalization
of foreign deposits, the possible establishment of exchange controls, or the
adoption of other foreign governmental restrictions which might adversely affect
the payment of principal and interest on such obligations. The obligations of
domestic branches of foreign banks may also be subject to other risks, including
political and economic developments in the country in which the foreign bank has
its main office. There may be less publicly available information about a
domestic branch of a foreign bank than about a domestic bank. In addition,
obligations of foreign branches of domestic banks and domestic branches of
foreign banks are not insured by the Federal Deposit Insurance Corporation.
5. Extendible notes that provide for an optional maturity date, at
Money Market Series' option, of 13 months or less from the date of acquisition.
Extendible notes issued with maturity dates in excess of 13 months from the date
of issuance that provide for optional maturity dates, at the holder's option, of
13 months or less shall be deemed by Money Market Series to have been issued
with the shorter optional maturity dates. Such extendible notes must meet the
quality and other standards of Rule 2a-7 (or successors thereto) and may not
account for greater than 25% of the total assets of Money Market Series.
6. Repurchase agreements in connection with obligations which are
suitable for investment under the categories set forth above.
7. Money Market Series may purchase obligations other than those
listed above if the obligation is accompanied by a guarantee of principal and
interest, provided that the guarantee is that of a bank or corporation whose
certificates of deposit or commercial paper may otherwise be purchased by Money
Market Series.
SHORT-TERM TRADING. Money Market Series intends to use short-term trading of its
securities as a means of managing its portfolios to achieve its investment
objectives. As used herein, "short-term trading" means selling securities held
for a relatively brief period of time, usually less than three months.
Short-term trading will be used by Money Market Series primarily in two
situations:
(a) MARKET DEVELOPMENTS. A security may be sold to avoid depreciation in
what Advisers anticipates will be a market decline (a rise in interest
rates), or a security may be purchased in anticipation of a market rise (a
decline in interest rates) and later sold; and
(b) YIELD DISPARITIES. A security may be sold and another security of
comparable quality purchased at approximately the same time, in order to
take advantage of what Advisers believes is a temporary disparity in the
normal yield relationship between the two securities (a yield disparity).
Short-term trading techniques will be used principally in connection with higher
quality, nonconvertible debt securities, which are often better suited for
short-term trading because the market in such securities is generally of greater
depth and offers greater liquidity than the market in debt securities of lower
quality.
Money Market Series will engage in short-term trading if it believes the
transactions, net of costs (including commission, if any), will result in
improving the appreciation potential or income of its investment portfolio.
Whether any improvement will be realized by short-term trading will depend upon
the ability of Advisers to evaluate particular securities and anticipate
relevant market factors, including interest rate trends and variations from such
trends. Short-term trading such as that contemplated by the Series places a
premium upon the ability of Advisers to obtain relevant information, to evaluate
it promptly, and to take advantage of its evaluations by completing transactions
on a favorable basis. To qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, less than 30% of the Series' gross
income (on an annual basis) can be derived from the sale or other disposition of
securities held for less than three months. The Series will not engage in
short-term trading if it would result in violation of this provision.
GROWTH STOCK SERIES
The primary investment objective of Growth Stock Series is short and long-term
capital appreciation. Current income through the receipt of interest or
dividends from investments will merely be incidental to the efforts of Growth
Stock Series in pursuing its primary objective. Growth Stock Series will
generally invest in companies representing a diversified cross section of
American industry. The Growth Stock Series will invest in both large and small
companies and both new and established companies.
In seeking to attain its investment objective, Growth Stock Series will invest
primarily in common stocks or securities convertible into common stocks.
Occasionally, however, limited amounts may be invested in other types of
securities (such as nonconvertible preferred and debt securities). In periods
when a more defensive position is deemed warranted, Growth Stock Series may
invest in high grade preferred stocks, bonds and other fixed income securities
(whether or not convertible into or carrying rights to purchase common stock) or
retain cash, all without limitation. Growth Stock Series may invest in
repurchase agreements and in both listed and unlisted securities.
Growth Stock Series may also invest up to 10% of its total assets (at the time
of investment) in foreign securities. Investing in foreign securities may result
in greater risk than that incurred in investing in domestic securities. For a
discussion of certain considerations of investing in foreign securities see
"Global Growth Series--Risk Factors."
GLOBAL GROWTH SERIES
The primary investment objective of the Global Growth Series is long-term
capital appreciation. Current income through the receipt of income such as
4
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interest or dividends from investments is a secondary objective. The Global
Growth Series seeks its objectives primarily by investing in a global portfolio
of equity securities, allocated among diverse international markets. The Global
Growth Series is designed for investors who wish to accept the risks entailed in
such investments, which are different from those associated with a portfolio
consisting entirely of U.S. securities. See "Risk Factors."
Although the Global Growth Series is not required to maintain any particular
proportion of stocks, bonds, or other securities in its portfolio, the Global
Growth Series, in view of its investment objectives, currently expects to invest
its assets primarily in common stocks of U.S. and non-U.S. issuers. The Global
Growth Series invests at least 65% of its equity securities in established
growth companies which have achieved a record of operating earnings over the
past five-year period. Such companies would usually be located in the United
States, Canada, the United Kingdom, Japan, Australia, and other Western European
nations. These companies will also have paid or have the ability to pay a
dividend. Established growth companies typically have less sensitivity to
general economic trends, tend to generate above average returns on invested
capital, and have stronger leadership positions in their respective industries.
When selecting securities of non-U.S. issuers, Advisers considers additional
factors related to the country of the non-U.S. issuer, including foreign
currency exchange, the political stability of the country of such non-U.S.
issuer, foreign regulations, and settlement practices. See "Risk Factors."
In addition, the Global Growth Series may invest up to 35% of its equity
securities in U.S. and non-U.S. emerging growth companies and in global emerging
markets. Emerging growth companies generally have annual gross revenues ranging
from $10 million to $1 billion, would be expected to show earnings growth over
time that is well above the growth rate of the overall economy and the rate of
inflation, and would have products, management, and market opportunities which
are usually necessary to become more widely recognized as growth companies. The
Global Growth Series has no minimum size requirements for the emerging growth
companies in which it will invest. As used in this Prospectus, global emerging
markets are countries categorized as emerging markets by the International
Finance Corporation, the World Bank's private sector division. Such countries
may include but are not limited to Singapore, Indonesia, China, India, and
certain Latin American countries such as Mexico, Argentina, Chile, and Brazil.
Such markets tend to be in the less economically developed regions of the world.
General characteristics of emerging market countries also include lower degrees
of political stability, a high demand for capital investment, a high dependence
on export markets for their major industries, a need to develop basic economic
infrastructures, and rapid economic growth. Advisers believes that investments
in equity securities in emerging growth companies and in global emerging markets
offer the opportunity for significant long-term investment returns. The Global
Growth Series may invest in any kind of equity security including common stocks,
preferred stocks, and warrants. The above investments involve certain risks. See
"Risk Factors."
For investment purposes, an issuer is typically considered as domiciled in a
particular country if it is incorporated under the laws of that country, at
least 50% of the value of its assets are located in that country, and it derives
at least 50% of its income from operations or sales in that country. For issuers
which do not meet this criteria, Advisers will consider where an issuer has its
principal activities and interests, taking into account such factors as the
location of the issuer's assets, personnel, sales, and earnings in determining
the country of an issuer.
The Global Growth Series may, however, invest substantially or primarily in
investment grade debt securities of U.S. and non-U.S. issuers when the total
return available from investments in such securities may equal or exceed the
total return available from investments in equity securities. The Global Growth
Series may invest up to substantially all of its assets in high quality debt
securities of U.S. and non-U.S. issuers when the Global Growth Series is
temporarily in a defensive position. "High quality" debt securities are
securities rated within one of the two highest ratings categories of Moody's
(Aaa and Aa) or of S&P (AAA and AA), or comparably rated by another nationally
recognized rating agency, or, if unrated, determined to be of comparable quality
by Advisers. To enable the Global Growth Series to respond to general economic
changes and market conditions around the world, the Global Growth Series is
authorized to invest up to 100% of its assets in either equity securities or in
debt securities.
The debt obligations in which the Global Growth Series may invest include a
variety of government bonds and corporate debt obligations. Government bonds the
Global Growth Series may purchase include debt obligations issued or guaranteed
by the United States or foreign governments (including foreign states,
provinces, or municipalities) or their agencies, authorities, or
instrumentalities and also may include debt obligations issued by supranational
entities, which entities are organized or supported by several national
governments, such as the World Bank and the Asian Development Bank. Other debt
obligations held by the Global Growth Series may include corporate bonds of U.S.
and non-U.S. issuers and debt obligations convertible into equity securities or
having attached warrants or rights to purchase equity securities.
The Global Growth Series expects that a large portion of its debt investments
will be "high quality" (as defined above) government or corporate bonds. The
Global Growth Series may retain a portfolio security whose rating has changed if
the security otherwise meets the Series' investment objectives and investment
criteria, provided that no more than 5% of the Global Growth Series' net assets
may be invested in a debt security rated lower than Baa or BBB. A description of
the Moody's and S&P ratings is included in the Appendix.
Global Growth Series invests its net assets in issues of not less than five
different countries (four if less than 80% invested in foreign securities; three
if less than 60%; two if less than 40%; and one if less than 20%). Issues of any
one country other than the United States will represent no more than 20% of net
assets, provided that an additional 15% of net assets may be invested in issuers
located in any one of the following countries: Australia, Canada, France, Japan,
the United Kingdom, or Germany. The Global Growth Series may purchase securities
that are issued by the government or a corporation or financial institution of
one nation but denominated in the currency of another nation (or a multinational
currency unit).
The Global Growth Series may hold cash (U.S. dollars, foreign currencies, or
multinational currency units) and/or invest any portion or all of its assets in
high quality money market instruments as temporary defensive strategies, pending
investment of proceeds from new sales of Global Growth Series shares or to meet
ordinary daily cash needs.
For temporary defensive reasons, such as during times of international political
or economic uncertainty, most or all of the Global Growth Series' investments
may be made in the United States and denominated in U.S. dollars.
OPTIONS, FUTURES, AND CURRENCY STRATEGIES. To attempt to hedge against adverse
movements in exchange rates between currencies, the Global Growth Series may
enter into forward currency contracts for the purchase or sale of a specified
currency at a specified future date. Such contracts may involve the purchase or
sale of a foreign currency against the U.S. dollar, or may involve two foreign
currencies. Although forward contracts will be used primarily to protect the
Global Growth Series from adverse currency movements, they also involve the risk
that anticipated currency movements will not be accurately predicted. The Global
Growth Series also may write covered call options and purchase put and call
options on currencies to hedge against movements in exchange rates.
The Global Growth Series may write covered call options and purchase put and
call options on equity and debt securities to hedge against the risk of
fluctuations in the prices of securities held by the Global Growth Series or
which Advisers intends to include in the Global Growth Series. The Global Growth
Series may use stock index futures contracts and options thereon to hedge all or
part of the equity portion of its portfolio against negative stock market
movements. Similarly, the Global Growth Series may use interest rate futures
contracts and options thereon to hedge the debt portion of its portfolio against
changes in the general level of interest rates.
The Global Growth Series may write only "covered" call options. An option
written on a security or currency is "covered" when, so long as the Global
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Growth Series is obligated under the option, it owns the underlying security or
currency. The Global Growth Series will "cover" options on futures contracts it
writes by maintaining in a segregated account either marketable securities
which, in Advisers' judgment, correlate to the underlying futures contract or an
amount of cash, U.S. government securities, or other liquid, high quality debt
securities equal in value to the amount the Global Growth Series would be
required to pay were the option exercised.
The Global Growth Series has adopted two percentage restrictions on the use of
options, futures, and forward contracts. The first restriction is that the
Global Growth Series will not enter into any options, futures, or forward
contract transactions if immediately thereafter the amount of premiums paid for
all options, initial margin deposits on all futures contracts and/or options on
futures contracts, and collateral deposited with respect to forward contracts
held by or entered into by the Global Growth Series would exceed 5% of the value
of the total assets of Global Growth Series. The second restriction is that the
aggregate value of the Global Growth Series' assets covering, subject to, or
committed to all options, futures, and forward contracts will not exceed 20% of
the value of the total assets of the Global Growth Series. These two
restrictions do not apply to securities purchased on a when-issued, delayed
delivery, or forward commitment basis as described under "Delayed Delivery
Transactions." However, the Global Growth Series intends to limit its investment
in futures during the coming year so that the aggregate value of the Global
Growth Series assets subject to futures contracts will not exceed 5% of the
value of its net assets. In addition, investments in options are further
restricted by a nonfundamental investment restriction that prohibits the Global
Growth Series from investing more than an aggregate of 10% of the value of its
total assets in: (a) restricted securities (both debt and equity) or in equity
securities of any issuer which are not readily marketable; (b) repurchase
agreements with a maturity of more than seven days; and (c) over-the-counter
option and futures contracts.
DEPOSITARY RECEIPTS. The Global Growth Series may hold equity securities of
foreign issuers in the form of American Depositary Receipts ("ADRs") or other
securities convertible into securities of eligible European or Far Eastern
issuers. These securities may not necessarily be denominated in the same
currency as the securities for which they may be exchanged. ADRs are receipts
typically issued by an American bank or trust company which evidence ownership
of underlying securities issued by a foreign corporation. For purposes of the
Global Growth Series' investment policies, investments in ADRs will be deemed to
be investments in the equity securities representing securities of foreign
issuers into which they may be converted.
RISK FACTORS. The Global Growth Series' net asset value will fluctuate,
reflecting fluctuations in the market value of its portfolio positions.
Foreign investing entails certain risks. The securities of non-U.S. issuers
generally will not be registered with, nor the issuers thereof be subject to,
the reporting requirements of the U.S. Securities and Exchange Commission.
Accordingly, there may be less publicly available information about foreign
securities and issuers than is available about domestic securities and issuers.
Foreign companies are not subject to uniform accounting, auditing, and financial
reporting standards, practices, and requirements comparable to those applicable
to domestic companies. Securities of some foreign companies are less liquid and
their prices may be more volatile than securities of comparable domestic
companies. Settlement periods for foreign securities, which are sometimes longer
than those for securities of U.S. issuers, may affect portfolio liquidity. These
different settlement practices may cause missed purchasing opportunities and/or
the loss of interest on money market and debt investments pending further equity
or long-term debt investments.
In addition, with respect to some foreign countries, there is the possibility of
expropriation or confiscatory taxation, limitations on the removal of funds or
other assets of the Global Growth Series, political, or social instability, or
diplomatic or economic developments which could affect the Global Growth Series'
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the United States economy in such respects
as growth of gross national product, rate of inflation, rate of savings and
capital reinvestment, resource self-sufficiency and balance of payments
positions. It is anticipated that substantially all of the equities purchased by
the Global Growth Series will be listed on foreign exchanges. Trading volume on
foreign and emerging market stock exchanges is substantially less than that on
the New York Stock Exchange. They also have further risks due to permanent or
temporary termination of trading and greater spreads between bid and asked
prices for securities in such markets. In addition, there is generally less
government supervision and regulation of foreign stock exchanges. Furthermore,
stock markets in emerging markets, such as nations in the Far East, while
offering opportunities for substantial returns, can be more volatile during
periods of investment uncertainty than established major exchanges. Shares of
Global Growth Series, therefore, are subject to greater fluctuation in value
than shares of a conservative equity fund or of a growth fund which invests
entirely in more established markets. The Global Growth Series may incur
additional costs because of generally higher foreign brokerage commissions and
the additional custodial costs associated with maintaining securities. Advisers
will rely on its worldwide financial and investment experience to attempt to
limit these risks.
Investing in both U.S. and non-U.S. emerging growth companies involves certain
special risks. The nature of investing in both U.S. and non-U.S. emerging growth
companies involves greater risk than is customarily associated with investments
in more established companies. Emerging growth companies may have limited
product lines, markets, or financial resources, and they may be dependent on a
limited management group. The securities of emerging growth companies may have
limited market stability and may be subject to more abrupt or erratic market
movements than securities of larger, more established companies or the market
averages in general. Shares of Global Growth Series, therefore, are subject to
greater fluctuation in value than shares of a conservative equity fund or of a
growth fund which invests entirely in more established growth stocks.
The risks of foreign investing are of greater concern in the case of investments
in emerging markets which may exhibit greater price volatility and have less
liquidity. Further, the economies of emerging market countries generally are
heavily dependent upon international trade and, accordingly, have been and may
continue to be adversely affected by trade barriers, managed adjustments in
relative currency values, and other protectionist measures imposed or negotiated
by the countries with which they trade. These emerging market economies also
have been and may continue to be adversely affected by economic conditions in
the countries with which they trade.
Since the Global Growth Series may invest substantially in securities
denominated in currencies other than the U.S. dollar, and since the Global
Growth Series may hold foreign currencies, the Global Growth Series may be
affected favorably or unfavorably by exchange control regulations or changes in
the exchange rates between such currencies and the U.S. dollar. Changes in
currency exchange rates will influence the value of dividends and interest
earned by the Global Growth Series and gains and losses realized by the Global
Growth Series. Exchange rates are determined by the forces of supply and demand
in the foreign exchange markets. These forces are affected by the international
balance of payments and other economic and financial conditions, government
intervention, speculation, and other factors. In addition, the Global Growth
Series may incur costs associated with currency hedging and the conversion of
foreign currency into U.S. dollars and may be adversely affected by restriction
on the conversion or transfer of foreign currency.
Also, the Global Growth Series' use of forward currency contracts and options
and futures strategies would involve certain additional investment risks and
transaction costs. These risks include: dependence on Advisers' ability to
predict movements in the prices of individual securities, fluctuations in the
general securities markets and movements in interest rates and currency markets;
imperfect correlation between movements in the price of currency, options,
futures contracts, or options thereon and movements in the price of the currency
or security hedged or used for cover; the fact that skills and techniques needed
to trade options, futures contracts and
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options thereon or to use forward currency contracts are different from those
needed to select the securities in which the Global Growth Series invests; lack
of assurance that a liquid secondary market will exist for any particular
option, futures contract or option thereon at any particular time; and the
possible need to defer closing out certain options, futures contracts and
options thereon in order to continue to qualify for the beneficial tax treatment
afforded "regulated investment companies" under the Internal Revenue Code. See
"Taxation."
ZERO COUPON OBLIGATIONS. The Global Growth Series may invest in zero coupon
obligations of the government and corporate issuers, including rights to
"stripped" coupon and principal payments. Certain obligations are "stripped" of
their coupons, and the rights to receive each coupon payment and the principal
payment are sold as separate securities. Once separated, each coupon as well as
the principal amount represents a different single-payment claim due from the
issuer of the security. Each single-payment claim (coupon or principal) is
equivalent to a zero coupon bond. A zero coupon security pays no interest to its
holder during its life, and its value consists of the difference between its
face value at maturity (the coupon or principal amount), if held to maturity, or
its market price on the date of sale, if sold prior to maturity, and its
acquisition price (the discounted "present value" of the payment to be
received).
Certain zero coupon obligations represent direct obligations of the issuer of
the "stripped" coupon and principal payments. Other zero coupon obligations are
securities issued by financial institutions which constitute a proportionate
ownership of an underlying pool of stripped coupon or principal payments. The
Global Growth Series may invest in either type of zero coupon obligation. The
investment policies and restrictions applicable to corporate and government
securities in Global Growth Series shall apply equally to its investments in
zero coupon securities (including, for example, minimum corporate bond ratings).
DELAYED DELIVERY TRANSACTIONS. Global Growth Series may purchase securities on a
"when-issued" or delayed delivery basis and purchase or sell securities on a
"forward commitment" basis. When such transactions are negotiated, the price is
fixed at the time the commitment is made, but delivery and payment for the
securities take place at a later date. Normally, the settlement date occurs
within two months after the transaction, but delayed settlements beyond two
months may be negotiated. At the time Global Growth Series enters into a
transaction on a when-issued or forward commitment basis, a segregated account
consisting of cash, U.S. Government securities or liquid high-grade debt
securities equal to the value of the when-issued or forward commitment
securities will be established and maintained with the custodian and will be
marked to the market daily. During the period between a commitment and
settlement, no payment is made for the securities and, thus, no interest accrues
to the purchaser from the transaction. If Global Growth Series disposes of the
right to acquire a when-issued security prior to its acquisition or disposes of
its right to deliver or receive against a forward commitment, it can incur a
gain or loss due to market fluctuation. The use of when-issued transactions and
forward commitments enables Global Growth Series to hedge against anticipated
changes in interest rates and prices. Global Growth Series may also enter into
such transactions to generate incremental income. In some instances, the
third-party seller of when-issued or forward commitment securities may determine
prior to the settlement date that it will be unable or unwilling to meet its
existing transaction commitments without borrowing securities. If advantageous
from a yield perspective, Global Growth Series may, in that event, agree to
resell its purchase commitment to the third-party seller at the current market
price on the date of sale and concurrently enter into another purchase
commitment for such securities at a later date. As an inducement for Global
Growth Series to "roll over" its purchase commitment, it may receive a
negotiated fee. The purchase of securities on a when-issued, delayed delivery,
or forward commitment basis exposes a Series to risk because the securities may
decrease in value prior to their delivery. Purchasing securities on a
when-issued, delayed delivery, or forward commitment basis involves the
additional risk that the return available in the market when the delivery takes
place will be higher than that obtained in the transaction itself. These risks
could result in increased volatility of a Series' net asset value to the extent
that the Series purchases securities on a when-issued, delayed delivery, or
forward commitment basis while remaining substantially fully invested. No more
than 20% of Global Growth Series' net assets may be invested in when-issued,
delayed delivery, or forward commitment transactions, and of such 20%, no more
than one-half (i.e., 10% of its net assets) may be invested in when-issued,
delayed delivery, or forward commitment transactions without the intention of
actually acquiring securities (i.e., dollar rolls).
SECURITIES LENDING. Global Growth Series is authorized to make loans of its
portfolio securities to broker-dealers or to other institutional investors. The
borrower must maintain with Global Growth Series' custodian collateral
consisting of cash, U.S. government securities, or other liquid, high-grade debt
securities equal to at least 100% of the value of the borrowed securities, plus
any accrued interest. Global Growth Series will receive any interest paid on the
loaned securities and a fee and/or a portion of the interest earned on the
collateral. Global Growth Series will limit its loans of portfolio securities to
an aggregate of 30% of the value of its total assets, measured at the time any
such loan is made.
The risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to firms deemed by Fortis
Advisers, Inc. ("Advisers") to be of good standing and will not be made unless,
in the judgment of Advisers, the consideration to be earned from such loans
would justify the risk.
INVESTMENT POLICIES AND RESTRICTIONS APPLICABLE TO MORE THAN ONE SERIES
REPURCHASE AGREEMENTS. Each of the Series may invest in repurchase agreements.
RESTRICTED OR ILLIQUID SECURITIES. A policy of Money Market Series and Growth
Stock Series which may not be changed without the approval of the shareholders,
is that each such Series may invest up to 5% of the value of its total assets
(at the time of investment) in securities which it might not be free to sell to
the public without registration of such securities under the Securities Act of
1933 (excluding Rule 144A securities). However, this policy is further
restricted by a policy--which could be changed without shareholder
approval--which prohibits more than an aggregate of 10% of each such Series'
assets from being invested in: (a) restricted securities (both debt and equity)
or in equity securities of any issuer which are not readily marketable; and (b)
companies which have been in business for less than three years.
Global Growth Series may invest up to 10% of the value of its total assets (at
the time of investment) in securities which are not registered under the
applicable securities laws of the country in which such securities are traded
and for which no alternative market is readily available (excluding Rule 144A
securities). This policy is restricted by a further policy which could be
changed without shareholder approval--that prohibits more than an aggregate of
10% of Global Growth Series' assets from being invested in (a) restricted
securities (both debt and equity) or in equity securities of any issuer which
are not readily marketable, (b) repurchase agreements with a maturity of more
than seven days, and (c) over-the-counter option and futures contracts.
BORROWINGS. Each Series may borrow money from banks as a temporary measure to
facilitate redemptions.
As a policy which may not be changed without shareholder approval, however,
borrowings may not exceed 10% of the value of the total assets of Money Market
Series and Growth Stock Series. Global Growth Series' borrowings through banks
and "roll" transactions will not exceed 33 1/3% of its total assets. However, an
investment policy changeable without shareholder approval further restricts
Global Growth Series' borrowings to 10% of its total assets. No additional
investment securities may be purchased by a Series whose outstanding borrowings,
(including "roll" transactions in the case of Global Growth Series) exceed 5% of
the value of such Series' total assets. If market fluctuations in the value of
the portfolio holdings of Global Growth Series or other factors cause the ratio
of Global Growth
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Series' total assets to outstanding borrowings to fall below 300%, within three
days (excluding Sundays and holidays) of such event Global Growth Series may be
required to sell portfolio securities to restore the 300% asset coverage, even
though from an investment standpoint such sales might be disadvantageous.
Interest paid on borrowings will not be available for investment.
VARIABLE AMOUNT MASTER DEMAND NOTES. Each Series may invest in variable amount
master demand notes. These instruments are short-term, unsecured promissory
notes issued by corporations to finance short-term credit needs. They allow the
investment of fluctuating amounts by the Series at varying market rates of
interest pursuant to arrangements between the Series, as lender, and the
borrower. Variable amount master demand notes permit a series of short-term
borrowings under a single note. Both the lender and the borrower have the right
to reduce the amount of outstanding indebtedness at any time. Such notes provide
that the interest rate on the amount outstanding varies on a daily basis
depending upon a stated short-term interest rate barometer. Advisers will
monitor the creditworthiness of the borrower throughout the term of the variable
master demand note. It is not generally contemplated that such instruments will
be traded and there is no secondary market for the notes. Typically, agreements
relating to such notes provide that the lender shall not sell or otherwise
transfer the note without the borrower's consent. Thus, variable amount master
demand notes may under certain circumstances be deemed illiquid assets. However,
such notes will not be considered illiquid where the Series has a "same day
withdrawal option," i.e., where it has the unconditional right to demand and
receive payment in full of the principal amount of the amount then outstanding
together with interest to the date of payment.
MORTGAGE-RELATED SECURITIES. Each Series may invest in mortgage-related
securities. Mortgage-related securities are securities that, directly or
indirectly, represent a participation in (or are secured by and payable from)
mortgage loans on real property. Mortgage-related securities may represent the
right to receive both principal and interest payments on underlying mortgages or
may represent the right to receive varying proportions of such payments. One
type of mortgage-related security includes certificates which represent pools of
mortgage loans assembled for sale to investors by various governmental and
private organizations. Another type of mortgage-related security includes debt
securities which are secured, directly or indirectly, by mortgages on commercial
or residential real estate.
Investments in mortgage-related securities involve certain risks. In periods of
declining interest rates, prices of fixed income securities tend to rise.
However, during such periods, the rate of prepayment of mortgages underlying
mortgage-related securities tends to increase, with the result that such
prepayments must be reinvested at lower rates. In addition, the value of such
securities may fluctuate in response to the market's perception of the
creditworthiness of the issuers of mortgage-related securities owned by the
Series. The ability of the issuer of mortgage-related securities to reinvest
favorably in underlying mortgages may be limited by prevailing economic
conditions or by government regulation. Additionally, although mortgages and
mortgage-related securities are generally supported by some form of government
or private guarantee and/or insurance, there is no assurance that private
guarantors or insurers will be able to meet their obligations.
SHORT-TERM MONEY MARKET INSTRUMENTS. Each Series may at any time invest funds
awaiting investment or held as reserves for the purposes of satisfying
redemption requests, payment of dividends or making other distributions to
shareholders, in cash and short-term money market instruments. Short-term money
market instruments in which each Series may invest include (i) short-term U.S.
government securities and short-term obligations of foreign sovereign
governments and their agencies and instrumentalities, (ii) interest bearing
savings deposits on, and certificates of deposit and bankers' acceptances of,
United States and foreign banks, (iii) commercial paper of U.S. or foreign
issuers rated A-1 or higher by S&P or Prime-1 by Moody's or comparably rated by
another nationally recognized rating agency, or, if not rated, determined by a
Series sub-adviser to be of comparable quality and (iv) repurchase agreements
relating to the foregoing.
U.S. GOVERNMENT SECURITIES. Each Series may invest in U.S. government
securities, which include: (i) the following U.S. Treasury obligations: U.S.
Treasury bills (initial maturities of one year or less), U.S. Treasury notes
(initial maturities of one to 10 years), and U.S. Treasury bonds (generally
initial maturities of greater than 10 years), all of which are backed by the
full faith and credit of the United States; and (ii) obligations issued or
guaranteed by U.S. government agencies or instrumentalities, including
government guaranteed mortgage-related securities, some of which are backed by
the full faith and credit of the U.S. Treasury, e.g., direct pass-through
certificates of the Government National Mortgage Association; some of which are
supported by the right of the issuer to borrow from the U.S. government, e.g.,
obligations of Federal Home Loan Banks; and some of which are backed only by the
credit of the issuer itself, e.g., obligations of the Student Loan Marketing
Association. U.S. government securities are backed by the full faith and credit
of the U.S. government or guaranteed by the issuing agency or instrumentality
and, therefore, there is generally considered to be no risk as to the issuer's
capacity to pay interest and repay principal. Nevertheless, due to fluctuations
in interest rates, there is no guarantee as to the market value of U.S.
government securities. See "Investment Objectives and Policies" in the Statement
of Additional Information for a further description of obligations issued or
guaranteed by U.S. government agencies or instrumentalities.
The insurance laws and regulations of various states as well as the Code and
regulations thereunder may, from time to time, impose additional restrictions on
the investments of the various Series.
MANAGEMENT
BOARD OF DIRECTORS
Under Minnesota law, the Board of Directors of Fortis Series (the "Board of
Directors") has overall responsibility for managing Fortis Series in good faith,
in a manner reasonably believed to be in the best interests of Fortis Series,
and with the care an ordinarily prudent person would exercise in similar
circumstances. However, this management may be delegated. The Articles of
Incorporation of Fortis Series limit the liability of directors to the fullest
extent permitted by law.
THE INVESTMENT ADVISER/TRANSFER AGENT/DIVIDEND AGENT
Fortis Advisers, Inc. ("Advisers") is the investment adviser, transfer agent,
and dividend agent for each Series. Advisers has been managing investment
company portfolios since 1949, and is indirectly owned 50% by Fortis AMEV and
50% by Fortis AG, diversified financial services companies. In addition to
providing investment advice, Advisers is responsible for management of Fortis
Series' business affairs, subject to the overall authority of the Board of
Directors. Advisers' address is P.O. Box 64284, St. Paul, MN 55164.
Money Market Series has been managed by Dennis M. Ott and Diane M. Gotham since
1986 and 1994, respectively.
Growth Stock Series has been managed by Stephen M. Poling, James S. Byrd, and
Keith R. Thomson since 1986, 1991, and 1988, respectively.
Global Growth Series has been managed by Stephen M. Poling and James S. Byrd
since 1992.
Mssrs. Poling, Ott, and Thomson have managed portfolios for Advisers for at
least the past five years. Prior to 1991, Mr. Byrd was Senior Vice President of
Templeton Investment Counsel, Inc., Ft. Lauderdale, Florida. Prior to June,
1994, Ms. Gotham was Advisory Systems Engineer of IBM Corp., Minneapolis, Minn.
All of the above managers are Vice Presidents of Advisers except Mssrs. Poling
(Executive Vice President and a director), Ott (Senior Vice President), and Ms.
Gotham (Fixed Income Analyst).
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EXPENSES AND ALLOCATIONS AMONG SERIES
For the most recent fiscal year, the ratio of Fortis Series' investment advisory
and management fee as a percentage of average daily net assets was .30% for
Money Market Series, .63% for Growth Stock Series, and .70% for Global Growth
Series.
BROKERAGE ALLOCATION
Advisers may consider sales of shares of Fortis Series, and of other funds
advised by Advisers, as a factor in the selection of broker-dealers to execute
Fortis Series' securities transactions when it is believed that this can be done
without causing Fortis Series to pay more in brokerage commissions than it would
otherwise.
PERIODIC REPORTS
Contract owners will receive semiannual reports including the financial
statements of the Series to which their premiums have been allocated and the
investments held in each such Series.
CAPITAL STOCK
Fortis Series has only common shares with equal voting rights.
VOTING PRIVILEGES
The voting privileges of Contract owners, and limitations thereon, are explained
in the accompanying prospectus for the Contracts. The shareholders are entitled
to vote all of the shares of Fortis Series, but they will generally do so in
accordance with the instructions of the Contract owners. Under certain
circumstances, however, shareholders may disregard voting instructions received
from Contract owners. For additional information describing how shareholders
will vote the shares of Fortis Series, see "Voting Privileges" in the
accompanying prospectus(es) for the applicable Contracts.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Fortis Series intends to distribute at least annually as dividends substantially
all the net investment income, if any, of each Series. For dividend purposes,
net investment income of each Series will consist of all dividends (other than
stock dividends) or interest received by such Series less the accrued expenses
of each such Series. Fortis Series will also declare and distribute all net
realized capital gains annually. Dividends from investment income of the Series
and capital gains distributions will be reinvested in additional full and
fractional shares. Dividends and distributions on shares not attributable to
Contracts, however, may be paid in cash.
TAXATION
Each Series intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended. So long as each Series so qualifies,
the Series is not taxed on the income it distributes to the Separate Accounts.
So long as each Series qualifies as a regulated investment company and meets
certain diversification tests applicable to the segregated asset accounts
underlying variable annuity and life insurance contracts, the Contract owners
will not be considered to be the owners of the shares of the Series, and income
earned with respect to the Contracts will not be taxed currently to the Contract
owners.
For the tax consequences of owning a Contract, see the accompanying prospectus
for the Contracts. For more information concerning the taxation of the Series,
see "Taxation" in the Statement of Additional Information.
PURCHASE AND REDEMPTION OF SHARES
GENERALLY
Shares in Fortis Series are currently offered at the respective per share net
asset values of the Series. Such shares are offered only to the Separate
Accounts, which fund benefits payable under the Contracts described in the
accompanying prospectus. Fortis Series sells its shares to the Separate Accounts
through Fortis Investors, Inc. ("Investors"). Investors receives no underwriting
compensation from Fortis Series. Fortis Series may in the future also offer its
shares to separate accounts of other insurance companies.
The Board of Directors will monitor events for the existence of any material
irreconcilable conflict between or among owners of insurance or annuity
contracts, and the relevant insurance companies will take whatever remedial
action may be necessary and appropriate. Fortis Benefits and First Fortis
currently do not foresee any disadvantages to their respective Contract owners
arising out of the fact that Fortis Series offers its shares both for variable
life insurance policies and variable annuity contracts. However, should an
irreconcilable conflict arise between the Separate Accounts, the conflict could
result in one or more of the Separate Accounts terminating its relationship with
Fortis Series, thus necessitating the liquidation of portfolio securities and
thereby potentially having an adverse impact on the net asset values of the
affected Series.
On each day when Fortis Series values its assets, shares of each Series are
purchased or redeemed by the Separate Accounts based upon, among other things,
the amounts of net premiums allocated to the Separate Account, dividends and
distributions reinvested, transfers to and among subaccounts of the Separate
Accounts, Policy loans, loan repayments and benefit payments to be processed on
that date. Such purchases and redemptions for the Separate Account are effected
at the net asset value per share for each Series determined as of that same
date. Any orders to purchase or redeem Fortis Series shares that do not result
automatically from Contract transactions will be effected at the net asset value
per share next computed after the order is placed.
OFFERING PRICE
The offering prices of the Series' shares are determined once daily, and are
equal to the net asset values per share of the shares next calculated after
receipt of the purchase order. The Series' net asset values per share are
determined by dividing the value of the securities owned by the Series, plus any
cash or other assets, less all liabilities, by the number of the Series' shares
outstanding. All significant expenses, including the investment advisory fee
payable to Advisers, are accrued daily. The portfolio securities in which the
Series invest fluctuate in value, and hence the net asset values per share of
the Series also fluctuate. The net asset values of the Series' shares are
determined as of the primary closing time for business on the New York Stock
Exchange (the "Exchange") on each day on which the Exchange is open.
Securities are generally valued at market value. A security listed or traded on
an exchange is valued at its last sale price on the exchange where it is
principally traded on the day of valuation. Lacking any sales on the exchange
where it is principally traded on the day of valuation, prior to the time as of
which assets are valued, the security generally is valued at the previous day's
last sale price on that exchange. A security listed or traded on the Nasdaq
National Market is valued at its last sale price that day, and lacking any sales
that day on the Nasdaq National Market, the security generally is valued at the
last bid price. Options will be valued at market value or fair value, as
determined in good faith by the Board of Directors, if no market exists. Futures
contracts will be valued in a like manner except that open futures contracts
sales will be valued using the closing settlement price or, in the absence of
such a price, the most recent quoted asked price.
When market quotations are not readily available, or when restricted securities
or other assets are being valued, such securities or other assets are valued at
fair value as determined in good faith by management under supervision of the
Board of Directors. Trading in securities on European and Far Eastern securities
exchanges and over-the-counter markets is normally completed well before the
close of the business day in New York. However, debt securities may be valued on
the basis of valuations furnished by a pricing service which utilizes electronic
data processing techniques to determine valuations for normal institutional-size
trading units of debt securities when such valuations are believed to more
accurately reflect the fair market value of such securities. Short-term
investments in debt securities with maturities of less than 60 days when
acquired, or which subsequently are within 60 days of maturity, are valued at
amortized cost. Purchases and sales by the Series after 2:00 P.M. Central Time
normally are not recorded until the following day.
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Any assets or liabilities initially expressed in terms of foreign currencies are
translated into U.S. dollars at the official exchange rate or, alternatively, at
the mean of the current bid and asked prices of such currencies against the U.S.
dollar last quoted by a major bank that is a regular participant in the foreign
exchange market or on the basis of a pricing service that takes into account the
quotes provided by a number of such major banks. If neither of these
alternatives is available nor provides a suitable methodology for converting a
foreign currency into U.S. dollars, the Board of Directors in good faith will
establish a conversion rate for such currency.
European or Far Eastern securities trading may not take place on all days on
which the Exchange is open. Further, trading takes place in Japanese markets on
certain Saturdays and in various foreign markets on days on which the Exchange
is not open and therefore the Series' net asset value is not calculated. The
calculation of the Series' net asset value therefore may not take place
contemporaneously with the determination of the prices of securities held by the
Series. Events affecting the values of portfolio securities that occur between
the time their prices are determined and the close of the Exchange will not be
reflected in the Series' net asset value unless management, under the
supervision of the Board of Directors, determines that the particular event
would materially affect net asset value. As a result, the Series' net asset
value may be significantly affected by such trading on days when Fortis Series
is not open for shareholder purchases and redemptions.
TRANSFERS AMONG SUBACCOUNTS
Contract owners may transfer amounts among the subaccounts available to them,
and may change allocations of premiums as explained in the accompanying
prospectus for the Contracts. Transfers between subaccounts are not taxable
under current Federal income tax law.
THE UNDERWRITER
Fortis Investors, Inc. ("Investors"), a subsidiary of Advisers, is Fortis
Series' underwriter. Investors' address is P.O. Box 64284, St. Paul, MN 55164.
Investors reserves the right to reject any purchase order. The following persons
are affiliated with both Investors and Fortis Series: Dean C. Kopperud is a
director and officer of both; Stephen M. Poling, and Robert J. Clancy are
directors of Investors and officers of both; and Dennis M. Ott, James S. Byrd,
Robert C. Lindberg, Keith R. Thomson, Robert W. Beltz, Jr., Thomas D. Gualdoni,
Larry A. Medin, John W. Norton, David G. Carroll, Chris J. Neuharth, Carol M.
Houghtby, Tamara L. Fagely, John E. Hite, Thomas E. Erickson, and Gregory S.
Swenson are officers of both.
REDEMPTION
Fortis Series is required to redeem all full and fractional shares of Fortis
Series for cash within seven days of receipt of proper notice of redemption. The
net asset value of redeemed shares may be more or less than the net asset value
of the same shares at the time the Separate Account invested in such shares.
For further information, Contract owners may also contact Fortis Benefits'
office, the address of which is the same as that of Fortis Series, as set forth
on the cover of this Prospectus. New York contract owners should instead contact
First Fortis' office: P.O. Box 3209, Syracuse, New York 13220.
APPENDIX
COMMERCIAL PAPER RATINGS
STANDARD & POOR'S CORPORATION. A Standard & Poor's commercial paper rating is a
current assessment of the likelihood of timely payment of debt having an
original maturity of no more than 365 days. Ratings are graded into categories
ranging from "A" for the highest quality obligations to "D" for the lowest.
"A" Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with
the numbers 1, 2 and 3 to indicate the relative degree of safety.
"A-1" This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a (+) sign
designation.
"A-2" Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated "A-1."
"A-3" Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
The commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
MOODY'S INVESTORS SERVICE, INC. Moody's short-term debt ratings are opinions of
the ability of the issuers to repay punctually senior debt obligations which
have an original maturity not exceeding one year. Moody's makes no
representation that such obligations are exempt from registration under the
Securities Act of 1933, nor does it represent that any specific note is a valid
obligation of a rated issuer or issued in conformity with any applicable law.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment capacity of rated issuers:
"Prime-1" Superior ability for repayment of senior short-term debt obligations.
"Prime-2" Strong ability for repayment of senior short-term debt obligations.
"Prime-3" Acceptable ability for repayment of senior short-term debt
obligations.
CORPORATE BOND RATINGS
STANDARD & POOR'S CORPORATION. Its ratings for corporate bonds have the
following definitions:
Debt rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity
to pay interest and repay principal is extremely strong.
Debt rated "AA" has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in a small degree.
Debt rated "A" has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
Debt rated "BBB" is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Debt rated "BB," "B," "CCC," "CC," and "C" is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse
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business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
Debt rated "CCC" has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
The rating "CC" is typically applied to debt subordinated to senior debt that is
assigned an actual or implied "CCC" rating.
The rating "C" is typically applied to debt subordinated to senior debt which is
assigned an actual or implied "CCC-" debt rating. The "C" rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
The rating "CI" is reserved for income bonds on which no interest is being paid.
Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The ratings from "AA" to "CCC" may be modified by the addition of a plus or
minus sign to show relative standing within the major categories.
"NR" indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
MOODY'S INVESTORS SERVICE, INC. Its ratings for corporate bonds include the
following:
Bonds which are rated "Aaa" are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Bonds which are rated "Aa" are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
Bonds which are rated "A" possess many favorable attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Bonds which are rated "Baa" are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds which are rated "Ba" are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated "Caa" are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Bonds which are rated "Ca" represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bond which rated "C" are the lowest rated class of bonds and issues so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories (Moody's ratings Aaa, Aa, A and Baa, and Standard & Poor's ratings
AAA, AA, A and BBB, commonly known as "Investment Grade" ratings) are generally
regarded as eligible for bank investment. In addition, the Legal Investment Laws
of various states impose certain rating or other standards for obligations
eligible for investment by savings banks, trust companies, insurance companies
and fiduciaries generally.
PREFERRED STOCK RATING
STANDARD & POOR'S CORPORATION. Its ratings for preferred stock have the
following definitions:
An issue rated "AAA" has the highest rating that may be assigned by Standard &
Poor's to a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
A preferred stock issue rated "AA" also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated "AAA."
An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
An issue rated "BBB" is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions, or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the "A" category.
MOODY'S INVESTORS SERVICE, INC. Its ratings for preferred stock include the
following:
An issue which is rated "Aaa" is considered to be a top-quality preferred stock.
This rating indicates good asset protection and the least risk of dividend
impairment within the universe of preferred stocks.
An issue which is rated "Aa" is considered a high-grade preferred stock. This
rating indicates that there is reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
An issue which is rated "A" is considered to be an upper-medium grade preferred
stock. While risks are judged to be somewhat greater than in the "aaa" and "aa"
classifications, earnings and asset protection are nevertheless expected to be
maintained at adequate levels.
An issue which is rated "Baa" is considered to be medium grade, neither highly
protected nor poorly secured. Earnings and asset protection appear adequate at
present but may be questionable over any great length of time.
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FORTIS SERIES FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 1995
This Statement of Additional Information is NOT a prospectus, but should be read
in conjunction with the Fortis Series Fund, Inc. ("Fortis Series")
Prospectus dated May 1, 1995. A copy of that prospectus may be obtained from
Fortis Series, P.O. Box 64582, St. Paul, Minnesota 55164.
No broker-dealer, sales representative, or other person has been authorized to
give any information or to make any representations other than those contained
in this Statement of Additional Information, and if given or made, such
information or representations must not be relied upon as having been authorized
by Fortis Benefits Insurance Company ("Fortis Benefits"), First Fortis Life
Insurance Company ("First Fortis"), Fortis Series, or Fortis Investors, Inc.
("Investors"). This Statement of Additional Information does not constitute an
offer or solicitation by anyone in any state in which such offer or solicitation
is not authorized, or in which the person making such offer or solicitation is
not qualified to do so, or to any person to whom it is unlawful to make such
offer or solicitation.
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TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
ORGANIZATION AND CLASSIFICATION................ 15
INVESTMENT OBJECTIVES AND POLICIES............. 15
- Certificates of Deposit and Bankers'
Acceptances............................... 15
- Mortgage-Backed Securities............... 15
- Securities of Foreign Companies.......... 16
- Repurchase Agreements.................... 16
- Extendible Notes......................... 16
- Lending of Portfolio Securities.......... 16
- Options.................................. 17
- Futures Contracts and Options on
Futures Contracts........................ 17
- Forward Foreign Currency
Exchange Contracts....................... 17
- Segregated Accounts...................... 18
- Restricted or Illiquid Securities........ 18
- Warrants or Rights....................... 18
- Short Sales Against the Box.............. 18
- Portfolio Turnover....................... 18
- Investment Restrictions.................. 18
- Risk Factors............................. 20
DIRECTORS AND EXECUTIVE OFFICERS............... 22
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INVESTMENT ADVISORY AND OTHER SERVICES......... 23
- General.................................. 23
- Control and Management of Advisers and
Investors................................ 24
- Investment Advisory and Management
Agreement................................ 24
PORTFOLIO TRANSACTIONS AND ALLOCATION OF
BROKERAGE..................................... 25
CAPITAL STOCK.................................. 26
COMPUTATION OF NET ASSET VALUE AND PRICING..... 26
REDEMPTION..................................... 26
TAXATION....................................... 27
UNDERWRITER.................................... 27
PERFORMANCE.................................... 27
FINANCIAL STATEMENTS........................... 32
CUSTODIAN; COUNSEL; ACCOUNTANTS................ 32
LIMITATION OF DIRECTOR LIABILITY............... 32
ADDITIONAL INFORMATION......................... 32
APPENDIX--DESCRIPTION OF FUTURES, OPTIONS AND
FORWARD CONTRACTS............................. 33
</TABLE>
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ORGANIZATION AND CLASSIFICATION
An investment company is an arrangement by which a number of persons invest in a
company that in turn invests in securities of other companies. Fortis Series
operates as an "open-end" investment company because it generally must redeem an
investor's shares upon request. Fortis Series operates as a "diversified"
investment company because it offers investors an opportunity to minimize the
risk inherent in all investments in securities by spreading their investment
over a number of companies in various industries. However, diversification
cannot eliminate such risks.
INVESTMENT OBJECTIVES AND POLICIES
Fortis Series operates as a "diversified" investment company as defined under
the Investment Company Act of 1940 (the "1940 Act"), which means that each
Series must meet the following requirements:
At least 75% of the value of its total assets will be represented by
cash and cash items (including receivables), Government securities,
securities of other investment companies, and other securities for
the purposes of this calculation limited in respect of any one
issuer to an amount not greater in value than 5% of the value of the
total assets of the Series and to not more than 10% of the
outstanding voting securities of such issuer.
As noted in the Prospectus, the Series may invest in certificates of deposits.
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES
Certificates of deposit are receipts issued by a bank in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest to
the bearer of the receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior to maturity.
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
MORTGAGE-BACKED SECURITIES
Consistent with the investment objectives and policies of the Series as set
forth in the Prospectus, and the investment restrictions set forth below, the
Series may invest in certain types of mortgage-related securities. One type of
mortgage-related security includes certificates which represent pools of
mortgage loans assembled for sale to investors by various governmental and
private organizations. These securities provide a monthly payment, which
consists of both an interest and a principal payment, which is in effect a
"pass-through" of the monthly payment made by each individual borrower on his or
her residential mortgage loan, net of any fees paid to the issuer or guarantor
of such securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs which may be incurred. Some certificates (such
as those issued by the Government National Mortgage Association) are described
as "modified pass-through." These securities entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain fees,
regardless of whether the mortgagor actually makes the payment.
A major governmental guarantor of pass-through certificates is the Government
National Mortgage Association ("GNMA"). GNMA guarantees, with the full faith and
credit of the United States government, the timely payments of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages.
Other governmental guarantors (but not backed by the full faith and credit of
the United States Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA
purchases residential mortgages from a list of approved seller/servicers which
include state and federally-chartered savings and loan associations, mutual
savings banks, commercial banks and credit unions and mortgage bankers.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the United States government. FHLMC issues Participation Certificates ("PCs")
which represent interests in mortgages from FHLMC's national portfolio. FHLMC
guarantees the timely payment of interest and ultimate collection of principal,
but PCs are not backed by the full faith and credit of the United States
government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers, and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers may
in addition be the originators of the underlying mortgage loans as well as the
guarantors of the pass-through certificates. Pools created by such
non-governmental issuers generally offer a higher rate of interest than
governmental pools because there are no direct or indirect governmental
guarantees of payments in the former pools. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool, and hazard insurance. The
insurance and guarantees are issued by government entities, private insurers,
and the mortgage poolers.
Fortis Series expects that governmental or private entities may create mortgage
loan pools offering pass-through investments in addition to those described
above. As new types of pass-through securities are developed and offered to
investors, Fortis Series' adviser may, consistent with the Series' investment
objectives, policies and restrictions, consider making investments in such new
types of securities.
Other types of mortgage-backed securities include debt securities which are
secured, directly or indirectly, by mortgages on commercial real estate or
residential rental properties, or by first liens on residential manufactured
homes (as defined in section 603(6) of the National Manufactured Housing
Construction and Safety Standards Act of 1974), whether such manufactured homes
are considered real or personal property under the laws of the states in which
they are located.
Investments in mortgage-backed securities involve certain risks. In periods of
declining interest rates, prices of fixed income securities tend to rise.
However, during such periods, the rate of prepayment of mortgages underlying
mortgage-backed securities tends to increase, with the result that such
prepayments must be reinvested by the issuer at lower rates. In addition, the
value of such securities may fluctuate in response to the market's perception of
the creditworthiness of the issuers of mortgage-backed securities owned by
Fortis Series. Because investments in mortgage-backed securities are interest
sensitive, the ability of the issuer to reinvest or to reinvest favorably in
underlying mortgages may be limited by government regulation or tax policy. For
example, action by the Board of Governors of the Federal Reserve System to limit
the growth of the nation's money supply may cause interest rates to rise and
thereby reduce the volume of new residential mortgages. Additionally, although
mortgages and mortgage-backed securities are generally supported by some form of
government or private guarantees and/or insurance, there is no assurance that
private guarantors or insurers will be able to meet their obligations.
The average mortgage in a pool may be expected to be repaid within 5 to 12
years. During periods when mortgage interest rates are decreasing, the value of
mortgage backed securities generally will increase; however, it is anticipated
that, during such periods, the average life of the mortgages in the pool will
decrease as borrowers refinance in order to take advantage of the lower rates.
Reinvestment by the Series of prepayments will likely be at lower interest rates
than the original investment. On the other hand, during
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periods when interest rates are increasing, the value of the Series' mortgage
backed securities will decrease. It is anticipated, however, during such
periods, that borrowers will not refinance; therefore, the average life of the
mortgages in the pool will probably be longer.
SECURITIES OF FOREIGN COMPANIES
Global Growth Series seeks its objectives primarily by investing in a global
portfolio of equity securities, allocated among diverse international markets.
In certain countries, governmental restrictions and other limitations on
investment may affect the maximum percentage of equity ownership in any one
company of Global Growth Series. In addition, in some instances only special
classes of securities may be purchased by foreigners, and the market prices,
liquidity, and rights with respect to those securities may vary from shares
owned by nationals. Money Market Series may invest in securities of, or
guaranteed by, the Government of Canada, a Province of Canada, or any
instrumentality or political subdivision thereof in an amount not exceeding 25%
of the value of its total assets. Money Market Series may invest up to an
additional 15% of its total assets in securities of foreign companies (which
does not include domestic branches of foreign banks and foreign branches of
domestic banks). However, Money Market Series may not invest more than 49% of
the value of its total assets collectively in: (i) securities of, or guaranteed
by, the Government of Canada, a Province of Canada, or any instrumentality or
political subdivision thereof; (ii) securities of foreign companies; and (iii)
securities of domestic branches of foreign banks and foreign branches of
domestic banks. Growth Stock Series may invest up to 10% of its total assets in
securities of foreign governments and companies.
Investing in foreign securities may result in greater risk than that incurred by
investing in domestic securities. See "Risk Factors."
REPURCHASE AGREEMENTS
Each of the Series may invest in repurchase agreements. A repurchase agreement
is an instrument under which securities are purchased from a bank or securities
dealer with an agreement by the seller to repurchase the securities at a
mutually agreed upon date, interest rate, and price. Generally, repurchase
agreements are of short duration--usually less than a week, but on occasion for
longer periods. Each of the Money Market Series, Growth Stock Series, and Global
Growth Series will limit its investment in repurchase agreements with a maturity
of more than seven days to 10% of its net assets (subject to the collective 10%
limitation regarding restricted or illiquid securities set forth below). In
investing in repurchase agreements, a Series' risk is limited to the ability of
such bank or securities dealer to pay the agreed upon amount at the maturity of
the repurchase agreement. In the opinion of management, such risk is not
material; if the other party defaults, the underlying security constitutes
collateral for the obligation to pay--although the Series may incur certain
delays in obtaining direct ownership of the collateral, plus costs in
liquidating the collateral. In the event a bank or securities dealer defaults on
the repurchase agreement, management believes that, barring extraordinary
circumstances, the Series will be entitled to sell the underlying securities or
otherwise receive adequate protection (as defined in the federal Bankruptcy
Code) for its interest in such securities. To the extent that proceeds from any
sale upon a default were less than the repurchase price, the Series could suffer
a loss. If the Series owns underlying securities following a default on the
repurchase agreement, the Series will be subject to risk associated with changes
in the market value of such securities. The Series' custodian will hold the
securities underlying any repurchase agreement or such securities may be part of
the Federal Reserve Book Entry System. The market value of the collateral
underlying the repurchase agreement will be determined on each business day. If
at any time the market value of the collateral falls below the repurchase price
of the repurchase agreement (including any accrued interest), the Series will
promptly receive additional collateral (so the total collateral is in an amount
at least equal to the repurchase price plus accrued interest). The Board of
Directors of Fortis Series (the "Board of Directors") evaluates the
creditworthiness of issuers which are securities dealers.
EXTENDIBLE NOTES
Money Market Series is permitted to invest up to 25% of the value of its total
assets in extendible notes. An extendible note is a debt arrangement under which
the holder, at its option, may require the issuer, typically a financial or an
industrial concern, to repurchase the note for a predetermined fixed price at
one or more times prior to the ultimate maturity date of the note. Typically, an
extendible note is issued at an interest rate that can be adjusted at fixed
times throughout its term. At the same times as the interest rate is adjusted by
the issuer, the holder of the note is typically given the option to "put" the
note back to the issuer at a predetermined price (e.g., at 100% of the
outstanding principal amount plus unpaid accrued interest) if the extended
interest rate is undesirable to the holder. This option to put the note back to
the issuer (i.e., to require the issuer to repurchase the note) provides the
holder with an optional maturity date that is shorter than the actual maturity
date of the note.
Extendible notes are typically issued with maturity dates in excess of 13 months
from the date of issuance. If such extendible notes provide for an optional
maturity date of 13 months or less, however, then such notes are deemed by these
Series to have been issued for the shorter optional maturity date. Accordingly,
investment in such extendible notes would not be in contravention of the
investment policy of the Series not to invest in securities having a maturity
date in excess of 13 months from the date of acquisition. Investment in
extendible notes is not expected to have a material impact on the effective
portfolio maturity of these Series.
An investment in an extendible note is liquid, and the note may be resold to
another investor prior to its optional maturity date at its market value. The
market value of an extendible note with a given optional maturity date is
determined and fluctuates in a similar manner to the market value of a fixed
maturity note with a maturity equivalent to the optional maturity of the
extendible note. Compared to fixed-term notes of the same issuer, however,
extendible notes with equivalent optional maturities generally yield higher
returns without a material increase in risk to the Series buying them.
The creditworthiness of the issuers of the extendible notes is monitored and
rated by Moody's and by S&P, and investments by these Series in such extendible
notes are restricted to notes with the same investment ratings as are acceptable
to the Series with respect to other forms of investment. The creditworthiness of
such issuers is also monitored by Advisers.
LENDING OF PORTFOLIO SECURITIES
Consistent with applicable regulatory requirements, Global Growth Series may
lend its portfolio securities (principally to broker-dealers) where such loans
are callable at any time and are continuously secured by collateral (cash, U.S.
government securities, certificates of deposit, or other high-grade, short-term
obligations or interest-bearing cash equivalents) equal to no less than the
market value, determined daily, of the securities loaned. Global Growth Series
will receive amounts equal to dividends or interest on the securities loaned.
Global Growth Series will also earn income for having made the loan. Any cash
collateral pursuant to these loans will be invested in U.S. government
securities, certificates of deposit or other high-grade, short-term obligations
or interest-bearing cash equivalents. Global Growth Series will limit such
lending to not more than 30% of the value of its total assets. Where voting or
consent rights with respect to loaned securities pass to the borrower,
management will follow the policy of calling the loan, in whole or in part as
may be appropriate, to permit the exercise of such voting or consent rights if
the issues involved have a material effect on Global Growth Series investment in
the securities loaned. Apart from lending its securities, investing in
repurchase agreements, and acquiring debt securities, as described in the
Prospectus and Statement of Additional Information, Global Growth Series will
not make loans to other persons.
The risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to firms
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deemed by Fortis Advisers, Inc. ("Advisers") to be of good standing and will not
be made unless, in the judgment of Advisers, the consideration to be earned from
such loans would justify the risk.
OPTIONS
As provided below, in order to protect against declines in the value of Series
securities or increases in the costs of securities to be acquired and in order
to increase the gross income of the Global Growth Series, the Global Growth
Series may enter into transactions in options on a variety of instruments and
indices. The types of instruments to be purchased and sold are further described
in the Appendix of this Statement of Additional Information, which should be
read in conjunction with the following sections.
OPTIONS ON SECURITIES. The Global Growth Series may write (sell) covered call
and covered put options and purchase call and put options on securities. Where
Global Growth Series writes an option which expires unexercised or is closed out
by Global Growth Series at a profit, it will retain all or a portion of the
premium received for the option, which will increase its gross income and will
offset in part the reduced value of any such security underlying the option, or
the increased cost of such securities to be acquired. In contrast, however, if
the price of the underlying security moves adversely to Global Growth Series'
position, the option may be exercised and Global Growth Series will be required
to purchase or sell the underlying security at a disadvantageous price, which
may only be partially offset by the amount of the premium, if at all. Global
Growth Series may also write combinations of put and call options on the same
security, known as "straddles." Such transactions can generate additional
premium income but also present increased risk.
Global Growth Series may also purchase put or call options in anticipation of
market fluctuations which may adversely affect the value of its portfolio or the
prices of securities that it wants to purchase at a later date. In the event
that the expected market fluctuations occur, Global Growth Series may be able to
offset the resulting adverse effect on its portfolio, in whole or in part,
through the options purchased. The premium paid for a put or call option plus
any transaction costs will reduce the benefit, if any, realized by Global Growth
Series upon exercise or liquidation of the option, and, unless the price of the
underlying security changes sufficiently, the option may expire without value to
Global Growth Series.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS. Global Growth Series may enter into interest rate futures
contracts and stock index futures contracts for hedging purposes. The Global
Growth Series may also enter into foreign currency futures contracts. (Unless
otherwise specified, interest rate futures contracts, stock index futures
contracts and foreign currency futures contracts are collectively referred to as
"Futures Contracts.")
Purchases or sales of stock index futures contracts are used to attempt to
protect the Global Growth Series' current or intended stock investments from
broad fluctuations in stock prices. Interest rate and foreign currency futures
contracts are purchased or sold to attempt to hedge against the effects of
interest or exchange rate changes on Global Growth Series' current or intended
investments in fixed income or foreign securities. In the event that an
anticipated decrease in the value of Global Growth Series securities occurs as a
result of a general stock market decline, a general increase in interest rates,
or a decline in the dollar value of foreign currencies in which portfolio
securities are denominated, the adverse effects of such changes may be offset,
in whole or in part, by gains on the sale of Futures Contracts. Conversely, the
increased cost of Global Growth Series' securities to be acquired, caused by a
general rise in the stock market, a general decline in interest rates, or a rise
in the dollar value of foreign currencies, may be offset, in whole or in part,
by gains on Futures Contracts purchased by Global Growth Series. Global Growth
Series will incur brokerage fees when it purchases and sells Futures Contracts,
and it will be required to make and maintain margin deposits.
OPTIONS ON FUTURES CONTRACTS. The Global Growth Series may purchase and write
options to buy or sell interest rate futures contracts. In addition, the Global
Growth Series may purchase and write options on stock index futures contracts,
and may purchase and write options on foreign currency futures contracts.
(Unless otherwise specified, options on interest rate futures contracts, options
on stock index futures contracts, and options on foreign currency futures
contracts are collectively referred to as "Options on Futures Contracts.") Such
investment strategies will be used as a hedge and not for speculation.
Put and call Options on Futures Contracts may be traded by Global Growth Series
in order to protect against declines in the values of such Series securities or
against increases in the cost of securities to be acquired. Purchases of Options
on Futures Contracts may present less risk in hedging than the purchase or sale
of the underlying Futures Contracts since the potential loss is limited to the
amount of the premium plus related transaction costs. The writing of such
options, however, does not present less risk than the trading of futures
contracts and will constitute only a partial hedge, up to the amount of the
premium received, and, if an option is exercised, Global Growth Series may
suffer a loss on the transaction.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Global Growth Series may enter into contracts for the purchase or sale of a
specific currency at a future date at a price set at the time of the contract (a
"Currency Contract"). Global Growth Series will enter into Currency Contracts
for hedging purposes only, in a manner similar to its use of foreign currency
futures contracts. Global Growth Series may enter into Currency Contracts either
with respect to specific transactions or with respect to its portfolio
positions. For example, when the Global Growth Series anticipates making a
purchase or sale of a security, it may enter into a Currency Contract in order
to set the rate (either relative to the U.S. dollar or another currency) at
which a currency exchange transaction related to the purchase or sale will be
made. Further, when Advisers believes that a particular currency may decline
compared to the U.S. dollar or another currency, the Global Growth Series may
enter into a Currency Contract to sell the currency Advisers expects to decline
in an amount approximating the value of some or all of the portfolio securities
of the Global Growth Series denominated in that currency. These transactions
will include forward purchases or sales of foreign currencies for the purpose of
protecting the dollar value of securities denominated in a foreign currency or
protecting the dollar equivalent of interest or dividends to be paid on such
securities. By entering into such transactions, however, Global Growth Series
may be required to forego the benefits of advantageous changes in exchange
rates. Currency Contracts are traded over-the-counter, and not on organized
commodities or securities exchanges. As a result, such contracts operate in a
manner distinct from exchange-traded instruments, and their use involves certain
risks beyond those associated with transactions in the futures and option
contracts described above. Except for the use of forward contracts in connection
with the settlement of investment purchases or sales, the Global Growth Series
will establish a segregated account with its custodian containing cash and
liquid high grade debt obligations to cover its obligations with respect to
forward contracts it has entered into. The value of such assets will be marked
to market on a daily basis.
OPTIONS ON FOREIGN CURRENCIES. The Global Growth Series may purchase and write
put and call options on foreign currencies for the purpose of protecting against
declines in the dollar value of foreign portfolio securities and against
increases in the dollar cost of foreign securities to be acquired. As in the
case of other types of options, however, the writing of an option on foreign
currency will constitute only a partial hedge, up to the amount of the premium
received, and Global Growth Series could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against fluctuations in exchange rates, although, in the event of rate movements
adverse to Global Growth Series' position, it may forfeit the entire amount of
the premium plus related transaction costs. As in the case of Currency
Contracts, certain options on foreign currencies are traded over-the-counter and
involve risks which may not be present in the case of exchange-traded
instruments.
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SEGREGATED ACCOUNTS
To comply with the 1940 Act, a Series engaging in certain transactions involving
options, futures, reverse repurchase agreements, and forward contracts on
foreign currencies will "cover" its positions by establishing a segregated
account. These segregated accounts will be established and maintained with the
Fortis Series' custodian and will contain only liquid assets such as cash, U.S.
Government securities, or other liquid high grade debt obligations.
RESTRICTED OR ILLIQUID SECURITIES
As fundamental policies, each of the Money Market Series and Growth Stock Series
may invest up to 5% and Global Growth Series up to 10% of its total assets (at
the time of investment) in securities which such Series may not be free to sell
to the public without registration under the Securities Act of 1933 (or in the
case of Global Growth Series, registered under the applicable securities laws of
the country in which such securities are traded) ("restricted securities"). This
restriction does not include restricted securities which may be resold to
qualified institutional buyers in accordance with the provisions of Rule 144A
under the Securities Act of 1933 ("Rule 144A securities"). The staff of the
Securities and Exchange Commission has taken the position that the liquidity of
Rule 144A securities in the portfolio of a fund offering redeemable securities
is a question of fact for a board of directors of such a fund to determine,
based upon a consideration by such board of the readily available trading
markets and a review of any contractual restrictions. The SEC staff also
acknowledges that, while such a board retains ultimate responsibility, it may
delegate this function to the fund's investment adviser. At the present time, it
is not possible to predict with assurance exactly how the market for Rule 144A
securities will develop. A Rule 144A security which when purchased enjoyed a
fair degree of marketability may subsequently become illiquid, thereby adversely
affecting the liquidity of the Series' portfolio.
WARRANTS OR RIGHTS
Warrants or rights may be acquired by the Global Growth Series in connection
with other securities or separately and provide the Global Growth Series with
the right to purchase at a later date other securities of the issuer. The Global
Growth Series has undertaken that its investments in warrants or rights, valued
at the lower of cost or market, will not exceed 5% of the value of its net
assets and not more than 2% of such assets will be invested in warrants and
rights which are not listed on established stock exchanges, such as the London,
Tokyo, or New York Stock Exchanges. Warrants or rights acquired by Global Growth
Series in units or attached to securities will be deemed to be without value for
purpose of this restriction. These limits are not fundamental policies of the
Global Growth Series and may be changed by the Fortis Series' Board of Directors
without shareholder approval.
SHORT SALES AGAINST THE BOX
The Global Growth Series may sell a security to the extent Global Growth Series
contemporaneously owns or has the right to obtain securities identical to those
sold short without payment of any additional consideration. Such a short sale is
referred to as a short sale "against the box." The aggregate market value of the
underlying securities subject to all outstanding short sales may not exceed 5%
of the net assets of the Global Growth Series.
PORTFOLIO TURNOVER
The portfolio turnover rate for a Series is calculated by dividing the lesser of
purchases or sales by such Series of investment securities for the particular
fiscal year by the monthly average value of investment securities owned by the
Series during the same fiscal year. "Investment securities" for purposes of this
calculation do not include securities with a maturity date less than twelve
months from the date of investment. A 100% portfolio turnover rate would occur,
for example, if the lesser of the value of purchases or sales of investment
securities for a particular year were equal to the average monthly value of the
investment securities owned during such year.
INVESTMENT RESTRICTIONS
Certain investment restrictions are fundamental to the operation of the Series
and may not be changed except with the approval of the holders of a majority of
the outstanding shares of the Series affected. For this purpose, "majority of
the outstanding voting securities" means the lesser of (i) 67% of the
outstanding shares of the affected Series present at the meeting of shareholders
if more than 50% of the outstanding shares of the affected Series are present in
person or by proxy, or (ii) more than 50% of the outstanding shares of the
affected Series. For a discussion of contract owner voting privileges, see the
accompanying Prospectus pertaining to the Contract.
INVESTMENT RESTRICTIONS OF MONEY MARKET SERIES AND GROWTH STOCK SERIES. As a
result of the following fundamental investment restrictions, except as otherwise
noted below, Money Market Series and Growth Stock Series will not:
(1) Purchase securities on margin or otherwise borrow money or
issue senior securities. Fortis Series may also obtain such short-term credit as
it needs for the clearance of securities transactions, and may borrow from a
bank, for the account of Money Market Series and Growth Stock Series, as a
temporary measure to facilitate redemptions (but not for leveraging or
investment) an amount that does not exceed 10% of the value of the Series' total
assets. Investment securities will not be purchased for a Series while
outstanding bank borrowings exceed 5% of the value of such Series' total assets.
(2) Write, purchase or sell puts, calls or combinations thereof.
(3) Mortgage, pledge or hypothecate its assets, except in an amount
not exceeding 10% of the value of its total assets to secure temporary or
emergency borrowing.
(4) Invest in commodities or commodity contracts.
(5) Act as an underwriter of securities of other issuers, except to the
extent that, in connection with the disposition of portfolio securities, Fortis
Series may be deemed an underwriter under applicable laws.
(6) Participate on a joint or a joint and several basis in any securities
trading account.
(7) Invest in real estate, except a Series may invest in securities
issued by companies owning real estate or interests therein.
(8) Makes loans to other persons. Repurchase agreements and the
purchase of publicly traded debt obligations are not considered to be "loans"
for this purpose and may be entered into or purchased by a Series in accordance
with its investment objectives and policies.
(9) Concentrate its investments in any particula industry, except
that (i) it may invest up to 25% of the value of its total assets in any
particular industry, and (ii) there is no limitation with respect to investments
in obligations issued or guaranteed by the United States Government or its
agencies and instrumentalities, or obligations of domestic commercial banks. As
to utility companies, gas, electric, water and telephone companies will be
considered as separate industries. As to finance companies, the following
categories will be considered as separate industries: (a) captive automobile
finance, such as General Motors Acceptance Corp. and Ford Motor Credit Corp.;
(b) captive equipment finance companies, such as Honeywell Finance Corporation
and General Electric Credit Corp.; (c) captive retail finance companies, such as
Macy Credit Corp. and Sears Roebuck Acceptance Corp.; (d) consumer loan
companies, such as Beneficial Finance Corporation and Household Finance
Corporation; (e) diversified finance companies such as CIT Financial Corp.,
Commercial Credit Corporation and Borg Warner Acceptance Corp.; and (f) captive
oil finance companies, such as Shell Credit, Inc., Mobil Oil Credit Corp. and
Texaco Financial Services, Inc.
(10) Purchase from or sell to any officer, director, or employee of Fortis
Series, or its adviser or underwriter, or any of their officers or directors,
any securities other than shares of Fortis Series' common stock.
(11) Make short sales, except for sales "against the box." While a short
sale is made by selling a security the Series does not own, a short sale is
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"against the box" to the extent that the Series contemporaneously owns or has
the right to obtain securities identical to those sold short at no added cost.
(12) Invest more than 5% of the value of its assets in restricted
securities. (Securities sold under Section 4(2) of the Securities Act of 1933
(the "1933 Act") that are eligible for resale pursuant to Rule 144A under the
1933 Act that have been determined to be liquid by the Board of Directors or the
investment adviser subject to the oversight of the Board of Directors will not
be considered to be "restricted securities" and will not be subject to this
limitation.)
The following seven investment restrictions may be changed by the Board of
Directors without shareholder approval.
The Money Market Series and Growth Stock Series will not:
(1) Purchase securities of other investment companies.
(2) Invest in a company for the purposes of exercising control or
management.
(3) Buy or sell foreign exchange, except as incidental to the purchase
or sale of permissible foreign investments.
(4) Investment in securities which would expose such Series to
liabilities exceeding the amount invested.
(5) Invest in interests (including partnership interests) in oil, gas, or
other mineral exploration or development programs, except it may purchase or
sell securities issued by corporations engaging in oil, gas, or other mineral
exploration or development business.
(6) Purchase or retain the securities of any issuer if those officers
and directors of Fortis Series or its investment adviser owning (including
beneficial ownership) individually more than 1/2 of 1% of the securities of such
issuer together own (including beneficial ownership) more than 5% of the
securities of such issuer.
(7) Invest more than an aggregate of 10% of the value of its total
assets in (a) restricted securities (both debt and equity) or in equity
securities of any issuer which are not readily marketable; and (b) companies
which have been in business for less than three years (except that a company
will be deemed to have been in business for more than three years if such
company is the subsidiary of another company which has been in business for more
than three years). (Securities sold under Section 4(2) of the 1933 Act that are
eligible for resale pursuant to Rule 144A under the 1933 Act that have been
determined to be liquid by the Board of Directors or the investment adviser
subject to the oversight of the Board of Directors will not be considered to be
"restricted securities" or "debt or equity securities of any issuer which are
not readily marketable" and will not be subject to this limitation.)
INVESTMENT RESTRICTIONS OF GLOBAL GROWTH SERIES. As a result of the following
fundamental investment restrictions, the Global Growth Series will not:
(1) Concentrate its investments, that is, invest 25% or more of its total
assets in any particular industry.
(2) Buy or sell commodities or commodity contracts, including
futures contracts, other than within the limitations set forth in the Prospectus
and Statement of Additional Information.
(3) Purchase or sell real estate or other interests in real estate, or
interests in real estate investment trusts; however, the Global Growth Series
may invest in debt securities secured by real estate or interests therein or
issued by corporations which invest in real estate or interests.
(4) Mortgage, pledge, hypothecate, or in any manner transfer, as
security for indebtedness, any securities owned or held by the Global Growth
Series, provided that this restriction shall not apply to the transfer of
securities in connection with any permissible borrowing or to collateral
arrangements in connection with permissible activities.
(5) Act as an underwriter of securities of other issuers, except to the
extent that, in connection with the disposition of portfolio securities, the
Global Growth Series may be deemed an underwriter under applicable laws and
except that the Global Growth Series may invest up to 10% of the value of its
assets (at time of investment) in portfolio securities which are not registered
under the applicable securities laws of the country in which such securities are
traded and for which no alternative market is readily available (such securities
are referred to herein as "restricted securities"). (Securities sold under
Section 4(2) of the 1933 Act that are eligible for resale pursuant to Rule 144A
under the 1933 Act that have been determined to be liquid by the Board of
Directors or the investment adviser subject to the oversight of the Board of
Directors will not be considered to be "restricted securities" and will not be
subject to this limitation.)
(6) Purchase securities on margin, except that the Global Growth
Series, in accordance with its investment objectives and policies, may purchase
securities on a when-issued and delayed delivery basis, within the limitations
set forth in the Prospectus and Statement of Additional Information. The Global
Growth Series may also obtain such short-term credit as it needs for the
clearance of securities transactions and may make margin deposits in connection
with futures contracts.
(7) Make short sales, except for sales "against the box." While a short
sale is made by selling a security the Global Growth Series does not own, a
short sale is "against the box" to the extent the Global Growth Series
contemporaneously owns or has the right to obtain securities identical to those
sold short without payment of any additional consideration.
(8) Make loans to other persons, except that it may purchase readily
marketable bonds, debentures, or other debt securities, whether or not publicly
distributed, enter into repurchase agreements, and make loans of portfolio
securities to an aggregate of 30% of the value of its total assets, measured at
the time any such loan is made.
(9) Issue senior securities, except that the Global Growth Series may
purchase securities on a when-issued and delayed delivery basis and enter into
roll transactions and other transactions within the limitations set forth in the
Prospectus and Statement of Additional Information which may be deemed to
constitute borrowing.
(10) Borrow money except from banks for temporary or emergency
purposes not in excess of 33 1/3% of the value of the Global Growth Series'
total assets. The Global Growth Series will not purchase securities while
borrowings (including "roll" transactions) in excess of 5% of total assets are
outstanding. In the event that the asset coverage for the Series' borrowings
falls below 300%, the Global Growth Series will reduce, within three days
(excluding Sundays and holidays), the amount of its borrowings in order to
provide for 300% asset coverage.
The following investment restrictions may be changed by the Board of Directors
without shareholder approval.
The Global Growth Series will not:
(1) Invest more than 5% of the value of its total assets in securities of
other investment companies, except in connection with a merger, consolidation,
acquisition, or reorganization; provided that the Series shall not purchase or
otherwise acquire more than 3% of the total outstanding voting stock of any
other investment company. (Since the Global Growth Series indirectly absorbs its
pro rata share of the other investment companies' expenses through the return
received on these securities, "double" investment advisory fees in effect are
paid on those portfolio assets invested in shares of other investment companies.
However, management believes that at times the return and liquidity features of
these securities will be more beneficial to the Global Growth Series than other
types of securities, and that the indirect absorption of these expenses has a de
minimis effect on the Series' return.)
(2) Invest in a company for the purposes of exercising control or
management.
(3) Invest in interests (including partnership interests or leases) in
oil, gas, or other mineral exploration or development programs, except the
Global Growth Series may purchase or sell securities issued by corporations
engaging in oil, gas, or other mineral exploration or development business.
(4) Purchase or retain the securities of any issuer if those officers
and directors of Fortis Series or its investment adviser owning (including
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beneficial ownership) individually more than 1/2 of 1% of the securities of such
issuer together own (including beneficial ownership) more than 5% of the
securities of such issuer.
(5) Invest more than 5% of its total assets in securities of unseasoned
issuers, including their predecessors, which have been in operation for less
than three years, and in equity securities of issuers which are not readily
marketable. (Securities sold under Section 4(2) of the 1933 Act that are
eligible for resale pursuant to Rule 144A under the 1933 Act that have been
determined to be liquid by the Board of Directors or the investment adviser
subject to the oversight of the Board of Directors will not be considered to be
"equity securities of issuers which are not readily marketable" and will not be
subject to this limitation.)
(6) Invest more than an aggregate of 10% of the value of its total
assets in (a) restricted securities (both debt and equity) or in debt or equity
securities of any issuer which are not readily marketable; (b) repurchase
agreements with a maturity of more than seven days; and (c) over-the-counter
option and futures contracts; provided further, that the Series will not invest
more than 5% of its total assets in restricted securities. (Securities sold
under Section 4(2) of the 1933 Act that are eligible for resale pursuant to Rule
144A under the 1933 Act that have been determined to be liquid by the Board of
Directors or Advisers subject to the oversight of the Board of Directors will
not be considered to be "restricted securities" or "debt or equity securities of
any issuer which are not readily marketable" and will not be subject to this
limitation.)
(7) Enter into any options, futures, or forward contract transactions
if immediately thereafter (a) the amount of premiums paid for all options,
initial margin deposits on all futures contracts and/or options on futures
contracts, and collateral deposited with respect to forward contracts held by or
entered into by the Series would exceed 5% of the value of the total assets of
the Series or (b) the Series' assets covering, subject to, or committed to all
options, futures, and forward contracts would exceed 20% of the value of the
total assets of the Series.
(8) Invest in real estate limited partnership interests.
(9) Purchase the securities of any issuer if such purchase at the time
thereof would cause more than 10% of the voting securities of any issuer to be
held by the Series.
(10) Borrow money in excess of 10% of its total assets, except as a
temporary or emergency measure. ("Roll" transactions will not be considered
borrowing for purposes of this restriction).
Any investment restriction or limitation, fundamental or otherwise, which
involves a maximum percentage of securities or assets shall not be considered to
be violated unless an excess over the percentage occurs immediately after an
acquisition of securities or utilization of assets, and such excess results
therefrom.
The insurance laws and regulations of various states could impose additional
restrictions on the investments of the various Series. One such restriction
currently prohibits the Separate Accounts from acquiring the voting securities
of any issuer if, as a result of the acquisition, the Separate Accounts and
Fortis Benefits, in the aggregate, will own more than 10% of the total issued
and outstanding voting securities of the issuer. Another restriction currently
prohibits the underlying Series of the Separate Accounts from acquiring the
securities of any issuer, other than securities issued or guaranteed as to
principal and interest by the United States Government, if immediately after
such acquisition, the value of the investment together with prior investments in
the security would exceed 10% of the value of the underlying Series of the
Separate Accounts' total assets.
RISK FACTORS
RISKS OF INVESTING IN FOREIGN SECURITIES. Investing in securities of non-U.S.
companies may entail additional risks due to the potential political and
economic instability of certain countries and risks of expropriation,
nationalization, confiscation, or the imposition of restrictions on foreign
investment and on repatriation of capital invested. In the event of such
expropriation, nationalization, or other confiscation, by any country, the
Series could lose its entire investment in any such country.
Certain countries prohibit or impose substantial restrictions on investments in
their capital markets, particularly their equity markets, by foreign entities
such as the Series. As illustrations, certain countries require governmental
approval prior to investments by foreign persons, or limit the amount of
investment by foreign persons in a particular company, or limit the investment
by foreign persons to only a specific class of securities of a company that may
have less advantageous terms than securities of the company available for
purchase by nationals. Moreover, the national policies of certain countries may
restrict investment opportunities in issuers or industries deemed sensitive to
national interests. In addition, some countries require governmental approval
for the repatriation of investment income, capital, or the proceeds of
securities sales by foreign investors. A Series, particularly the Global Growth
Series, could be adversely affected by delays in, or a refusal to grant, any
required governmental approval for repatriation, as well as by the application
to it of other restrictions on investments.
Foreign companies are not generally subject to uniform accounting, auditing, and
financial reporting standards or to other regulatory requirements comparable to
those applicable to U.S. companies. Most of the securities held by the Global
Growth Series will not be registered with the SEC or regulators of any foreign
country, nor will the issuers thereof be subject to the SEC's reporting
requirements. Thus, there will be less available information concerning foreign
issuers of securities held by the Series than is available concerning U.S.
issuers. In instances where the financial statements of an issuer are not deemed
to reflect accurately the financial situation of the issuer, the Series will
take appropriate steps to evaluate the proposed investment, which may include
on-site inspection of the issuer, interviews with its management and
consultations with accountants, bankers, and other specialists.
Because the Global Growth Series will invest at least a majority of its total
assets in the securities of foreign issuers which are denominated in foreign
currencies, the strength or weakness of the U.S. dollar against such foreign
currencies may account for part of the Series' investment performance. A decline
in the value of any particular currency against the U.S. dollar will cause a
decline in the U.S. dollar value of the Series' holdings of securities
denominated in such currency and, therefore, will cause an overall decline in
the Series' net asset value and any net investment income and capital gains to
be distributed in U.S. dollars to shareholders of the Global Growth Series.
The rate of exchange between the U.S. dollar and other currencies is determined
by several factors including the supply and demand for particular currencies,
central bank efforts to support particular currencies, the movement of interest
rates, the pace of business activity in certain other countries, and the U.S.,
and other economic and financial conditions affecting the world economy.
Although the Global Growth Series values its assets daily in terms of U.S.
dollars, the Global Growth Series does not intend to convert its holdings of
foreign currencies into U.S. dollars on a daily basis. The Global Growth Series
will do so from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Series at one rate,
while offering a lesser rate of exchange should the Series desire to sell that
currency to the dealer.
Securities of many foreign issuers may be less liquid and their prices more
volatile than securities of comparable U.S. issuers. In addition, foreign
securities exchanges and brokers are generally subject to less governmental
supervision and regulation than in the U.S., and foreign securities exchange
transactions are usually subject to fixed commissions, which are generally
higher than negotiated commissions on U.S. transactions. In addition, foreign
securities exchange transactions may be subject to difficulties associated with
the settlement of such transactions. Delays in settlement could result in
temporary periods when assets of the Series are uninvested and no return is
earned thereon. The inability of the Series to
20
<PAGE>
make intended security purchases due to settlement problems could cause the
Series to miss attractive opportunities. Inability to dispose of a portfolio
security due to settlement problems either could result in losses to the Series
due to subsequent declines in value of the portfolio security or, if the Series
has entered into a contract to sell the security, could result in possible
liability to the purchaser. The Series will consider such difficulties when
determining the allocation of the Series' assets, although the Series does not
believe that such difficulties will have a material adverse effect on the
portfolio trading activities.
The Series' net investment income from foreign issuers may be subject to
non-U.S. withholding taxes, thereby reducing the Series' net investment income.
See "Taxation" in the Prospectus.
Pursuant to Rule 17f-5 under the 1940 Act, the Board of Directors approved the
use of the following subcustodian banks to maintain foreign securities in or
near the market in which they are principally traded and to maintain cash in
amounts reasonably necessary to effect foreign securities transactions in such
locations. The Board of Directors may from time to time approve other countries
and subcustodian banks pursuant to Rule 17f-5.
<TABLE>
<CAPTION>
COUNTRY BANK/DEPOSITORY
- ------------------ ---------------------------------------------------
<S> <C>
Argentina Citibank, N.A. (Buenos Aires Branch)
Caja de Valores ("CDV")
Australia Australia and New Zealand Banking
Group Limited (ANZ)
Austra Clear Ltd.
Austria Creditanstalt-Bankverein
Osteneichische Kontrollebank
(OeKB)
Belgium Generale Bank
Caisse Interprofessionelle de Depots
et de Virements de Titres S.A.
(C.I.K.)
Brazil Citibank, N.A. (Sao Paulo Branch)
The Bolsa de Valores de Sao Paulo
(BOVESPA)
Canada The Toronto-Dominion Bank
Canadian Depository for Securities
Limited (CDS)
Chile Citibank, N.A. (Santiago Branch)
China Standard Chartered Bank
Shanghai Securities Central Clearing
and Registration Corp.
Colombia Cititrust Colombia, S.A.
Deposito Central de Valores (DLV)
Czech Republic Ceskoslovenska Obchodi Banka, A.S.
Stredisko Cennych Papinu (SCP)
Denmark Den Danske Bank Vaerdipapircentralen (Danish
Securities Centre)
Finland Kansallis-Osake-Pankki
The Central Share Register of Finland
France Banque Paribas
Societe Interprofessionelle de
Compensation des Valeurs
Mobilieres (SICOVAM)
Germany Dresdner Bank, AG
Deutscher Kassenverein A.G.
(Kassenverein)
Greece National Bank of Greece S.A.
Apothetirio Titlon
Hong Kong Standard Chartered Bank
Central Clearing and Securities
System (CCAS)
Hungary Citibank Budapest Rt.
The Central Depository and Clearinghouse
India The Hong Kong and Shanghai
Banking Corporation Limited
(HSBC)
Indonesia Standard Chartered Bank
Italy Citibank, N.A. (Milan Branch) Monte Titoli, S.p.A.
<CAPTION>
COUNTRY BANK/DEPOSITORY
- ------------------ ---------------------------------------------------
<S> <C>
Japan The Bank of Tokyo
Japan Securities Depository
(JASDEC)
Korea Standard Chartered Bank
Korea Securities Settlement
Corporation (KSSC)
Luxembourg Cedel Luxembourg
Malaysia Chung Khiaw Bank (Malaysia)
Malaysian Central Depository
Sdn Bhd (MCD)
Mexico Bancomer S.A., Institution DeBanca Multiple,
Grupo Financiero
Instituto para el Deposito de Valores
(S.D. Indeval) (equity securities only)
Netherlands ABN-AMRO Bank
Nederlands Centraal
Institut voor Giraal Effectenverkeer
B.V. (NECIGEF)
New Zealand Australia and New Zealand Banking
Group Limited (ANZ)
Austraclear NZ
Norway Euroclear
Norwegian Registry of Securities
(NRS/VPS)
Pakistan Standard Chartered Bank
Peru Citibank, N.A. (Lima Branch)
Caja de Valores (CAVAL)
Philippines Standard Chartered Bank
Poland Citibank (Poland), S.A.
National Depository of Securities
Portugal Banco Espirito Santo E Comercial
De Lisboa, SA (BESCL)
Central de Valores Mobiliarios (CVM)
Singapore United Overseas Bank Ltd.
The Central Securities Depository
(PTE) Ltd. (CDP)
South Africa First National Bank of Southern
Africa, Ltd.
Spain Banco Santader
Servicio de Compensacion y
Liquidacion de Valores (SCLV)
Sri Lanka Standard Chartered Bank
The Central Depository System Ltd.
Sweden Svenska Handelsbanken Vardepappercentralen VPC
AB
Switzerland Bankers Trust A.G.
Schweizerische Effekten
Giro A G (SEGA)
Taiwan Central Trust of China-Taipai
The Taiwan Securities Central Depository Company
Ltd.
Thailand Standard Chartered Bank
The Share Depository Center (SDC)
Turkey Osmanli Bankasi A.S. (Ottoman Bank)
Istanbul Stock Exchange
United Kingdom/ Bankers Trust Company
Ireland (London Branch)
Central Gilts Office
Venezuela Citibank, N.A. (Caracas Branch)
Transnational Euroclear
Transnational Cedel
</TABLE>
RISKS OF INVESTING IN ILLIQUID SECURITIES. The sale of restricted or 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 over-the-counter
markets. Restricted securities often sell at a price lower than similar
securities that are not subject to restrictions on resale.
21
<PAGE>
RISKS OF TRANSACTIONS IN OPTIONS, FUTURES CONTRACTS, AND FORWARD
CONTRACTS. Although the Global Growth Series may enter into transactions in
Futures Contracts, Options on Futures Contracts, Currency Contracts, and certain
options solely for hedging purposes, their use does involve certain risks. For
example, a lack of correlation between the index or instrument underlying an
option or futures contract and the assets being hedged or unexpected adverse
price movements, could render Global Growth Series' hedging strategy
unsuccessful and could result in losses. Global Growth Series also may enter
into transactions in options on securities and indexes of securities for other
than hedging purposes, which involves greater risk. In addition, there can be no
assurance that a liquid secondary market will exist for any contract purchased
or sold, Global Growth Series may be required to maintain a position until
exercise or expiration, which could result in losses.
Transactions in options, Futures Contracts, Options on Futures Contracts, and
Currency Contracts may be entered into on United States exchanges regulated by
the SEC or the Commodity Futures Trading Commission, as well as in the
over-the-counter market and on foreign exchanges. In addition, the securities
underlying options and Futures Contracts traded by Global Growth Series may
include domestic as well as foreign securities. Investors should recognize that
transactions involving foreign securities or foreign currencies, and
transactions entered into in foreign countries, may involve considerations and
risks not typically associated with investing in U.S. markets.
- --------------------------------------------------------------------------------
DIRECTORS AND EXECUTIVE OFFICERS
The names, addresses, principal occupations, and other affiliations of directors
and executive officers of Fortis Series are given below:
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION AND AFFILIATIONS WITH
NAME & ADDRESS FORTIS SERIES "AFFILIATED PERSONS" OR INVESTORS (PAST 5 YEARS)
- ------------------------ --------------- -------------------------------------------------------------------------------------
<S> <C> <C>
Richard W. Cutting Director Certified public accountant and financial consultant.
137 Chapin Parkway
Buffalo, New York
Allen R. Freedman* Director Chairman and Chief Executive Officer of Fortis, Inc.; a Managing Director of
Suite 5001 Fortis International, N. V.
One World Trade Cente
New York, New York
Dr. Robert M. Gavin Director President, Macalester College.
1600 Grand Avenue
St. Paul, Minnesota
Jean L. King Director President, Communi-King, a communications consulting firm.
12 Evergreen Lane
St. Paul, Minnesota
Dean C. Kopperud* President and President and a Director of Advisers and Investors and Senior Vice President of
500 Bielenberg Drive Director Fortis Benefits Insurance Company and Time Insurance Company.
Woodbury, Minnesota
Edward M. Mahoney Director Retired; prior to December, 1994, Chairman and Chief Executive Officer and a Director
2760 Pheasant Road of Advisers and Investors, Senior Vice President and a Director of Fortis Benefits
Excelsior, Minnesota Insurance Company, and Senior Vice President of Time Insurance Company.
Thomas R. Pellett Director Retired; prior to January, 1991, Senior Vice President--Administration and Corporate
731 Havenwood Circle Drive Affairs, Pet Incorporated, which is in the food products business.
Warson Woods, Missouri
Robb L. Prince Director Vice President and Treasurer, Jostens, Inc., a producer of products and services for
5501 Norman Center Dr. the youth, education, sports award, and recognition markets.
Minneapolis, Minnesota
Leonard J. Santow Director Principal, Griggs & Santow, Incorporated, economic and financial consultants.
75 Wall Street
21st Floor
New York, New York
Joseph M. Wikler Director Investment consultant and private investor; prior to January, 1994, Director of
12520 Davan Drive Research, Chief Investment Officer, Principal, and a Director, The Rothschild Co.,
Silver Spring, Maryland Baltimore, Maryland. The Rothschild Co. is an investment advisory firm.
Stephen M. Poling Vice President Executive Vice President and a Director of Advisers and Investors.
5500 Wayzata Boulevard
Golden Valley, Minnesota
Dennis M. Ott Vice President Senior Vice President of Advisers and Investors.
5500 Wayzata Boulevard
Golden Valley, Minnesota
James S. Byrd Vice President Vice President of Advisers and Investors; prior to March, 1991, Senior Vice
5500 Wayzata Boulevard President, Templeton Investment Counsel, Inc., Fort Lauderdale, Florida.
Golden Valley, Minnesota
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION AND AFFILIATIONS WITH
NAME & ADDRESS FORTIS SERIES "AFFILIATED PERSONS" OR INVESTORS (PAST 5 YEARS)
- ---------------------------- --------------- -------------------------------------------------------------------------------
<S> <C> <C>
Robert C. Lindberg Vice President Vice President of Advisers and Investors; prior to July, 1993, Vice President,
5500 Wayzata Boulevard Portfolio Manager, and Chief Securities Trader, COMERICA, Inc. Detroit,
Golden Valley, Minnesota Michigan. COMERICA, Inc. is a bank.
Keith R. Thomson Vice President Vice President of Advisers and Investors.
5500 Wayzata Boulevard
Golden Valley, Minnesota
Robert W. Beltz, Jr. Vice President Vice President--Mutual Fund Operations of Advisers and Investors.
500 Bielenberg Drive
Woodbury, Minnesota
Robert J. Clancy Vice President Senior Vice President and a Director of Advisers and Investors and Senior
500 Bielenberg Drive Vice President, Investment Products of Fortis Benefits Insurance Company.
Woodbury, Minnesota
Thomas D. Gualdoni Vice President Vice President of Advisers, Investors, and Fortis Benefits Insurance Company.
500 Bielenberg Drive
Woodbury, Minnesota
Larry A. Medin Vice President Senior Vice President--Sales of Advisers and Investors; from August 1992 to
500 Bielenberg Drive November 1994, Senior Vice President, Western Divisional Officer of Colonial
Woodbury, Minnesota Investment Services, Inc., Boston Massachusetts; from June 1991 to August 1992,
Regional Vice President, Western Divisional Officer of Alliance Capitalx
Regional Vice President, Western Divisional Officer National Sales Director,
Met Life State Street Investment Services, Inc., New York, New York.
Jon H. Nicholson Vice President Vice President--Marketing and Product Development of Fortis Benefits Insurance
500 Bielenberg Drive Company.
Woodbury, Minnesota
John W. Norton Vice President Senior Vice President, General Counsel, and Secretary of Advisers and Investors;
500 Bielenberg Drive since January, 1993, Senior Vice President and General Counsel, Life and
Woodbury, Minnesota Investment Products, Fortis Benefits Insurance Company and Vice President and
General Counsel, Life and Investment Products, Time Insurance Company.
David A. Peterson Vice President Vice President and Assistant General Counsel, Fortis Benefits Insurance
500 Bielenberg Drive Company; prior to January, 1991, Senior Vice President--Law, State Bond
Woodbury, Minnesota and Mortgage Company, Minneapolis, Minnesota.
Michael J. Radmer Secretary Partner, Dorsey & Whitney P.L.L.P., the Fund's General Counsel.
220 South Sixth Street
Minneapolis, Minnesota
Tamara L. Fagely Treasurer Fund Accounting Officer of Advisers and Investors.
500 Bielenberg Drive
Woodbury, Minnesota
<FN>
- -------------------------------------------
* Mr. Kopperud is an "interested person" (as defined under the 1940 Act) of
Fortis Series, Advisers, and Investors primarily because he is President of
each. Mr. Freedman is an "interested person" of Fortis Series, Advisers, and
Investors because he is Chairman and Chief Executive Officer of Fortis, Inc.
("Fortis"), the parent company of Advisers and indirect parent company of
Investors, and a Managing Director of Fortis International, N. V., the
parent company of Fortis.
- -------------------------------------------
</TABLE>
All of the above officers and directors also are officers and/or directors of
other investment companies of which Advisers is the investment adviser. No
compensation is paid by Fortis Series to any of its officers or directors except
for a fee of $200 per month, $100 per meeting attended, and $50 per applicable
committee meeting attended (and reimbursement of travel expenses to attend
meetings) to each director not affiliated with Advisers. During the fiscal year
ended December 31, 1994, the Money Market Series, Growth Stock Series, and
Global Growth Series paid $1,446, $12,779, and $4,361, respectively, to
directors who were not affiliated with Advisers or Investors and reimbursed two
such directors a total of $120, $1,155, and $200, respectively, for travel
expenses incurred in attending directors' meetings. Legal fees and expenses of
$2,715, $22,146, and $8,229, respectively, also were paid to a law firm of which
Fortis Series' Secretary is a partner. As of April 30, 1995, none of the
directors and executive officers beneficially owned any of the outstanding
shares of Fortis Series. Directors Kopperud, Mahoney, Prince, and King are
members of the Executive Committee of the Board of Directors. While the
Executive Committee is authorized to act in the intervals between regular board
meetings with full capacity and authority of the full Board of Directors, except
as limited by law, it is expected that the Committee will act only infrequently.
INVESTMENT ADVISORY AND OTHER
SERVICES
GENERAL
Fortis Advisers, Inc. ("Advisers") has been the investment adviser and manager
of Fortis Series since Fortis Series began business in 1986. Investors acts as
Fortis Series' underwriter. Both act as such pursuant to written agreements
periodically approved by the directors or shareholders of Fortis Series. The
address of both Advisers and Investors is P.O. Box 64284, St. Paul, MN 55164.
As of March 31, 1995, Advisers managed twenty-eight investment company
portfolios with combined net assets of approximately $3,481,569,000, and one
private account with net assets of approximately $15,301,000. As of March 31,
1995, the investment company portfolios had an aggregate of 213,111
shareholders.
During the fiscal year ended December 31, 1992, Money Market Series, Growth
Stock Series, and Global Growth Series paid investment advisory and management
fees of $60,394, $905,529, and $28,982, respectively.
23
<PAGE>
During the fiscal year ended December 31, 1993, such Series paid investment
advisory and management fees of $76,324, $1,567,285, and $220,060, respectively.
During the fiscal year ended December 31, 1994, such Series paid investment
advisory and management fees of $118,752, $2,140,994, and $833,424,
respectively.
CONTROL AND MANAGEMENT OF ADVISERS AND INVESTORS
Fortis owns 100% of the outstanding voting securities of Advisers, and Advisers
owns all of the outstanding voting securities of Investors.
Fortis, located in New York, New York, is a wholly owned subsidiary of Fortis
International, N.V., which has approximately $100 billion in assets worldwide
and is in turn a wholly owned subsidiary of AMEV/VSB 1990 N.V. ("AMEV/VSB
1990").
AMEV/VSB 1990 is a corporation organized under the laws of The Netherlands to
serve as the holding company for all U.S. operations and is owned 50% by Fortis
AMEV and 50% by Fortis AG ("Group AG"). AMEV/VSB 1990 owns a group of companies
active in insurance, banking and financial services, and real estate development
in The Netherlands, the United States, Western Europe, Australia, and New
Zealand.
Fortis AMEV is a diversified financial services company headquartered in
Utrecht, The Netherlands, where its insurance operations began in 1847. Fortis
AG is a diversified financial services company headquartered in Brussels,
Belgium, where its insurance operations began in 1824. Fortis AMEV and Fortis AG
own a group of companies (of which AMEV/VSB 1990 is one) active in insurance,
banking and financial services, and real estate development in The Netherlands,
Belgium, the United States, Western Europe, and the Pacific Rim.
Dean C. Kopperud is President of Advisers and Investors; Stephen M. Poling is
Executive Vice President of Advisers and Investors; Robert J. Clancy, Larry A.
Medin, and Dennis M. Ott are Senior Vice Presidents of Advisers and Investors;
John W. Norton is Senior Vice President, General Counsel, and Secretary of
Advisers and Investors; Robert W. Beltz, Jr., James S. Byrd, Thomas D. Gualdoni,
Robert C. Lindberg, Lee V. Rosenblum, Kyle R. Selberg, Keith R. Thomson, and
Sylvia R. Wagner are Vice Presidents of Advisers and Investors; Barbara W.
Kirby, David G. Carroll, Carol M. Houghtby, and Chris J. Neuharth are 2nd Vice
Presidents of Advisers and Investors; Michael D. O'Connor is Qualified Plan
Officer of Advisers and Investors; Tamara L. Fagely is Fund Accounting Officer
of Advisers and Investors; John E. Hite is Corporate Counsel and Assistant
Secretary of Advisers and Investors; Gregory S. Swenson and Thomas E. Erickson
are Assistant Secretaries of Advisers and Investors; Sharon R. Jibben is
Assistant Secretary of Advisers; and Barbara J. Wolf is Trading Officer of
Advisers.
Messrs. Kopperud, Clancy, and Poling are the Directors of Advisers.
All of the above persons reside or have offices in the Minneapolis/St. Paul
area.
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
Advisers acts as investment adviser and manager of all of the Series under an
Investment Advisory and Management Agreement dated May 1, 1992 (the
"Agreement"), which became effective the same date following approval by the
shareholders of Growth Stock Series and Money Market Series on April 21, 1992.
The Agreement became effective with respect to Global Growth Series on May 1,
1992, following approval by its then sole shareholder on the same date. The
Agreement will be submitted to holders of Global Growth Series for approval at
the next shareholders meeting of Fortis Series. The Agreement was last approved
by the Board of Directors (including a majority of the directors who are not
parties to the Agreements or interested persons of the Agreements) on December
8, 1994. The Agreement will terminate automatically in the event of its
assignment. In addition, the Agreement is terminable at any time, without
penalty, by the Board of Directors or, with respect to any particular Series, by
vote of a majority of the outstanding voting securities of the applicable
Series, on not more than 60 days' written notice to Advisers, and by Advisers on
60 days' notice to Fortis Series. Unless sooner terminated, the Agreement shall
continue in effect for more than two years after its execution only so long as
such continuance is specifically approved at least annually by either the Board
of Directors or, with respect to any particular Series, by vote of a majority of
the outstanding voting securities of the applicable Series, provided that in
either event such continuance is also approved by the vote of a majority of the
directors who are not parties to such Agreement, or interested persons of such
parties, cast in person at a meeting called for the purpose of voting on such
approval.
The Agreement provides for an investment advisory and management fee calculated
as described in the following table. As you can see from the table, this fee
decreases (as a percentage of each Series net assets) as the Series grows. As of
March 31, 1995, the Series' net assets totaled approximately $41,937,000 for
Money Market Series, $404,465,000 for Growth Stock Series, and $149,132,000 for
Global Growth Series.
<TABLE>
<CAPTION>
ANNUAL INVESTMENT
ADVISORY AND
SERIES AVERAGE NET ASSETS MANAGEMENT FEE
<S> <C> <C>
Money Market Series For the first $500 million .3%
For assets over $500 million .25%
Growth Stock Series For the first $100 million .7%
For assets over $100 million .6%
Global Growth Series For the first $500 million .7%
For assets over $500 million .6%
</TABLE>
Advisers, at its own expense, furnishes suitable office space, facilities,
equipment, administrative services, and clerical and other personnel as may be
required for the management of the affairs and business of Fortis Series, and
acts as Fortis Series' registrar, transfer agent, and dividend disbursing agent.
Fortis Series pays all its expenses which are not expressly assumed by Advisers
or Investors. These expenses include, among others, the investment advisory and
management fee, the fees and expenses of directors and officers of Fortis Series
who are not "affiliated persons" of Advisers, interest expenses, taxes,
brokerage fees and commissions, fees and expenses of registering and qualifying
Fortis Series and its shares for distribution under Federal securities laws,
expenses of preparing prospectuses and of printing and distributing prospectuses
annually to existing Contract owners, custodian charges, auditing and legal
expenses, insurance expenses, association membership dues, and the expense of
reports to shareholders and Contract owners, shareholders' meetings, and proxy
solicitations. Fortis Series is also liable for such nonrecurring expenses as
may arise, including litigation to which it may be a party. Fortis Series may
have an obligation to indemnify its directors and officers with respect to such
litigation.
Advisers bears the costs of acting as Fortis Series transfer agent, registrar,
and dividend agent. Investors has agreed to pay all expenses of distributing
Fortis Series' shares, including, but not limited to, costs of printing and
distributing prospectuses to new Contract owners. Pursuant to a separate
Distribution Agreement between Fortis Benefits and investors, Fortis Benefits
reimburses Investors for these costs and expenses with respect to variable life
insurance policies issued by Fortis Benefits or pays them on Investors' behalf.
Advisers reserves the right, but shall not be obligated, to institute voluntary
expense reimbursement programs which, if instituted, shall be in such amounts
and based on such terms and conditions as Advisers, in its sole and absolute
discretion, determines. Furthermore, Advisers reserves the absolute right to
discontinue any of such reimbursement programs at any time without notice to
Fortis Series.
Expenses that relate exclusively to a particular Series, such as custodian
charges and registration fees for shares, are charged to that Series. Other
expenses of Fortis Series are allocated between the Series in an equitable
manner as determined by officers of Fortis Series under the supervision of the
Board of Directors, usually on the basis of net assets or number of contract
holders.
Under the Agreement, Advisers, as investment adviser to Fortis Series, has the
sole authority and responsibility to make and execute investment
24
<PAGE>
decisions for Fortis Series within the framework of Fortis Series' investment
policies, subject to review by the Board of Directors. Advisers also furnishes
Fortis Series with all required management services, facilities, equipment, and
personnel.
Although investment decisions for each Series are made independently from those
of the other Series or those of other funds or private accounts managed by
Advisers, sometimes the same security is suitable for more than one Series,
fund, or account. If and when two or more Series, funds, or accounts
simultaneously purchase or sell the same security, the transactions will be
allocated as to price and amount in accordance with arrangements equitable to
each Series, fund, or account. The simultaneous purchase or sale of the same
securities by a Series and another Series, fund, or account may have a
detrimental effect on the Series, as this may affect the price paid or received
by the Series or the size of the position obtainable by the Series.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Advisers is responsible for decisions to buy and sell securities for the Series,
the selection of brokers and dealers to effect the transactions and the
negotiation of brokerage commissions, if any. Transactions on a stock exchange
in equity securities will be executed primarily through brokers that will
receive a commission paid by the Series. The Series which buy fixed income
securities, on the other hand, will not normally incur any brokerage
commissions. Fixed income securities, as well as equity securities traded in the
over-the-counter market, are generally traded on a "net" basis with dealers
acting as principals for their own accounts without a stated commission,
although the price of the security usually includes a profit to the dealer. In
underwritten offerings, securities are purchased at a fixed price that includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount. Certain of these securities may also be
purchased directly from an issuer, in which case neither commissions nor
discounts are paid.
In placing orders for securities transactions, the primary criterion for the
selection of a broker-dealer is the ability of the broker-dealer, in the opinion
of Advisers, to secure prompt execution of the transactions on favorable terms,
including the reasonableness of the commission and considering the state of the
market at the time. When consistent with these objectives, business may be
placed with broker-dealers who furnish investment research services to Advisers.
Such research services include advice, both directly and in writing, as to the
value of securities; the advisability of investing in, purchasing, or selling
securities; and the availability of securities, or purchasers or sellers of
securities; as well as analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts. This allows Advisers to supplement its own investment research
activities and enables Advisers to obtain the views and information of
individuals and research staffs of many different securities research firms
prior to making investment decisions for the Series. To the extent such
commissions are directed to these other broker-dealers who furnish research
services to Advisers, Advisers receives a benefit, not capable of evaluation in
dollar amounts, without providing any direct monetary benefit to the Series from
these commissions. Advisers believes that most research services obtained by it
generally benefit several or all of the investment companies and private
accounts which it manages, as opposed to solely benefiting one specific managed
fund or account. Normally, research services obtained through managed funds or
accounts investing in common stocks would primarily benefit the managed funds or
accounts which invest in common stock; similarly, services obtained from
transactions in fixed income securities would normally be of greater benefit to
the managed funds or accounts which invest in debt securities.
Advisers has not entered into any formal or informal agreements with any
broker-dealers, nor does it maintain any "formula" which must be followed in
connection with the placement of Fortis Series transactions in exchange for
research services provided Advisers, except as noted below. However, Advisers
does maintain an informal list of broker-dealers, which is used from time to
time as a general guide in the placement of Fortis Series business, in order to
encourage certain broker-dealers to provide Advisers with research services
which Advisers anticipates will be useful to it. Because the list is merely a
general guide, which is to be used only after the primary criterion for the
selection of broker-dealers (discussed above) has been met, substantial
deviations from the list are permissible and may be expected to occur. Advisers
will authorize Fortis Series to pay an amount of commission for effecting a
securities transaction in excess of the amount of commission another
broker-dealer would have charged only if Advisers determines in good faith that
such amount of commission is reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer, viewed in terms
of either that particular transaction or Advisers' overall responsibilities with
respect to the accounts as to which Advisers exercises investment discretion.
Generally, Fortis Series pays higher commissions than the lowest rates
available.
During the fiscal year ended December 31, 1994, for Growth Stock Series,
brokerage commissions totaled $161,072, amounting to .05% of average net assets
and resulting in an average commission rate (calculated by dividing the total
dollar amount of transactions into the total dollar amount of commissions paid)
of .25%. For Global Growth Series, brokerage commissions totaled $278,249,
amounting to .23% of average net assets and resulting in an average commission
rate of .47%. For Money Market Series, Growth Stock Series, and Global Growth
Series, transactions having an aggregate dollar value of approximately
$705,526,000, $43,070,000, and $7,514,000, respectively, were traded at net
prices including a spread or markup.
During the fiscal year ended December 31, 1994, virtually all of the $161,072
paid in commissions by the Growth Stock Series in connection with transactions
having an aggregate value of approximately $63,836,000 and the $278,249 paid in
commissions by the Global Growth Series in connection with transactions having
an aggregate value of approximately $59,633,000 were paid to broker-dealers who
furnished investment research to Advisers, as outlined above.
The Series' acquisitions during the fiscal year ended December 31, 1994, of
securities of its regular brokers or dealers or of the parent of those brokers
or dealers that derive more than fifteen percent of their gross revenue from
securities-related activities is presented below:
<TABLE>
<CAPTION>
VALUE OF
SECURITIES OWNED
AT END OF PERIOD
NAME OF ISSUER ($)
- ---------------------------------------------------- ----------------
<S> <C>
Money Market
Ford Motor Credit Co.............................. $ 1,996,273
Merrill Lynch, Pierce, Fenner & Smith Inc......... 1,995,775
Norwest Corp...................................... 1,991,973
National Westminster.............................. 1,991,778
General Motors Acceptance Corp.................... 1,991,225
General Electric Capital Corp..................... 1,989,422
John Deere Credit Co.............................. 1,986,935
American General Finance Corp..................... 1,985,138
Prudential-Bache Securities, Inc.................. 1,982,869
First Bank (N.A.) Minneapolis..................... 1,949,000
Beneficial Corp................................... 1,881,158
Growth Stock
General Motors Acceptance Corp.................... 16,985,479
First Bank (N.A.) Minneapolis..................... 16,973,595
Ford Motor Credit Co.............................. 16,971,903
National Westminster.............................. 16,967,133
Goldman, Sachs & Co............................... 2,840,000
Global Growth
General Motors Acceptance Corp.................... 6,489,348
First Bank (N.A.) Minneapolis..................... 6,091,000
Norwest Corp...................................... 1,199,025
Ford Motor Credit Corp............................ 1,498,550
Goldman, Sachs & Co............................... 1,198,000
</TABLE>
25
<PAGE>
CAPITAL STOCK
Fortis Series' shares have a par value of $.01 per share and equal rights to
share in dividends and assets. The shares possess no preemptive or conversion
rights.
On March 31, 1995, Fortis Series' ownership of record or, to its knowledge,
beneficially was as follows:
<TABLE>
<CAPTION>
MONEY MARKET GROWTH STOCK GLOBAL GROWTH
NAME OR IDENTITY OF GROUP SHARES OWNED SHARES OWNED SHARES OWNED
- ------------------------------------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Separate Accounts of
Fortis Benefits (policyholder money)............................. 4,038,178 17,454,824 11,743,688
Fortis Benefits (seed money)..................................... -- 57,877 40,750
</TABLE>
Each Series constitutes a separate series of shares. Under Fortis Series'
Articles of Incorporation, the Board of Directors is authorized to create new
series in addition to those already existing without the approval of the
shareholders of Fortis Series. Each share of stock will have a pro-rata interest
in the assets of the Series to which the stock of that series relates and will
have no interest in the assets of any other Series. In the event of liquidation,
each share of a Series would have the same rights to dividends and assets as
every other share of that Series.
Each share of a Series has one vote (with proportionate voting for fractional
shares) irrespective of the relative net asset value of the Series' shares. On
some issues, such as the election of directors, all shares of Fortis Series vote
together as one series. Cumulative voting is not authorized. This means that the
holders of more than 50% of the shares voting for the election of directors can
elect 100% of the directors if they choose to do so, and, in such event, the
holders of the remaining shares will be unable to elect any directors.
On an issue affecting only a particular Series, the shares of the affected
Series vote as a separate series. An example of such an issue would be a
fundamental investment restriction pertaining to only one Series. In voting on
the Agreement, approval of the Agreement by the shareholders of a particular
Series would make the Agreement effective as to that Series whether or not it
had been approved by the shareholders of the other Series. (Although Fortis
Benefits and First Fortis are the only shareholders of each Series, all shares
held by them will generally be voted in accordance with the instructions of the
Contract owners. See "Voting Privileges" below.)
Fortis Series is not required under Minnesota law to hold annual or periodically
scheduled regular meetings of shareholders. Minnesota corporation law provides
for the Board of Directors to convene shareholder meetings when it deems
appropriate. In addition, if a regular meeting of shareholders has not been held
during the immediately preceding fifteen months, a shareholder or shareholders
holding three percent or more of the voting shares of Fortis Series may demand a
regular meeting of shareholders by written notice of demand given to the chief
executive officer or the chief financial officer of Fortis Series. Within ninety
days after receipt of the demand, a regular meeting of shareholders must be held
at Fortis Series' expense. Additionally, the 1940 Act requires shareholder votes
for all amendments to fundamental investment policies and restrictions and for
all investment advisory contracts and amendments thereto.
COMPUTATION OF NET ASSET VALUE AND PRICING
On December 31, 1994, the Series' net asset values per share was calculated as
follows:
MONEY MARKET SERIES
<TABLE>
<S> <C>
Net Assets ($44,832,735)
- -------------------------------- = Net Asset Value Per Share ($10.63)
Shares Outstanding (4,217,239)
</TABLE>
GROWTH STOCK SERIES
<TABLE>
<S> <C>
Net Assets ($377,482,538)
- -------------------------------- = Net Asset Value Per Share ($22.11)
Shares Outstanding (17,075,189)
</TABLE>
GLOBAL GROWTH SERIES
<TABLE>
<S> <C>
Net Assets ($144,646,911)
- -------------------------------- = Net Asset Value Per Share ($12.31)
Shares Outstanding (11,754,070)
</TABLE>
The primary close of trading currently is 3:00 P.M. (Central Time), but this
time may be changed. The offering price for purchase orders received in the
office of Fortis Series after the beginning of each day the New York Stock
Exchange (the "Exchange") is open for trading is based on net asset value
determined as of the primary closing time for business on the Exchange that day;
the price in effect for orders received after such close is based on the net
asset value as of such close of the Exchange on the next day the Exchange is
open for trading.
Generally, the net asset value of each Series' shares is determined on each day
on which the Exchange is open for business. The Exchange is not open for
business on the following holidays (nor on the nearest Monday or Friday if the
holiday falls on a weekend): New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Additionally, net asset value need not be determined (i) on days on which
changes in the value of the portfolio securities will not materially affect the
current net asset value of the Series' shares; or (ii) on days during which no
such Series' shares are tendered for redemption and no orders to purchase or
sell such Series' shares are received by Fortis Series.
REDEMPTION
The right of the Separate Account to redeem shares or to receive payment with
respect to any redemption may be suspended only for any period during which
trading on the Exchange is restricted as determined by the Securities and
Exchange Commission or when such Exchange is closed (other than customary
weekend or holiday closings), for any period during which an emergency exists as
defined by the Securities and Exchange Commission as a result of which disposal
of a Series' securities or determination of the net asset value of each Series
is not reasonably practicable, and for such other periods as the Securities and
Exchange Commission may by order permit for the protection of shareholders of
each Series.
Redemption of shares, or payment, may be suspended at times (a) when the
Exchange is closed for other than customary weekend or holiday closings, (b)
when trading on said Exchange is restricted, (c) when an emergency exists, as a
result of which disposal by Fortis Series of securities owned by it is not
reasonably practicable, or it is not reasonably practicable for Fortis Series
fairly to determine the value of its net assets, or during any other period when
the Securities and Exchange Commission, by order, so permits; provided that
applicable rules and regulations of the Securities and Exchange Commission shall
govern as to whether the conditions prescribed in (b) or (c) exist. The Exchange
is not open for business on the
26
<PAGE>
following holidays (nor on the nearest Monday or Friday if the holiday falls on
a weekend), on which the Fund will not redeem shares: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
TAXATION
Each Series of Fortis Series then in existence qualified in 1994, and each
Series intends to continue to qualify (or to initially qualify, if applicable),
as a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code"). As long as each such Series so qualifies, the Series is
not taxed on the income it distributes to the shareholders. Generally, in order
to qualify as a regulated investment company, a Series must derive at least 90
percent of its gross income from dividends, interest, and gains from the sale or
other disposition of stock or securities or other income derived with respect to
its investing in such stock or securities. In addition, less than 30 percent of
its income may be derived from sales of stock or securities held for less than
three months. Being qualified as a regulated investment company does not mean
that the Internal Revenue Service supervises Fortis Series or approves its
policies.
Under the Code, each Series of Fortis Series will generally be treated as a
separate entity for federal tax purposes. Therefore, each Series will be treated
separately in determining whether it qualifies as a regulated investment company
and in determining the net ordinary income (or loss), net realized capital gains
(or losses) and distributions necessary to relieve each Series of Fortis Series
of any federal income tax liability.
Pursuant to the Code, each Series will be subject to a nondeductible excise tax
for each calendar year equal to 4 percent of the excess, if any, of the amount
required to be distributed over the amount distributed. However, the excise tax
does not apply to any income on which a Series pays income tax. In order to
avoid the imposition of this excise tax, each Series generally must declare
dividends by the end of a calendar year representing 98 percent of the Series'
ordinary income for the calendar year and 98 percent of its capital gain net
income (both long-term and short-term capital gains) for the twelve-month period
ending October 31 of the calendar year.
The Code imposes certain diversification requirements on the investments of
segregated asset accounts underlying variable annuity and life insurance
contracts. Treasury Regulations interpret those requirements. Under the Code and
the Regulations, if a variable contract is based in part or in whole on a
segregated asset account that fails to meet the diversification standards, the
variable contract will not be treated as an annuity or life insurance contract
for federal income tax purposes. As a consequence, the income on the contract
for any taxable year, whether or not distributed, will be treated as ordinary
income received by the Contract owner during such year.
As a general rule, each Series of Fortis Series may invest not more than 55% of
the value of its total assets in the securities of a single issuer, not more
than 70% of the value of its total assets in the securities of any two issuers,
not more than 80% of the value of its total assets in the securities of any
three issuers, and not more than 90% of the value of its total assets in the
securities of any four issuers. Under the Code and the Regulations, for purposes
of the diversification tests, the securities of each agency or instrumentality
of the U.S. government are considered the securities of a separate issuer. Each
Series intends to satisfy either the diversification test described above or an
alternative diversification test provided by the Code, so that the variable
contracts invested in each Series will be treated as variable contracts under
the Code and the income earned with respect to the contracts will not be
currently taxable to the Contract owners.
If the Global Growth Series invests in zero coupon obligations upon their
issuance, such obligations will have original issue discount in the hands of
Global Growth Series. Generally, original issue discount equals the difference
between the "stated redemption price at maturity" of the obligation and its
"issue price" as those terms are defined in the Code. Global Growth Series is
required to accrue as ordinary interest income a portion of such original issue
discount even though it receives no cash currently as interest payments on the
obligation. Similarly, in the case of PIKs, Global Growth Series is required to
recognize interest income in the amount of the fair market value of the
securities received as interest payments on the PIKs, even though they receive
no cash.
For Federal income tax purposes the Series had the following capital loss
carryovers at December 31, 1994, which, if not offset by subsequent capital
gains, will expire in 1995 through 2003. It is unlikely the Board of Directors
will authorize a distribution of any net realized gains until the available
capital loss carryovers have been offset or expired.
<TABLE>
<S> <C>
Money Market Series................... $ 127,374
Growth Stock Series................... 26,110,262
Global Growth Series.................. 5,826,999
</TABLE>
UNDERWRITER
On December 8, 1994, the Board of Directors (including a majority of the
directors who are not parties to the contract, or interested persons of any such
party) last approved the Underwriting Agreement with Investors dated May 1,
1994, which became effective May 1, 1994. This Underwriting Agreement may be
terminated by Fortis Series or Investors at any time by the giving of 60 days'
written notice, and terminates automatically in the event of its assignment.
Unless sooner terminated, the Underwriting Agreement shall continue in effect
for more than two years after its execution only so long as such continuance is
also approved by the vote of a majority of the directors who are not parties to
such Underwriting Agreement, or interested persons of such parties, cast in
person at a meeting called for the purpose of voting on such approval.
The Underwriting Agreement requires Investors to pay all promotional expenses in
connection with the distribution of the Fortis Series' shares, including paying
for printing and distributing prospectuses and shareholder reports to new Policy
owners, and the costs of sales literature. Pursuant to a separate distribution
agreement between Fortis Benefits and Investors, Fortis Benefits reimburses
Investors for these expenses or pays them on Investors' behalf, to the extent
they involve shares issued to fund variable life insurance policies issued by
Fortis Benefits.
In the Underwriting Agreement, Investors undertakes to indemnify Fortis Series
against all costs of litigation and other legal proceedings, and against any
liability incurred by or imposed upon Fortis Series in any way arising out of or
in connection with the sale or distribution of the Fortis Series' shares, except
to the extent that such liability is the result of information which was
obtainable by Investors only from persons affiliated with Fortis Series but not
with Investors.
PERFORMANCE
Cumulative total return is computed by finding the cumulative compounded rate of
return over the period indicated in the advertisement that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
ERV-P
CTR = (-----) 100
P
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of the period of a hypothetical
$1,000 payment made at the beginning of such period; and
P = initial payment of $1,000
This calculation assumes all dividends and capital gains distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.
27
<PAGE>
Average annual total return figures are computed by finding the average annual
compounded rates of return over the periods indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the period of a hypothetical
$1,000 payment made at the beginning of such period.
This calculation assumes all dividends and capital gains distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.
Yield is computed by dividing the net investment income per share (as defined
under Securities and Exchange Commission rules and regulations) earned during
the computation period by the maximum offering price per share on the last day
of the period, according to the following formula:
(a-b) 6
YIELD = 2{[ ---- +1] -1}
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of the period.
Current yield (calculated over a seven-day period) is a percentage computed by
determining the net change, exclusive of capital changes, in the value of a
hypothetical preexisting account having a balance of one share at the beginning
of the period, subtracting a hypothetical charge reflecting deductions from
shareholder accounts, and dividing the difference by the value of the account at
the beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7) with the resulting figure carried
to at least the nearest hundredth of one percent. Effective yield (calculated
over a seven-day period) is computed by determining the net change, exclusive of
capital changes, in the value of a hypothetical preexisting account having a
balance of one share at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then compounding the base period return by
adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting
1 from the result, according to the following formula:
365/7
Effective Yield = [(Base Period Return +1) ] -1
The Series also may quote annual yield figures, calculated similarly to the
above methods.
Current yield information is useful in reviewing performance, but because
current yield will fluctuate, (1) such information may not provide a basis for
comparison with bank deposits or other investments which pay a fixed yield for a
stated period of time and may be insured and (2) the current yield is not
necessarily representative of future results.
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
1/1/94 TO 1/1/90 TO 1/13/87 TO
SERIES 12/31/94 12/31/94 12/31/94
- ------------------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Growth Stock....................................................... -2.82% 10.11% 11.59%(1)
Global Growth(2)................................................... -2.98% N/A N/A
<FN>
- ------------------------
(1)From effective date of the Series' SEC registration. (However, March 24, 1987
was the first day any separate account assets from Contracts were invested in
the Series and the average annual total return from March 24, 1987 to
December 31, 1994 was 9.29% for the Growth Stock Series.)
(2)The average annual total return for the Global Growth Series from its
inception on May 1, 1992 through December 31, 1994, was 9.32%.
</TABLE>
Any stub period return has been annualized (average annual total return).
CUMULATIVE TOTAL RETURNS
<TABLE>
<CAPTION>
1/1/94 TO 1/1/90 TO 1/13/87 TO
SERIES 12/31/94 12/31/94 12/31/94
- -------------------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Growth Stock........................................................ -2.82% 61.87% 139.58%
Global Growth(2).................................................... -2.98% N/A N/A
<FN>
- ------------------------
(1)From effective date of the Series' SEC registration. (However, March 24, 1987
was the first day any separate account assets from Contracts were invested in
the Series and the cumulative total return from March 24, 1987 to December
31, 1994 was 108.05%, for the Growth Stock Series.)
(2)The cumulative total return for the Global Growth Series from its inception
on May 1, 1992 through December 31, 1994 was 26.85%.
</TABLE>
As noted in the Prospectus, Fortis Series may advertise the Series' relative
performance as compiled by outside organizations or refer to publications which
have mentioned its performance.
Fortis Series may from time to time compare the Series with the following:
(1) The Salomon Brothers Non-U.S. Dollars Indices, which are measures of the
total return performance of high-quality non-U.S. dollar denominated securities
in major sectors of the worldwide bond markets.
(2) The Shearson Lehman Government/Corporate Bond Index, which is a
comprehensive measure of all public obligations of the U.S. Treasury (excluding
flower bonds and foreign targeted issues), a publicly issued debt of agencies of
the U.S. Government (excluding mortgage-backed securities), and all public,
fixed rate, nonconvertible investment grade domestic corporate debt rated at
least Baa by Moody's or BBB by S&P, or, in the case of nonrated bonds. BBB by
Fitch Investors Service (excluding Collateralized Mortgage Obligations).
28
<PAGE>
(3) Average of Savings Accounts, which is a measure of all kinds of savings
deposits, including longer-term certificates (based on figures supplied by the
U.S. League of Savings Institutions). Savings accounts offer a guaranteed rate
of return on principal, but no opportunity for capital growth. During a portion
of the period, the maximum rates paid on some savings deposits were fixed by
law.
(4) The Consumer Price Index, which is a measure of the average change in
prices over time in a fixed market basket of goods and services (e.g., food,
clothing, shelter, fuels, transportation fares, charges for doctors' and
dentists' services, prescription medicines, and other goods and services that
people buy for day-to-day living).
(5) Bear Stearns Foreign Bond Index, which provides simple average returns
for individual countries and GNP-weighted index, beginning in 1975. The returns
are broken down by local market and currency.
(6) Ibbottson Associates International Bond Index, which provides a detailed
breakdown of local market and currency returns since 1960.
(7) Standard & Poor's "500" Index ("S&P 500") which is a widely recognized
index composed of the capitalization-weighted average of the price of 500 of the
largest publicly traded stocks in the United States.
(8) Salomon Brothers Broad Investment Grade Index which is a widely used
index composed of U.S. domestic government, corporate and mortgage-backed fixed
income securities.
(9) Dow Jones Industrial Average.
(10) Financial News Composite Index.
(11) Morgan Stanley Capital International World Indices, including, among
others, the Morgan Stanley Capital International Europe, Australia, Far East
Index ("EAFE Index"). The EAFE Index is an unmanaged index of more than 800
companies of Europe, Australia, and the Far East.
Indices prepared by the research departments of such financial organizations as
Salomon Brothers, Inc.; Merrill Lynch, Pierce, Fenner & Smith, Inc.; Bear
Stearns & Co., Inc.; Morgan Stanley; and Ibbottson Associates may be used, as
well as information provided by the Federal Reserve Board.
Fortis Series may refer to the rating services listed below.
RATINGS SERVICE
---------------
Lipper Analytical Services, Inc.
Wiesenberger Investment Companies Services
Morningstar Publications, Inc.
Johnson's Charts
CDA Investment Technologies, Inc.
As noted in the Prospectus, Fortis Series may refer to publications which have
mentioned its performance.
29
<PAGE>
Following is a list of the publications whose articles may be referred to:
AMERICAN BANKER (The)
AP-DOW Jones News Service
ASSOCIATED PRESS (The)
BARRON'S
BETTER INVESTING
BOARDROOM REPORTS
BOND BUYER & CREDIT MARKETS (The)
BOND BUYER (The)
BONDWEEK
BUSINESS MONTH
BUSINESS WEEK
CABLE NEWS NETWORK
CASHFLOW MAGAZINE
CFO
CHICAGO TRIBUNE (The)
CHRISTIAN SCIENCE MONITOR
CITY BUSINESS/CORPORATE REPORT
CITYBUSINESS PUBLICATIONS
COMMERCIAL & FINANCIAL CHRONICLE
CONSUMER GUIDE
CORPORATE FINANCE
DALLAS MORNING NEWS
DOLLARS & SENSE
DOW-JONES NEWS SERVICE
ECONOMIST (The)
EQUITY INTERNATIONAL
EUROMONEY
FINANCIAL EXECUTIVE
FINANCIAL PLANNING
FINANCIAL SERVICES WEEK
FINANCIAL TIMES
FINANCIAL WORLD
FORBES
FORTUNE
FUTURES
GLOBAL FINANCE
GLOBAL INVESTOR
INDUSTRY WEEK
INSTITUTIONAL INVESTOR
INTERNATIONAL HERALD TRIBUNE
INVESTMENT DEALER'S DIGEST
INVESTOR'S BUSINESS DAILY
KIPLINGER PERSONAL FINANCE
KIPLINGER CALIF. LETTER (The)
KIPLINGER FLORIDA LETTER
KIPLINGER TEXAS LETTER
KIPLINGER WASHINGTON LETTER (The)
KNIGHT/RIDDER FINANCIAL
LA TIMES
LIPPER ANALYTICAL SERVICES
MARKET CHRONICLE
MINNEAPOLIS STAR TRIBUNE
MONEY
MONEY MANAGEMENT LETTER
MOODY'S INVESTORS SERVICE, INC.
NATIONAL THRIFT NEWS
NATIONAL UNDERWRITER
NELSON'S RESEARCH MONTHLY
NEW YORK DAILY NEWS
NEW YORK NEWSDAY
NEW YORK TIMES (The)
NEWSWEEK
NIGHTLY BUSINESS REPORT (The)
PENSION WORLD
PENSIONS & INVESTMENT AGE
PERSONAL INVESTOR
PORTFOLIO LETTER
REGISTERED REPRESENTATIVE
RUETERS
SECURITIES PRODUCT NEWS
SECURITIES WEEK
SECURITY TRADERS HANDBOOK
SAINT PAUL PIONEER PRESS
STANDARD & POOR'S CORPORATION
STANGER'S INVESTMENT ADVISOR
STANGER'S SELLING MUTUAL FUNDS
STOCK MARKET MAGAZINE (The)
TIME
TRUSTS & ESTATES
U.S. NEWS & WORLD REPORT
UNITED PRESS INTERNATIONAL
USA TODAY
WALL STREET JOURNAL (The)
WASHINGTON POST (The)
FORTIS BENEFITS INSURANCE COMPANY
WOODBURY BULLETIN
WIESENBERGER INVESTMENT COMPANIES SERVICES
30
<PAGE>
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31
<PAGE>
Fortis Series also may advertize data concerning its portfolio securities'
performance and biographical information about its portfolio managers.
FINANCIAL STATEMENTS
The financial statements included as part of Fortis Series' 1994 Annual Report
to Shareholders, filed with the Securities and Exchange Commission in February,
1994, are incorporated herein by reference. The Annual Report accompanies this
Statement of Additional Information.
CUSTODIAN; COUNSEL; ACCOUNTANTS
First Bank National Association, First Bank Place, Minneapolis MN 55101 acts as
custodian of Fortis Series' assets and portfolio securities; Dorsey & Whitney
P.L.L.P., 220 South Sixth Street, Minneapolis, MN 55402, is the independent
General Counsel for Fortis Series; and KPMG Peat Marwick LLP, 4200 Norwest
Center, Minneapolis, MN 55402, acts as Fortis Series' independent auditors.
LIMITATION OF DIRECTOR LIABILITY
Under Minnesota law, each director of Fortis Series owes certain fiduciary
duties to Fortis Series and to its shareholders. Minnesota law provides that a
director "shall discharge the duties of the position of director in good faith,
in a manner the director reasonably believes to be in the best interests of the
corporation, and with the care an ordinarily prudent person in a like position
would exercise under similar circumstances." Fiduciary duties of a director of a
Minnesota corporation include, therefore, both a duty of "loyalty" (to act in
good faith and act in a manner reasonably believed to be in the best interests
of the corporation) and a duty of "care" (to act with the care an ordinarily
prudent person in a like position would exercise under similar circumstances).
Minnesota law authorizes corporations to eliminate or limit the personal
liability of a director to the corporation or its shareholders for monetary
damages for breach of the fiduciary duty of "care." Minnesota law does not,
however, permit a corporation to eliminate or limit the liability of a director
(i) for any breach of the director's duty of "loyalty" to the corporation or its
shareholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for authorizing a
dividend, stock repurchase or redemption or other distribution in violation of
Minnesota law or for violation of certain provisions of Minnesota securities
laws, or (iv) for any transaction from which the director derived an improper
personal benefit. The Articles of Incorporation of Fortis Series limit the
liability of directors to the fullest extent permitted by Minnesota statutes,
except to the extent that such a liability cannot be limited as provided in the
1940 Act (which act prohibits any provisions which purport to limit the
liability of directors arising from such directors' willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of their role as directors).
Minnesota law does not eliminate the duty of "care" imposed upon a director. It
only authorizes a corporation to eliminate monetary liability for violations of
that duty. Minnesota law, further, does not permit elimination or limitation of
liability of "officers" to the corporation for breach of their duties as
officers (including the liability of directors who serve as officers for breach
of their duties as officers). Minnesota law does not permit elimination or
limitation of the availability of equitable relief, such as injunctive or
rescissionary relief. Further, Minnesota law does not permit elimination or
limitation of a director's liability under the Securities Act of 1933 or the
Securities Exchange Act of 1934, and it is uncertain whether and to what extent
the elimination of monetary liability would extend to violations of duties
imposed on directors by the 1940 Act and the rules and regulations adopted under
such Act.
ADDITIONAL INFORMATION
Fortis Series has filed with the Securities and Exchange Commission, Washington,
D.C. 20549, a Registration Statement under the Securities Act of 1933, as
amended, with respect to the common stock offered hereby. The Prospectus and
this Statement of Additional Information do not contain all of the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with Rules and Regulations of the Commission. The Registration
Statement may be inspected at the principal office of the Commission at 450
Fifth Street, N.W., Washington, D.C., and copies thereof may be obtained from
the Commission at prescribed rates.
32
<PAGE>
APPENDIX
DESCRIPTION OF FUTURES, OPTIONS AND FORWARD CONTRACTS
OPTIONS ON SECURITIES
An option on a security provides the purchaser, or "holder," with the right, but
not the obligation, to purchase, in the case of a "call" option, or sell, in the
case of a "put" option, the security or securities underlying the option, for a
fixed exercise price up to a stated expiration date or, in the case of certain
options, on such date. The holder pays a nonrefundable purchase price for the
option, known as the "premium." The maximum amount of risk the purchaser of the
option assumes is equal to the premium plus related transaction costs, although
this entire amount may be lost. The risk of the seller, or "writer," however, is
potentially unlimited, unless the option is "covered." A call option written by
the Series is "covered" if the Series owns the underlying security covered by
the call or has an absolute and immediate right to acquire that security without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the Series
holds a call on the same security and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Series in cash and
high grade government securities in a segregated account with its custodian. A
put option written by the Series is "covered" if the Series maintains cash and
high grade government securities with a value equal to the exercise price in a
segregated account with its custodian, or else holds a put on the same security
and in the same principal amount as the put written where the exercise price of
the put held is equal to or greater than the exercise price of the put written.
If the writer's obligation is not so covered, it is subject to the risk of the
full change in value of the underlying security from the time the option is
written until exercise.
Upon exercise of the option, the holder is required to pay the purchase price of
the underlying security, in the case of a call option, or to deliver the
security in return for the purchase price in the case of a put option.
Conversely, the writer is required to deliver the security, in the case of a
call option, or to purchase the security, in the case of a put option. Options
on securities which have been purchased or written may be closed out prior to
exercise or expiration by entering into an offsetting transaction on the
exchange on which the initial position was established, subject to the
availability of a liquid secondary market.
Options on securities and options on indexes of securities, discussed below, are
traded on national securities exchanges, such as the Chicago Board Options
Exchange and the New York Stock Exchange, which are regulated by the SEC. The
Options Clearing Corporation guarantees the performance of each party to an
exchange-traded option, by in effect taking the opposite side of each such
option. A holder or writer may engage in transactions in exchange-traded options
on securities and options on indexes of securities only through a registered
broker-dealer which is a member of the exchange on which the option is traded.
In addition, options on securities and options on indexes of securities may be
traded on exchanges located outside the United States and over-the-counter
through financial institutions dealing in such options as well as the underlying
instruments. The particular risks of transactions on foreign exchanges and
over-the-counter transactions are set forth more fully in the Statement of
Additional Information.
OPTIONS ON STOCK INDEXES
In contrast to an option on a security, an option on a stock index provides the
holder with the right to make or receive a cash settlement upon exercise of the
option, rather than the right to purchase or sell a security. The amount of this
settlement is equal to (a) the amount, if any, by which the fixed exercise price
of the option exceeds (in the case of a call) or is below (in the case of a put)
the closing value of the underlying index on the date of exercise, multiplied by
(b) a fixed "index multiplier." The purchaser of the option receives this cash
settlement amount if the closing level of the stock index on the day of exercise
is greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. The writer of the option is obligated, in return
for the premium received, to make delivery of this amount if the option is
exercised. As in the case of options on securities, the writer or holder may
liquidate positions in stock index options prior to exercise or expiration by
entering into closing transactions on the exchange on which such positions were
established, subject to the availability of a liquid secondary market.
The Series will cover all options on stock indexes by owning securities whose
price changes, in the opinion of Advisers, are expected to be similar to those
of the index, or in such other manner as may be in accordance with the rules of
the exchange on which the option is traded and applicable laws and regulations.
Nevertheless, where the Series covers a call option on a stock index through
ownership of securities, such securities may not match the composition of the
index. In that event, the Series will not be fully covered and could be subject
to risk of loss in the event of adverse changes in the value of the index. The
Series will secure put options on stock indexes by segregating assets equal to
the option's exercise price, or in such other manner as may be in accordance
with the rules of the exchange on which the option is traded and applicable laws
and regulations.
The index underlying a stock option index may be a "broad-based" index, such as
the Standard & Poor's 500 Index or the New York Stock Exchange Composite Index,
the changes in value of which ordinarily will reflect movements in the stock
market in general. In contrast, certain options may be based upon narrower
market indexes, such as the Standard & Poor's 100 Index, or on indexes of
securities of particular industry groups, such as those of oil and gas or
technology companies. A stock index assigns relative values to the stocks
included in the index and the index fluctuates with changes in the market values
of the stocks so included.
FUTURES CONTRACTS ON FIXED INCOME SECURITIES, STOCK INDEXES AND FOREIGN
CURRENCIES
A Futures Contract is a bilateral agreement providing for the purchase and sale
of a specified type and amount of a financial instrument or foreign currency, or
for the making and acceptance of a cash settlement, at a stated time in the
future for a fixed price. By its terms, a Futures Contract provides for a
specified settlement date on which, in the case of the majority of interest rate
and foreign currency futures contracts, the fixed income securities or currency
underlying the contract are delivered by the seller and paid for by the
purchaser, or on which, in the case of stock index futures contracts and certain
interest rate and foreign currency futures contracts, the difference between the
price at which the contract was entered into and the contract's closing value is
settled between the purchaser and the seller in cash. Futures Contracts differ
from options in that they are bilateral agreements, with both the purchaser and
the seller equally obligated to complete the transaction. Futures Contracts call
for settlement only on the expiration date, and cannot be "exercised" at any
other time during their term.
The purchase or sale of a Futures Contract differs from the purchase or sale of
a security or the purchase of an option in that no purchase price is paid or
received. Instead, an amount of cash or cash equivalents, which varies but may
be as low as 5% or less of the value of the contract, must be deposited with the
broker as "initial margin." Subsequent payments to and from the broker, referred
to as "variation margin," are made on a daily basis as the value of the index or
instrument underlying the Futures Contract fluctuates, making positions in the
Futures Contracts more or less valuable, a process known as "marking to the
market."
U.S. Futures Contracts may be purchased or sold only on an exchange, known as a
"contract market," designated by the CFTC for the trading of such contract, and
only through a registered futures commission merchant which is a member of such
contract market. A commission must be paid on each completed purchase and sale
transaction. The contract market clearing house guarantees the performance of
each party to a Futures Contract, by in effect taking the opposite side of such
contract. At any time prior to the expiration of a Futures Contract, a trader
may elect to close out its position by taking an opposite position on the
contract market on which the position was entered into, subject to the
availability of a secondary market,
33
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which will operate to terminate the initial position. At that time, a final
determination of variation margin is made and any loss experienced by the trader
is required to be paid to the contract market clearing house while any profit
due to the trader must be delivered to it. Futures Contracts may also be traded
on foreign exchanges.
Interest rate Futures Contracts currently are traded on a variety of fixed
income securities, including long-term U.S. Treasury Bonds, Treasury Notes,
Government National Mortgage Association modified pass-through mortgage-backed
securities, and U.S. Treasury Bills. In addition, interest rate Futures
Contracts include contracts on indexes of municipal securities. Foreign currency
Futures Contracts currently are traded on the British pound, Canadian dollar,
Japanese yen, Swiss franc, West German mark, and on Eurodollar deposits.
A stock index or Eurodollar Futures Contract provides for the making and
acceptance of a cash settlement in much the same manner as the settlement of an
option on a stock index. The types of indexes underlying stock index futures
contracts are essentially the same as those underlying stock index options, as
described above. The index underlying a municipal bond index futures contract is
a broad-based index of municipal securities designed to reflect movements in the
municipal securities market as a whole. The index assigns weighted values to the
securities included in the index and its composition is changed periodically.
OPTIONS ON FUTURES CONTRACTS
An Option on a Futures Contract provides the holder with the right to enter into
a "long" position in the underlying Futures Contract, in the case of a call
option, or a "short" position in the underlying Futures Contract, in the case of
a put option, at a fixed exercise price up to a stated expiration date or, in
the case of certain options, on such date. Upon exercise of the option by the
holder, the contract market clearing house establishes a corresponding short
position for the writer of the option, in the case of a call option, or a
corresponding long position, in the case of a put option. In the event that an
option is exercised, the parties will be subject to all the risks associated
with the trading of Futures Contracts, such as payment of variation margin
deposits. In addition, the writer of an Option on a Futures Contract, unlike the
holder, is subject to initial and variation margin requirements on the option
position.
A position in an Option on a Futures Contract may be terminated by the purchaser
or the seller prior to expiration by affecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
Options on Futures Contracts that are written or purchased by the Series on
United States exchanges are traded on the same contract market as the underlying
Futures Contract and, like Futures Contracts, are subject to regulation by the
CFTC and the performance guarantee of the exchange clearing house. In addition,
Options on Futures Contracts may be traded on foreign exchanges.
An option, whether based on a Futures Contract, a stock index, or security,
becomes worthless to the holder when it expires. Upon exercise of an option, the
exchange or contract market clearing house assigns exercise notices on a random
basis to those of its members which have written options of the same series and
with the same expiration date. A brokerage firm receiving such notices then
assigns them on a random basis to those of its customers which have written
options of the same series and expiration date. A writer therefore has no
control over whether an option will be exercised against it, nor over the timing
of such exercise.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A Currency Contract is a contractual obligation to purchase or sell a specific
quantity of a given foreign currency for a fixed exchange rate at a future date.
Currency Contracts are individually negotiated and are traded through the
"interbank currency market," an informal network of banks and brokerage firms
which operates around the clock and throughout the world. Transactions in the
interbank market may be executed only through financial institutions acting as
market-makers in the interbank market, or through brokers exercising purchases
and sales through such institutions. Market-makers in the interbank market
generally act as principals in taking the opposite side of their customers'
positions in Currency Contracts, and ordinarily charge a mark-up commission
which may be included in the cost of the Contract. In addition, market-makers
may require their customers to deposit collateral upon entering into a Currency
Contract, as security for the customer's obligation to make or receive delivery
of currency, and to deposit additional collateral if exchange rates move
adversely to the customer's position. Such deposits may function in a manner
similar to the margining of Futures Contracts, described above.
Prior to the stated maturity date of a Currency Contract, it may be possible to
liquidate the transaction by entering into an offsetting contract. In order to
do so, however, a customer may be required to maintain both contracts as open
positions until maturity and to make or receive a settlement of the difference
owed to or from the market-maker or broker at that time.
OPTIONS ON FOREIGN CURRENCIES
Options on foreign currencies are traded in a manner substantially similar to
options on securities. In particular, an option on foreign currency provides the
holder with the right to purchase, in the case of a call option, or to sell, in
the case of a put option, a stated quantity of a particular currency for a fixed
price up to a stated expiration date or, in the case of certain options, on such
date. The writer of the option undertakes the obligation to deliver, in the case
of a call option, or to purchase, in the case of a put option, the quantity of
the currency called for in the option, upon exercise of the option by the
holder.
As in the case of other types of options, the holder of an option on foreign
currency is required to pay a one-time, nonrefundable premium, which represents
the cost of purchasing the option. The holder can lose the entire amount of this
premium, as well as related transaction costs, but not more than this amount.
The writer of the option, in contract, generally is required to make initial and
variation margin payments, similar to margin deposits required in the trading of
Futures Contracts and the writing of other types of options. The writer is
therefore subject to risk of loss beyond the amount originally invested and
above the value of the option at the time it is entered into.
Certain options on foreign currencies, like Currency Contracts, are traded
over-the-counter through financial institutions acting as market-makers in such
options and the underlying currencies. Such transactions therefore involve risks
not generally associated with exchange-traded instruments, which are discussed
below. Options on foreign currencies may also be traded on national securities
exchanges regulated by the SEC and on exchanges located in foreign countries.
Over-the-counter transactions can only be entered into with a financial
institution willing to take the opposite side, as principal, of the Series'
position, unless the institution acts as broker and is able to find another
counterparty willing to enter into the transaction with the Series. Where no
such counterparty is available, it will not be possible to enter into a desired
transaction. There also may be no liquid secondary market in the trading of
over-the-counter contracts, and the Series could be required to retain options
purchased or written until exercise, expiration or maturity. This in turn could
limit the Series' ability to profit from open positions or to reduce losses
experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of an
exchange clearing house, and the Series will therefore be subject to the risk of
default by, or the bankruptcy of, the financial institution serving as its
counterparty. One or more of such institutions also may decide to discontinue
their role as market-makers in a particular currency or security, thereby
restricting the Series' ability to enter into desired hedging transactions. The
Series will enter into an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by Advisers.
96724N (REV. 5/95)
34
