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[FORTIS LOGO]
FORTIS SERIES FUND, INC.
JANUARY 5, 2001
SUPPLEMENT TO FORTIS SERIES FUND STATEMENT OF ADDITIONAL INFORMATION DATED MAY
1, 2000
- THE FOLLOWING CHANGE APPLIES TO THE ENTIRE STATEMENT OF ADDITIONAL
INFORMATION.
T. Rowe Price International, Inc. has become the sub-adviser for International
Stock Series II, formerly known as Global Asset Allocation Series. References to
Global Asset Allocation Series are deleted.
- THE FOLLOWING PARAGRAPH REPLACES THE THIRD PARAGRAPH UNDER SECTION ENTITLED
"BLUE CHIP STOCK SERIES" ON PAGES 7-8.
The Fund will hold a certain portion of its assets in money market
reserves. Reserve positions are expected to consist primarily of shares of the
Reserve Investment Funds, Inc. money market funds managed by T. Rowe Price, the
Fund's subadviser, and available to clients of T. Rowe Price. Currently, two
such money market funds are in operation--Reserve Investment Fund ("RIF") and
Government Reserve Investment Fund ("GRF"), each a series of the Reserve
Investment Funds, Inc. Additional series may be created in the future. These
funds were created and operate under and Exemptive Order issued by the SEC
(Investment Company Act Release No. IC-22770, July 29, 1997). RIF and GRF must
comply with the requirements of Rule 2a-7 under the 1940 Act governing money
market funds. The RIF invests at least 95% of its total assets in prime money
market instruments receiving the highest credit rating. The GRF invests
primarily in a portfolio of U.S. government-backed securities, primarily U.S.
Treasuries and repurchase agreements thereon. The funds do not pay an advisory
fee to the investment manager at T. Rowe Price, but will incur other expenses.
However RIF and GRF are expected by T. Rowe Price to operate at very low expense
ratios. The Fund will only invest in RIF or GRF to the extent it is consistent
with its objective and program. RIF and GRF are neither insured nor guaranteed
by the U.S. government, and there is no assurance they will maintain a stable
net asset value of $1.00 per share. Short-term, high quality U.S. and foreign
dollar-denominated money market securities, including repurchase agreements, in
the two highest rating categories, maturing in one year or less may also be
held. This reserve position provides flexibility in meeting redemptions,
expenses, and the timing of new investments, and can serve as a short-term
defense during periods of unusual market volatility. During periods when the
Fund assumes a temporary defensive position, it will not be pursuing its
investment objective.
- THE FOLLOWING SECTION REGARDING THE INVESTMENT POLICIES OF INTERNATIONAL
STOCK SERIES II IS ADDED ON PAGE 9, IMMEDIATELY FOLLOWING THE SECTION
ENTITLED "INTERNATIONAL STOCK SERIES."
INTERNATIONAL STOCK SERIES II
International Stock Series II invests primarily in common stocks of
well-established, non-U.S. companies and diversifies broadly among developed and
emerging countries throughout the world. The Fund may purchase the stocks of
companies of any size, but the focus will typically
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be on large and, to a lesser extent, medium-sized companies. The Fund's
investment in foreign securities may include American Depositary Receipts or
Global Depositary Receipts. The Fund also invests in other securities, including
preferred stocks, warrants, convertibles and/or debt securities when they are
considered consistent with the Fund's investment objective.
The Fund will hold a certain portion of its assets in money market
reserves. Reserve positions are expected to consist primarily of shares of the
Reserve Investment Funds, Inc. money market funds managed by T. Rowe Price, the
subadviser, and available to clients of T. Rowe Price. Currently, two such money
market funds are in operation--Reserve Investment Fund ("RIF") and Government
Reserve Investment Fund ("GRF"), each a series of the Reserve Investment Funds,
Inc. Additional series may be created in the future. These funds were created
and operate under and Exemptive Order issued by the SEC (Investment Company Act
Release No. IC-22770, July 29, 1997). RIF and GRF must comply with the
requirements of Rule 2a-7 under the 1940 Act governing money market funds. The
RIF invests at least 95% of its total assets in prime money market instruments
receiving the highest credit rating. The GRF invests primarily in a portfolio of
U.S. government-backed securities, primarily U.S. Treasuries and repurchase
agreements thereon. The funds do not pay an advisory fee to the investment
manager at T. Rowe Price, but will incur other expenses. However RIF and GRF are
expected by T. Rowe Price to operate at very low expense ratios. The Fund will
only invest in RIF or GRF to the extent it is consistent with its objective and
program. RIF and GRF are neither insured nor guaranteed by the U.S. government,
and there is no assurance they will maintain a stable net asset value of $1.00
per share. Short-term, high quality U.S. and foreign dollar-denominated money
market securities, including repurchase agreements, in the two highest rating
categories, maturing in one year or less may also be held. This reserve position
provides flexibility in meeting redemptions, expenses, and the timing of new
investments, and can serve as a short-term defense during periods of unusual
market volatility. During periods when the Fund assumes a temporary defensive
position, it will not be pursuing its investment objective.
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
The Fund may (i) enter into repurchase agreements; (ii) enter into
reverse repurchase agreements; (iii) purchase securities on a "when-issued" or
delayed delivery basis; (iv) enter into dollar roll transactions; (v) engage in
the lending of portfolio securities; (vi) enter into futures contracts and
options thereon; (vii) purchase, write or sell options on securities or
financial indices; (viii) purchase or sell foreign currency and foreign currency
forward exchange contracts; (ix) purchase and write put and call options on
foreign currencies; and (x) sell securities short against the box. For more
information about these investment strategies, restrictions on their use and
certain associated risks, see the related headings under "More Information on
Certain Investments and Investment Strategies."
- THE FOLLOWING CHANGES APPLY TO THE DISCLOSURE ON CERTAIN INVESTMENTS AND
INVESTMENT STRATEGIES ON PAGES 13-35.
- Where the description of a certain investment or investment strategy indicates
that it may be employed by each Fund, the phrase "each Fund" is understood to
include International Stock Series II.
- Under "Securities of Other Investment Companies" on page 14, International
Stock Series II also may invest in shares of the Reserve Investment Funds, Inc.
money market fund managed by T. Rowe Price.
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- Under "Securities of Foreign Issuers" on pages 24-26, International Stock
Series II is added to the list of Funds that may invest significantly in
securities of foreign issuers. In addition to International Stock Series II,
this list includes Multisector Bond Series, International Stock Series, Global
Growth Series and Global Equity Series.
- International Stock Series II may invest in emerging markets and may hold
equity securities of foreign issuers in the form of depositary receipts. These
investment strategies are described on page 26, under the headings "Emerging
Markets" and "Depositary Receipts."
- Under "Futures Contracts and Options on Futures Contracts" on pages 28-29,
International Stock Series II may enter into interest rate futures contracts,
stock index futures contracts and foreign currency futures contracts.
- Under "Foreign Currency Forward Exchange Contracts" on page 29, International
Stock Series II may purchase or sell foreign currency forward exchange contracts
to attempt to minimize the risk from adverse changes in the relationship between
the various currencies in which the Fund invests.
- Under "Options on Foreign Currencies" on page 29, International Stock Series
II 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.
- Under "Reverse Repurchase Agreements" on page 32, International Stock Series
II may enter into reverse repurchase agreements to meet redemption requests
where the liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous, although the Fund does not currently intend to make such
investments.
- Under "Lending of Portfolio Securities" on page 33, International Stock Series
II may lend its portfolio securities and is doing so.
- THE FOLLOWING SECTION IS ADDED IMMEDIATELY FOLLOWING THE SECTION ENTITLED
"DEPOSITARY RECEIPTS" ON PAGE 26.
PASSIVE FOREIGN INVESTMENT COMPANIES. The Funds which may invest in
foreign securities may purchase the securities of certain foreign investment
funds or trusts called passive foreign investment companies. Such trusts have
been the only or primary way to invest in certain countries. In addition to
bearing their proportionate share of the trust's expenses (management fees and
operating expenses), shareholders will also indirectly bear similar expenses of
such trusts. Capital gains on the sale of such holdings are considered ordinary
income regardless of how long a Fund held its investment. In addition, a Fund
may be subject to corporate income tax and an interest charge on certain
dividends and capital gains earned from these investments, regardless of whether
such income and gains are distributed to shareholders.
- THE FOLLOWING REPLACES THE SECTION ENTITLED "OPTIONS" ON PAGES 26-28.
OPTIONS. To reduce fluctuations in net asset value or to increase
current income, Multisector Bond Series, High Yield Series, Asset Allocation
Series, American Leaders Series, Value Series, Capital Opportunities Series,
Growth & Income Series, S&P 500 Index Series, Blue Chip Stock Series, Blue Chip
Stock Series II, International Stock Series, International Stock
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Series II, Mid Cap Stock Series, Small Cap Value Series, Global Growth Series,
Global Equity Series, Large Cap Growth Series, Investors Growth Series, Growth
Stock Series and Aggressive Growth Series may:
- sell (write) covered call and secured put options (except that
Large Cap Growth Series may not write put options); and
- purchase call and put options
on securities written by others. These Funds may write and buy options on the
same types of securities that these Funds may purchase directly. However, all
options purchased or written by S&P 500 Index Series and Mid Cap Stock Series
must be listed on a national securities or futures exchange or traded in the
over-the-counter ("OTC") market.
For more information on the limitations that apply to the Funds'
investment in options, see "More Information on Certain Investments and
Investment Strategies--Limitations on Investments in Options, Futures Contracts
and Forward Contracts."
USE OF OPTIONS. Put and call options may be used for a variety of
purposes:
- To Hedge. Options can be used to hedge against loss. For example,
if a portfolio manager wishes to hedge a security that the manager
owns against a decline in price, the manager may purchase a put
option on the underlying security, i.e., purchase the right to
sell the security to a third party at a stated price. If the
underlying security then declines in price, the manager can
exercise the put option, thus limiting the amount of the manager's
loss resulting from the decline in price. Similarly, if the
manager intends to purchase a security at some date in the future,
the manager may purchase a call option on the security today in
order to hedge against an increase in its price before the
intended purchase date. The premium paid for a put or call option
plus any transaction costs will reduce the benefit, if any,
realized by a Fund upon exercise or liquidation of the option,
and, unless the price of the underlying security changes
sufficiently, the option may expire without value to the Fund.
- To Speculate. Options also can be used for speculative purposes.
For example, if a portfolio manager believes that the price of
stocks generally is going to rise, the manager may purchase a call
option on a stock index, the components of which are unrelated to
the stocks the manager holds in a Fund or intends to purchase. If
the stock index appreciates sufficiently, the Fund will realize a
gain. If the stock index falls, the Fund will lose the premium
paid for the option plus related transaction costs.
- To Increase Current Income. Finally, a portfolio manager may write
covered call options or secured put options to increase current
income. If the options expire unexercised, the Fund realizes
additional current income equal to the difference between the
amount of the price (premium) received for selling the option and
the related transaction costs.
Each of the Funds that may invest in options may do so for both hedging
purposes and to increase current income. However, Multisector Bond Series, High
Yield Series, Asset Allocation Series, American Leaders Series, Value Series,
Growth & Income Series, Blue Chip Stock Series, Blue Chip Stock Series II,
International Stock Series, International Stock Series II, Mid Cap
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Stock Series, Global Growth Series, Growth Stock Series and Aggressive Growth
Series may also enter into options transactions for speculative purposes.
WRITING CALL OPTIONS. When a Fund sells (writes) a call option, it
gives a third party the right to purchase a security from the Fund at the
exercise price for a stated period or on a stated date. A call option written by
a Fund is "covered" if the Fund:
- owns the underlying security covered by the call or has an
absolute and immediate right to acquire that security without
additional cash consideration upon conversion or exchange of other
securities held in its portfolio; or
- holds a call on the same security having the same principal amount
as the call written and the exercise price of the call held (i) is
equal to or less than the exercise price of the call written or
(ii) is greater than the exercise price of the call written if the
difference is maintained and segregated by the Fund in cash and
other liquid assets.
By writing covered call options, a Fund might lose the potential for gain on the
underlying security if the option is exercised. However, Advisers believes that
this technique is a relatively low-risk way to enhance a Fund's return. The
Funds will not write "uncovered" call options.
WRITING PUT OPTIONS. When a Fund sells (writes) a put option, it gives
a third party the right to sell a security to the Fund at the exercise price for
a stated period or on a stated date. A put option written by a Fund is "secured"
if the Fund:
- segregates cash or other liquid assets with a value equal to the
exercise price of the put; or
- holds a put on the same security having the same principal amount
as the put written and the exercise price of the put held is (a)
equal to or greater than the exercise price of the put written or
(b) less than the exercise price of the put written if the
difference is maintained and segregated by the Fund in cash and
other liquid assets.
By writing a put option, a Fund might become obligated to purchase the
underlying security for more than its current market price upon exercise of the
option. The Funds will not write "unsecured" put options.
BUYING CALL OPTIONS. As a holder of a call option, a Fund has the
option to buy the underlying security from the option writer at the exercise
price at any time during the option period or on a stated date. If a Fund buys a
call option, any loss will be limited to the premium paid for the call option
and related transaction costs. A Fund may exercise the call option, permit it to
expire, or sell it. By selling the call option, the Fund eliminates its
position.
A Fund may buy call options on securities that it intends to purchase
to limit the risk of a substantial increase in the market price of the security.
A Fund may also buy call options on securities held in its portfolio and on
which it has written call options. Prior to its expiration, a call option may be
sold which eliminates the Fund's position. Profit or loss from such a sale will
depend on whether the amount received is more or less than the premium paid for
the call option plus the related transaction costs.
BUYING PUT OPTIONS. As the holder of a put option, a Fund has the
option to sell the underlying security at the exercise price at any time during
the option period or on a stated date. If a Fund buys a put option, any loss
will be limited to the premium paid for the put option and
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related transaction costs. A Fund may exercise the put option, permit it to
expire, or sell it. By selling the put option, the Fund eliminates its position.
A Fund may buy a put option on an underlying security owned by the Fund
(a "protective put") as a hedging technique to protect against an anticipated
decline in the value of the security. This hedge protection is provided only
during the life of the put option when the Fund, as the holder of the put
option, is able to sell the underlying security at the put exercise price,
regardless of any decline in the underlying security's market price. For
example, a put option may be purchased in order to protect unrealized
appreciation of a security when the manager deems it desirable to continue to
hold the security due to tax considerations. The premium paid for the put option
and related transaction costs would reduce any gain realized when the underlying
security is eventually sold.
Each Fund that may invest in options for speculative purposes (listed
above under the heading "Use of Options") may also buy put options at a time
when such Fund does not own the underlying security. By buying put options on a
security it does not own, the Fund seeks to benefit from a decline in the market
price of the underlying security. If the put option is not sold when it has
remaining value, and if the market price of the underlying security remains
equal to or greater than the exercise price during the life of the put option,
the Fund will lose some or all of the premium it paid to purchase the put
option. For the purchase of a put option to be profitable, the market price of
the underlying security must decline sufficiently below the exercise price to
cover the premium and transaction costs.
OPTIONS ON FINANCIAL INDICES. Multisector Bond Series, Asset Allocation
Series, American Leaders Series, Value Series, Capital Opportunities Series,
Growth & Income Series, S&P 500 Index Series, Blue Chip Stock Series, Blue Chip
Stock Series II, International Stock Series II, Mid Cap Stock Series, Global
Growth Series, Global Equity Series, Large Cap Growth Series, Investors Growth
Series, Growth Stock Series, and Aggressive Growth Series may:
- sell (write) covered call options and secured put options on
financial indices; and
- purchase call and put options on financial indices.
In contrast to an option on a security, an option on a financial index
provides the holder with the option to receive cash settlement upon exercise of
the option, rather than the right to purchase or sell a security. The amount of
the cash settlement is generally equal to:
- the difference between the closing price of the index and the
exercise price of the option, multiplied by
- a fixed "index multiplier".
Thus, unlike an option on a particular security, all settlements are in
cash, and gain or loss depends on price movements in the financial market
generally (or in a particular industry or segment of the market) rather than
price movements in an individual security.
Covered Call Options on Financial Indices. A call option written on a
financial index is "covered" if the Fund:
- holds a diversified portfolio of securities similar to those on
which the underlying index is based. However, a Fund cannot, as a
practical matter, acquire and hold a portfolio containing exactly
the same securities that underlie the index and, as a
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result, bears a risk that the value of the securities held will
not be perfectly correlated with the value of the index; or
- holds a call on the same index and in the same principal amount as
the call written where the exercise price of the call held is (a)
equal to or less than the exercise price of the call written or
(b) greater than the exercise price of the call written if the
difference is maintained and segregated by the Fund in cash and
other liquid assets.
The Funds will not write "uncovered" call options on financial indices.
Secured Put Options on Financial Indices. A Fund may also "secure" put
options on financial indices by:
- holding a put on the same index and in the same principal amount
as the put written where the exercise price of the put held is (a)
equal to or greater than the exercise price of the put written or
(b) less than the exercise price of the put written if the
difference is maintained and segregated by the Fund in cash and
other liquid assets; or
- segregating cash or other liquid assets in an amount equal to the
exercise price of the option.
The Funds will not write "unsecured" put options on financial indices.
Additional information about options is contained in Appendix A.
- THE FOLLOWING PARAGRAPH IS ADDED UNDER "LIMITATIONS ON INVESTMENTS IN
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS" ON PAGE 31.
For Blue Chip Stock Series and International Stock Series II, in connection
with options on securities, the total market value of securities against which
the Fund has written call or put options may not exceed 25% of the Fund's total
assets. In addition, Blue Chip Stock Series and International Stock Series II
will not commit individually more than 5% of their total assets to premiums when
purchasing call or put options.
- THE FOLLOWING APPLIES TO THE SECTION ENTITLED "INVESTMENT RESTRICTIONS" ON
PAGES 35-37.
- The restrictions described under the heading "Fundamental Investment
Restrictions" apply to International Stock Series II. The nonfundamental
investment restriction regarding investment in illiquid securities, described on
page 36, applies to International Stock Series II.
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MONEY MARKET SERIES
U.S. GOVERNMENT SECURITIES SERIES
DIVERSIFIED INCOME SERIES
MULTISECTOR BOND SERIES
HIGH YIELD SERIES
ASSET ALLOCATION SERIES
AMERICAN LEADERS SERIES
VALUE SERIES
CAPITAL OPPORTUNITIES SERIES
GROWTH & INCOME SERIES
S&P 500 INDEX SERIES
BLUE CHIP STOCK SERIES
BLUE CHIP STOCK SERIES II
INTERNATIONAL STOCK SERIES
INTERNATIONAL STOCK SERIES II
MID CAP STOCK SERIES
SMALL CAP VALUE SERIES
GLOBAL GROWTH SERIES
GLOBAL EQUITY SERIES
LARGE CAP GROWTH SERIES
INVESTORS GROWTH SERIES
GROWTH STOCK SERIES
AGGRESSIVE GROWTH SERIES
EACH A SERIES OF FORTIS SERIES FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 2000
AS SUPPLEMENTED JANUARY 5, 2001
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to a Prospectus for the Series
listed above (individually, a "Fund" and collectively, the "Funds") dated May 1,
2000, as supplemented September 1, 2000, and should be read in conjunction
therewith. The financial statements included as a part of the Funds' Annual
Report to Shareholders for the fiscal year ended December 31, 1999 are
incorporated by reference into this Statement of Additional Information. Copies
of the Funds' Prospectus and/or Annual Report are available, without charge, by
writing or calling the Funds, P.O. Box 64284, St. Paul, Minnesota 55164
(telephone: (651) 738-4000 or (800) 800-2000).
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TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
Fund History......................................................................................................1
Investment Strategies and Risk Considerations.....................................................................1
Investment Restrictions..........................................................................................44
Management of the Funds..........................................................................................47
Principal Holders of Securities..................................................................................52
Investment Advisory and Other Services...........................................................................52
Brokerage Allocation and Other Practices.........................................................................59
Capital Stock....................................................................................................64
Pricing of Shares................................................................................................65
Redemption of Shares.............................................................................................67
Taxation.........................................................................................................67
Underwriter......................................................................................................69
Performance Information..........................................................................................69
Other Service Providers..........................................................................................73
Limitation of Director Liability.................................................................................73
Additional Information...........................................................................................73
Financial Statements.............................................................................................74
Appendix A--Description of Futures, Options and Forward Contracts................................................75
Appendix B--Commercial Paper, Corporate Bond and Preferred Stock Ratings.........................................80
</TABLE>
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FUND HISTORY
Each Fund is a series of Fortis Series Fund, Inc. ("Fortis Series"),
which was incorporated in Minnesota in 1986. Fortis Series is registered with
the Securities and Exchange Commission under the Investment Company Act of 1940,
as amended (the "1940 Act") as an open-end management investment company. The
Funds are advised by Fortis Advisers, Inc. ("Advisers"). For certain Funds,
Advisers has retained the services of a subadviser. See "Investment Advisory and
Other Services--Sub-Advisory Agreements."
Shares of the Funds 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 and variable
annuity contracts issued by Fortis Benefits and First Fortis. The Separate
Accounts invest in shares of the Funds through subaccounts that correspond to
the different Funds.
INVESTMENT STRATEGIES AND RISK CONSIDERATIONS
This section of the Statement of Additional Information contains more
information on the types of securities in which the Funds may invest and the
investment strategies that the Funds may use, including securities and
strategies not discussed in the Prospectus. Unless, otherwise noted, investment
strategies used by the Funds may be changed without the approval of
shareholders.
MONEY MARKET SERIES
Although Money Market Series does not attempt to maintain its net asset
value at any set price, it is nevertheless subject to certain investment
restrictions of Rule 2a-7 under the 1940 Act, in addition to the other policies
and restrictions discussed herein and in the Prospectus. Rule 2a-7 requires that
the Fund invest exclusively in securities that mature within 397 days from the
date of purchase and that it maintain an average dollar weighted maturity of not
more than 90 days. Under Rule 2a-7, securities that are subject to specified
types of demand or put features may be deemed to mature at the next demand or
put date although they have a longer stated maturity. Rule 2a-7 also requires
that all investments by the Fund be limited to United States dollar-denominated
investments that (a) present "minimal credit risk" and (b) are at the time of
acquisition "Eligible Securities." Eligible Securities include, among others,
securities that are rated by two Nationally Recognized Statistical Rating
Organizations ("NRSROs") in one of the two highest categories for short-term
debt obligations, such as A-1 or A-2 by Standard & Poor's Rating Services
("S&P"), a division of The McGraw-Hill Companies, Inc., or Prime-1 or Prime-2 by
Moody's Investors Service, Inc. ("Moody's"). It is the responsibility of
Advisers to determine that the Fund's investments present only "minimal credit
risks" and are Eligible Securities, pursuant to the oversight of, and written
guidelines and procedures established by, the Fund's Board of Directors.
Rule 2a-7 requires that the Fund may not invest more than 5% of its
total assets in the securities of a single issuer, other than United States
"Government Securities" (as defined in the 1940 Act), provided that the Fund may
invest in First Tier Securities (as defined in Rule 2a-7) in excess of that
limitation for a period of up to three business days after the purchase thereof,
but the Fund may not make more than one such investment at any time. Rule 2a-7
also requires that (1) 95% of the assets of the Fund be invested in Eligible
Securities that are deemed First Tier Securities, which include, among others,
securities rated by two NRSROs in the highest category
1
<PAGE> 11
(such as A-1 and P-1), (2) the Fund may not invest more than 5% of its total
assets in Second Tier Securities (i.e., Eligible Securities that are not First
Tier Securities) and (3) the Fund's investment in Second Tier Securities of a
single issuer may not exceed the greater of 1% of the Fund's total assets or
$1,000,000.
As noted in the Prospectus, Money Market Series' investments in U.S.
dollar-denominated foreign securities may include obligations of foreign banks
having total assets in excess of one billion dollars, and obligations of foreign
branches of domestic banks which have total assets in excess of one billion
dollars. In addition, Money Market Series may invest in U.S. dollar-denominated
securities 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 U.S.
dollar-denominated 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. No more than
49% of Money Market Series' total assets may be invested collectively foreign
securities.
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
Money Market Series may invest in obligations other than those listed
in this Statement of Additional Information or in the Prospectus 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 Fund.
Money Market Series (i) may enter into repurchase agreements and (ii)
sell securities short against the box. For information about these investment
strategies, restrictions on their use and certain associated risks, see related
headings under "More Information on Certain Investments and Investment
Strategies."
U.S. GOVERNMENT SECURITIES SERIES
At least 65% of U.S. Government Securities Series' total assets
(exclusive of collateral associated with securities lending) will be invested in
securities issued or guaranteed by the United States government or its agencies
or instrumentalities, and in repurchase agreements pertaining to such
securities.
Up to 35% of U.S. Government Securities Series' total assets may
consist of:
(1) Marketable non-convertible debt securities which are rated at the
time of purchase within the three highest grades assigned by Moody's (Aaa, Aa or
A) or S&P (AAA, AA or A), or comparably rated by another nationally recognized
rating agency. See Appendix B for a discussion of S&P and Moody's ratings;
(2) Marketable 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 the Fund's
total assets);
(3) Obligations of, or guaranteed by, U.S. banks, which obligations,
although not rated as a matter of policy by either Moody's or S&P, are
considered by Advisers to have
2
<PAGE> 12
investment quality comparable to securities which may be purchased under item
(1) above (such securities not to exceed 25% of the Fund's total assets);
(4) Commercial paper obligations rated Prime-1 by Moody's or A-1 by
S&P, or comparably rated by another nationally recognized rating agency; and
(5) Cash, other non-securities assets such as accrued interest,
receivables from investment securities sold, prepaid expenses, as well as other
high-quality short-term interest bearing debt securities not discussed above.
The Fund's investments may include mortgage-backed securities. There is
no percentage limitation on the Fund's purchase of mortgage-backed securities
issued or guaranteed by the United States government or its agencies or
instrumentalities. The Fund may also invest in mortgage-backed securities issued
and insured by private organizations if such securities fall within the
investment restrictions for marketable non-convertible debt securities set forth
above.
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
The Fund may (i) enter into repurchase agreements; (ii) purchase
securities on a "when-issued" or delayed delivery basis; (iii) enter into dollar
roll transactions; and (iv) sell securities short against the box. For more
information about these investment strategies, restrictions on their use and
certain associated risks, see the related headings under "More Information on
Certain Investments and Investment Strategies."
DIVERSIFIED INCOME SERIES
Under normal circumstances, Diversified Income Series invests at least
70% of its total assets (exclusive of collateral associated with securities
lending) in (a) corporate fixed income securities rated within one of the four
highest grades assigned by Moody's (Aaa, Aa, A and Baa) or S&P (AAA, AA, A and
BBB), or comparably rated by another nationally recognized rating agency; (b)
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities; (c) mortgage-backed securities in which U.S. Government
Securities Series may invest; (d) repurchase agreements pertaining to such
securities; (e) commercial paper of companies having, at the time of purchase,
an issue of outstanding debt securities rated Baa or above by Moody's or BBB or
above by S&P, or comparably rate by another nationally recognized rating agency,
or commercial paper rated P-1 or P-2 by Moody's or A-1 or A-2 by S&P, or
comparably rated by another nationally recognized rating agency; and (f) cash
and income producing cash equivalents.
The Fund may also invest in common and preferred stocks, convertible
securities and dollar denominated foreign securities. Under normal
circumstances, up to 30% of Diversified Income Series' total assets may be
invested in any combination of (a) common and preferred stocks and convertible
securities; (b) foreign securities (provided that such investments in foreign
securities will be limited to 25% of the Fund's total assets); and (c)
non-investment grade bonds (sometimes referred to as "junk bonds") and non-rated
corporate bonds.
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
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<PAGE> 13
The Fund may (i) enter into repurchase agreements; (ii) purchase
securities on a "when-issued" or delayed delivery basis; (iii) enter into dollar
roll transactions; and (iv) sell securities short against the box. For more
information about these investment strategies, restrictions on their use and
certain associated risks see the related headings under "More Information on
Certain Investments and Investment Strategies."
MULTISECTOR BOND SERIES
Multisector Bond Series generally acquires bonds in new offerings or in
principal trades with broker-dealers. Ordinarily, the Fund does not purchase
securities with the intention of engaging in short-term trading. However, any
particular security will be sold, and the proceeds reinvested, whenever such
action is deemed prudent from the viewpoint of the Fund's investment objective,
regardless of the holding period of that security.
A portion of the Fund's assets may be held in cash and high quality,
short-term money market instruments including money market funds that have the
Fund's subadviser, A I M Capital Management ("AIM"), or an affiliate of AIM as
an investment adviser, certificates of deposit, commercial paper, bankers'
acceptances, short-term U.S. Government obligations, taxable municipal
securities, master notes, and repurchase agreements, pending investment in
portfolio securities, to meet anticipated short-term cash needs such as dividend
payments or redemptions of shares, or for temporary defensive purposes.
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
The Fund may (i) enter into repurchase agreements; (ii) enter into
reverse repurchase agreements; (iii) purchase securities on a "when-issued" or
delayed delivery basis; (iv) enter into dollar roll transactions; (v) engage in
the lending of portfolio securities; (vi) enter into futures contracts and
options thereon; (vii) purchase, write or sell options on securities or
financial indices; (viii) purchase or sell foreign currency forward exchange
contracts; (ix) purchase and write put and call options on foreign currencies;
and (x) sell securities short against the box. For more information about these
investment strategies, restrictions on their use and certain associated risks,
see the related headings under "More Information on Certain Investments and
Investment Strategies."
HIGH YIELD SERIES
High Yield Series invests at least 65% of its total assets (exclusive
of collateral associated with securities lending) in a diversified portfolio of
high-yield, high-risk, fixed income securities (sometimes referred to as "junk
bonds"). The Fund also may invest up to 15% of net assets in collateralized
mortgage obligations ("CMOs"), issued by government agencies or by private
entities, and up to 25% of total assets in certain types of accrual bonds. The
Fund may also invest in foreign securities (provided that such investments in
foreign securities will be limited to 25% of the Fund's total assets),
investment grade fixed income instruments, convertible securities, common and
preferred stocks, other equity securities and cash or cash equivalents.
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
4
<PAGE> 14
The Fund may (i) enter into repurchase agreements; (ii) purchase
securities on a "when-issued" or delayed delivery basis; (iii) enter into dollar
roll transactions; (iv) engage in the lending of portfolio securities; (v) enter
into futures contracts and options thereon; (vi) write call options and purchase
put and call options on securities; (vii) purchase or sell foreign currency
forward exchange contracts; (viii) purchase and write put and call options on
foreign currencies; and (ix) sell securities short against the box. For more
information about these investment strategies, restrictions on their use and
certain associated risks, see the related headings under "More Information on
Certain Investments and Investment Strategies."
ASSET ALLOCATION SERIES
Asset Allocation Series invests primarily in common stocks and
fixed-income securities. As noted in the Prospectus, Asset Allocation Series may
invest up to 25% of its total assets in foreign securities. However, no more
than 15% of the Fund's total assets may be invested in foreign securities that
are not traded on national foreign securities exchanges or traded in the United
States.
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
The Fund may (i) enter into repurchase agreements; (ii) purchase
securities on a "when-issued" or delayed delivery basis; (iii) enter into dollar
roll transactions; (iv) engage in the lending of portfolio securities; and (v)
sell securities short against the box. For more information about these
investment strategies, restrictions on their use and certain associated risks,
see the related headings under "More Information on Certain Investments and
Investment Strategies."
AMERICAN LEADERS SERIES
American Leaders Series invests at least 65% of its total assets
(exclusive of collateral associated with securities lending) in equity
securities issued by blue chip companies. These equity securities may include
common stocks, preferred stocks, securities of limited liability companies,
business trusts and companies organized outside the United States that are
comparable to common or preferred stock, real estate investment trusts,
warrants, convertible securities and American Depositary Receipts. The Fund may
also invest in certain fixed income securities.
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
The Fund may (i) enter into repurchase agreements; (ii) enter into
reverse repurchase agreements; (iii) purchase securities on a "when-issued" or
delayed delivery basis; (iv) enter into dollar roll transactions; (v) engage in
the lending of portfolio securities; (vi) enter into futures contracts and
options thereon; (vii) purchase, write or sell options on securities or
financial indices; and (viii) sell securities short against the box. For more
information about these investment strategies, restrictions on their use and
certain associated risks, see the related headings under "More Information on
Certain Investments and Investment Strategies."
5
<PAGE> 15
VALUE SERIES
Value Series invests primarily in common stocks. The Fund may also
invest in securities convertible into common stocks, and may occasionally invest
limited amounts in other types of securities (such as nonconvertible preferred
stock and debt securities). Value Series may invest in both listed and unlisted
securities. The Fund may invest up to 10% of its total assets in foreign
securities.
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
The Fund may (i) enter into repurchase agreements; (ii) purchase
securities on a "when-issued" or delayed delivery basis; (iii) enter into dollar
roll transactions; (iv) engage in the lending of portfolio securities; (v) enter
into futures contracts and options thereon; (vi) write call options and purchase
put and call options on securities; (vii) purchase or sell foreign currency
forward exchange contracts; and (viii) sell securities short against the box.
For more information about these investment strategies, restrictions on their
use and certain associated risks, see the related headings under "More
Information on Certain Investments and Investment Strategies."
CAPITAL OPPORTUNITIES SERIES
Capital Opportunities Series invests, under normal market conditions,
at least 65% of its total assets (exclusive of collateral associated with
securities lending) in common stocks and equity-related securities, such as
preferred stocks, convertible securities and depositary receipts. Up to 15% of
the Fund's net assets may be invested in fixed income securities that are rated
Ba or lower by Moody's, BB or lower by S&P, comparably rated by another
nationally recognized rating agency, or are unrated and determined to be of
comparable quality by the Fund's subadviser. See "More Information on Certain
Investments and Investment Strategies -- High-Yield/High-Risk Securities." Up to
35% of the Fund's net assets may be invested in foreign securities, including
securities of issuers located in emerging markets. See "More Information on
Certain Investments and Investment Strategies -- Securities of Foreign Issuers"
and "More Information on Certain Investments and Investment Strategies --
Emerging Markets."
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
The Fund may (i) enter into repurchase agreements; (ii) purchase
securities on a "when-issued" or delayed delivery basis; (iii) engage in the
lending of portfolio securities; (iv) enter into futures contracts and options
thereon; (v) purchase, write or sell options on securities or financial indices;
(vi) purchase or sell foreign currency forward exchange contracts; (vii)
purchase and write put and call options on foreign currencies; and (viii) sell
securities short against the box. For more information about these investment
strategies, restrictions on their use and certain associated risks, see the
related headings under "More Information on Certain Investments and Investment
Strategies."
GROWTH & INCOME SERIES
Growth & Income Series invests primarily in common stocks. The Fund may
also invest in securities convertible into common stocks, and may occasionally
invest limited amounts in other types of securities (such as nonconvertible
preferred stock and debt securities). Growth &
6
<PAGE> 16
Income Series may invest in both listed and unlisted securities. The Fund may
invest up to 10% of its total assets in foreign securities.
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
The Fund may (i) enter into repurchase agreements; (ii) purchase
securities on a "when-issued" or delayed delivery basis; (iii) enter into dollar
roll transactions; (iv) engage in the lending of portfolio securities; (v) enter
into futures contracts and options thereon; (vi) write call options and purchase
put and call options on securities; (vii) purchase or sell foreign currency
forward exchange contracts; and (viii) sell securities short against the box.
For more information about these investment strategies, restrictions on their
use and certain associated risks, see the related headings under "More
Information on Certain Investments and Investment Strategies."
S & P 500 INDEX SERIES
Under normal circumstances, S&P 500 Index Series invests at least 95%
of its total assets (exclusive of collateral associated with securities lending)
in the common stocks included in the S&P 500 Index. To maintain liquidity, the
Fund also may invest in U.S. Government securities, commercial paper, bank
certificates of deposit and bank demand and time deposits.
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
The Fund may (i) enter into repurchase agreements; (ii) enter into
reverse repurchase agreements; (iii) purchase securities on a "when-issued" or
delayed delivery basis; (iv) enter into dollar roll transactions; (iv) engage in
the lending of portfolio securities; (v) enter into stock index futures
contracts and options thereon; (vi) purchase and sell options on stock indexes;
and (vii) sell securities short against the box. For more information about
these investment strategies, restrictions on their use and certain associated
risks, see the related headings under "More Information on Certain Investments
and Investment Strategies."
Standard & Poor's, "S&P," "S&P 500," "Standard & Poor's 500," and "500"
are trademarks of McGraw-Hill, Inc. and have been licensed for use by Fortis
Series. The Fund is not sponsored, endorsed, sold or promoted by S&P and S&P
makes no representation regarding the advisability of investing in the Fund. S&P
makes no representation or warranty, express or implied, to the owners of the
Fund or any member of the public regarding the advisability of investing in
securities generally or in the Fund particularly or the ability of the S&P 500
Index to track general stock market performance. S&P's only relationship to
Fortis Series is the licensing of certain trademarks and trade names of S&P and
of the S&P 500 Index which is determined, composed and calculated by S&P without
regard to Fortis Series or the Fund. S&P has no obligation to take the needs of
Fortis Series or the owners of the Fund into consideration in determining,
composing or calculating the S&P 500 Index. S&P is not responsible for and has
not participated in the determination of the prices and amount of the Fund or
the timing of the issuance or sale of the Fund or in the determination or
calculation of the equation by which the Fund is to be converted into cash. S&P
has no obligation or liability in connection with the administration, marketing
or trading of the Fund.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P
500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NOT LIABILITY FOR ANY
ERRORS, OMISSIONS, OR
7
<PAGE> 17
INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS
TO BE OBTAINED BY THE FUND, OWNERS OF THE FUND OR ANY OTHER PERSON OR ENTITY
FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO
EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE
FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE,
INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF
THE POSSIBILITY OF SUCH DAMAGES.
BLUE CHIP STOCK SERIES
Blue Chip Stock Series will invest at least 65% of its total assets
(exclusive of collateral associated with securities lending) in the common
stocks of large and medium-sized blue chip growth companies, as defined by the
Fund's subadviser. The Fund may also purchase other types of securities, such as
preferred stocks, convertible stocks and bonds, and warrants, when considered
consistent with the Fund's investment objectives. The Fund may invest in fixed
income securities of any type without regard to quality or rating. Such
securities would be purchased in companies, municipalities and entities that
meet the investment criteria for the Fund. However, the Fund will not purchase a
non-investment grade fixed income security if, immediately after such purchase,
the Fund would have more than 5% of its total assets invested in such
securities. Investments in convertible securities, preferred stocks and fixed
income securities are limited to 25% of total assets.
The Fund may also invest in hybrid instruments (a type of potentially
high-risk derivative) that can combine the characteristics of securities,
futures and options. For example, the principal amount, redemption or conversion
terms of a security could be related to the market price of some commodity,
currency or securities index. Such securities may bear interest or pay dividends
at below market (or even relatively nominal) rates. Under certain conditions,
the redemption value of such an investment could be zero. The Fund may invest up
to 10% of its total assets in hybrid instruments.
The Fund will hold a certain portion of its assets in money market
reserves. Reserve positions are expected to consist primarily of shares of the
Reserve Investment Funds, Inc. money market funds managed by T. Rowe Price, the
Fund's subadviser, and available to clients of T. Rowe Price. Currently, two
such money market funds are in operation--Reserve Investment Fund ("RIF") and
Government Reserve Investment Fund ("GRF"), each a series of the Reserve
Investment Funds, Inc. Additional series may be created in the future. These
funds were created and operate under and Exemptive Order issued by the SEC
(Investment Company Act Release No. IC-22770, July 29, 1997). RIF and GRF must
comply with the requirements of Rule 2a-7 under the 1940 Act governing money
market funds. The RIF invests at least 95% of its total assets in prime money
market instruments receiving the highest credit rating. The GRF invests
primarily in a portfolio of U.S. government-backed securities, primarily U.S.
Treasuries and repurchase agreements thereon. The funds do not pay an advisory
fee to the investment manager at T. Rowe Price, but will incur other expenses.
However RIF and GRF are expected by T. Rowe Price to operate at very low expense
ratios. The Fund will only invest in RIF or GRF to the extent it is consistent
with its objective and program. RIF and GRF are neither insured nor guaranteed
by the U.S. government, and there is no assurance they will maintain a stable
net asset value of $1.00 per share. Short-term, high quality U.S. and foreign
dollar-denominated money market securities, including repurchase agreements, in
the two highest rating categories, maturing in one year or less may also be
held. This reserve position provides flexibility in meeting
8
<PAGE> 18
redemptions, expenses, and the timing of new investments, and can serve as a
short-term defense during periods of unusual market volatility. During periods
when the Fund assumes a temporary defensive position, it will not be pursuing
its investment objective.
The Fund may invest up to 20% of its total assets (excluding reserves)
in foreign securities, including securities from emerging markets. These include
non-dollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers traded in the U.S. (such as
ADRs).
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
The Fund may (i) enter into repurchase agreements; (ii) enter into
reverse repurchase agreements; (iii) purchase securities on a "when-issued" or
delayed delivery basis; (iv) enter into dollar roll transactions; (v) engage in
the lending of portfolio securities; (vi) enter into futures contracts and
options thereon; (vii) purchase, write or sell options on securities or
financial indices; (viii) purchase or sell foreign currency forward exchange
contracts; and (ix) purchase and write put and call options on foreign
currencies. For more information about these investment strategies, restrictions
on their use and certain associated risks, see the related headings under "More
Information on Certain Investments and Investment Strategies."
BLUE CHIP STOCK SERIES II
Blue Chip Stock Series II's primary investment objective is long-term
growth of capital with a secondary objective of current income. It is
anticipated that at least 65% of the Series' total assets (exclusive of
collateral associated with securities lending) will be invested in common
stocks, convertible securities and bonds of blue chip companies (i.e., companies
with leading market positions and which possess strong financial
characteristics, as described below). While current income is a secondary
objective, most of the stocks in the Series' portfolio are expected to pay
dividends. The Fund will generally invest in large-sized companies (listed in
the United States) which possess the following characteristics:
- MARKET CHARACTERISTICS - Blue chip companies are those which occupy (or in
AIM's judgment have the potential to occupy) leading market positions that
are expected to be maintained or enhanced over time. Strong market
positions, particularly in growing industries can give a company pricing
flexibility as well as the potential for strong unit sales. These factors
can in turn lead to higher earnings growth and greater share appreciation.
Market leaders can be identified within an industry as those companies
which have (i) superior growth prospects compared with other companies in
the same industry; (ii) possession of proprietary technology with the
potential to bring about major changes within an industry; and/or (iii)
leading sales within an industry, or the potential to become a market
leader.
- FINANCIAL CHARACTERISTICS - A blue chip company possesses at least one of
the following attributes: (i) faster earnings growth than its competitors
and the market in general; (ii) higher profit margins relative to its
competitors; (iii) strong cash flow relative to its competitors; and/or a
balance sheet with relatively low debt and a high return on equity relative
to its competitors.
9
<PAGE> 19
The Fund will diversify among industries and therefore will not invest
25% or more of its total assets in any one industry. Under normal market
conditions, Blue Chip's portfolio will be diversified among industries in a
manner similar to the industry diversification of broad market indices.
The Fund will not invest in non-convertible corporate debt securities
rated below investment grade by Standard and Poor's Rating Services ("S&P") and
Moody's Investors Service ("Moody's") or in unrated non-convertible corporate
debt securities believed by the Fund's investment adviser to be below investment
grade quality. For information on ratings of fixed income securities see
Appendix A.
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
The Fund may (i) enter into repurchase agreements; (ii) enter into
reverse repurchase agreements; (iii) purchase securities on a "when-issued" or
delayed delivery basis; (iv) enter into dollar roll transactions; (v) engage in
the lending of portfolio securities; (vi) enter into futures contracts and
options thereon; (vii) purchase, write or sell options on securities or
financial indices; (viii) purchase or sell foreign currency forward exchange
contracts; (ix) purchase and write put and call options on foreign currencies;
and (x) sell securities short against the box. For more information about these
investment strategies, restrictions on their use and certain associated risks,
see the related headings under "More Information on Certain Investments and
Investment Strategies."
INTERNATIONAL STOCK SERIES
International Stock Series invests primarily in the equity securities
of non-U.S. companies (i.e., incorporated or organized outside the United
States). However, the Fund may have substantial investments in American
Depositary Receipts and in convertible bonds and other convertible securities.
The Fund may invest up to 20% of the value of its total assets in fixed income
securities and short-term money market instruments. International Stock Series'
fixed income investments will be limited to those rated A or better by S&P or
Moody's or comparably rated by another nationally recognized rating agency, or,
if unrated, determined by the Fund's subadviser to be of comparable quality. See
Appendix B for a description of the ratings of fixed income securities.
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
The Fund may (i) enter into repurchase agreements; (ii) purchase
securities on a "when-issued" or delayed delivery basis; (iii) enter into dollar
roll transactions; (iv) engage in the lending of portfolio securities; (v) enter
into futures contracts and options thereon; (vi) purchase, write or sell options
on securities or financial indices; (vii) purchase or sell foreign currency
forward exchange contracts; (viii) purchase and write put and call options on
foreign currencies; and (ix) sell securities short against the box. For more
information about these investment strategies, restrictions on their use and
certain associated risks, see the related headings under "More Information on
Certain Investments and Investment Strategies."
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<PAGE> 20
INTERNATIONAL STOCK SERIES II
International Stock Series II invests primarily in common stocks of
well-established, non-U.S. companies and diversifies broadly among developed and
emerging countries throughout the world. The Fund may purchase the stocks of
companies of any size, but the focus will typically be on large and, to a lesser
extent, medium-sized companies. The Fund's investment in foreign securities may
include American Depositary Receipts or Global Depositary Receipts. The Fund
also invests in other securities, including preferred stocks, warrants,
convertibles and/or debt securities when they are considered consistent with the
Fund's investment objective.
The Fund will hold a certain portion of its assets in money market
reserves. Reserve positions are expected to consist primarily of shares of the
Reserve Investment Funds, Inc. money market funds managed by T. Rowe Price, the
subadviser, and available to clients of T. Rowe Price. Currently, two such money
market funds are in operation--Reserve Investment Fund ("RIF") and Government
Reserve Investment Fund ("GRF"), each a series of the Reserve Investment Funds,
Inc. Additional series may be created in the future. These funds were created
and operate under and Exemptive Order issued by the SEC (Investment Company Act
Release No. IC-22770, July 29, 1997). RIF and GRF must comply with the
requirements of Rule 2a-7 under the 1940 Act governing money market funds. The
RIF invests at least 95% of its total assets in prime money market instruments
receiving the highest credit rating. The GRF invests primarily in a portfolio of
U.S. government-backed securities, primarily U.S. Treasuries and repurchase
agreements thereon. The funds do not pay an advisory fee to the investment
manager at T. Rowe Price, but will incur other expenses. However RIF and GRF are
expected by T. Rowe Price to operate at very low expense ratios. The Fund will
only invest in RIF or GRF to the extent it is consistent with its objective and
program. RIF and GRF are neither insured nor guaranteed by the U.S. government,
and there is no assurance they will maintain a stable net asset value of $1.00
per share. Short-term, high quality U.S. and foreign dollar-denominated money
market securities, including repurchase agreements, in the two highest rating
categories, maturing in one year or less may also be held. This reserve position
provides flexibility in meeting redemptions, expenses, and the timing of new
investments, and can serve as a short-term defense during periods of unusual
market volatility. During periods when the Fund assumes a temporary defensive
position, it will not be pursuing its investment objective.
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
The Fund may (i) enter into repurchase agreements; (ii) enter into
reverse repurchase agreements; (iii) purchase securities on a "when-issued" or
delayed delivery basis; (iv) enter into dollar roll transactions; (v) engage in
the lending of portfolio securities; (vi) enter into futures contracts and
options thereon; (vii) purchase, write or sell options on securities or
financial indices; (viii) purchase or sell foreign currency and foreign currency
forward exchange contracts; (ix) purchase and write put and call options on
foreign currencies; and (x) sell securities short against the box. For more
information about these investment strategies, restrictions on their use and
certain associated risks, see the related headings under "More Information on
Certain Investments and Investment Strategies."
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<PAGE> 21
MID CAP STOCK SERIES
Under normal circumstances, at least 65% of Mid Cap Stock Series' total
assets (exclusive of collateral associated with securities lending) will be
invested in common stocks. The Fund may also invest in: (1) obligations issued
or guaranteed as to interest and principal by the U.S. government or its
agencies or instrumentalities; (2) instruments of U.S. and foreign banks,
including certificates of deposit (including Eurodollar and Yankee certificates
of deposit), banker's acceptances and time deposits (including Eurodollar time
deposits); (3) corporate obligations rated at least Baa by Moody's or BBB by S&P
or, if unrated, of comparable quality as determined by Fund's subadviser; (4)
Eurodollar bonds and notes; (5) securities of foreign companies evidenced by
American Depository Receipts; and (6) commercial paper.
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
The Fund may (i) enter into repurchase agreements; (ii) enter into reverse
repurchase agreements; (iii) purchase securities on a "when-issued" or delayed
delivery basis; (iv) enter into dollar roll transactions; (v) engage in the
lending of portfolio securities; (vi) enter into futures contracts and options
thereon; (vii) purchase, write or sell options on securities or financial
indices; (viii) purchase or sell foreign currency forward exchange contracts;
(ix) purchase and write put and call options on foreign currencies; and (x) sell
securities short against the box. For more information about these investment
strategies, restrictions on their use and certain associated risks, see the
related headings under "More Information on Certain Investments and Investment
Strategies."
SMALL CAP VALUE SERIES
Small Cap Value Series invests at least 65% of its total assets (exclusive
of collateral associated with securities lending) in common stocks of companies
whose market capitalization, at the time of initial purchase, is less than the
12-month average of the maximum market capitalization for companies included in
the Russell 2000 Index. Market capitalization is defined as total current market
value of a company's outstanding common stock. The Fund may also invest in
common stocks of companies with market capitalizations in excess of such
12-month average; equity securities other than common stocks, such as
convertible securities, preferred stocks, warrants and rights; government
securities; short-term investments; or other securities. In addition, Small Cap
Value Series may invest in certain securities with unique risks, such as special
situations and securities of unseasoned issuers. The Fund may also invest in
foreign securities.
Special Situations. The Fund may invest in special situations, that is, in
common stocks of companies that have recently experienced or are anticipated to
experience a significant change in structure, management, products or services.
Examples of special situations are companies being reorganized or merged,
companies having unusual new products, or which enjoy particular tax advantages,
or companies that are run by new management or may be probable takeover
candidates. The opportunity to invest in special situations, however, is limited
and depends in part on the market's assessment of these issuers and their
circumstances. In addition, stocks of companies in special situations may be
more volatile, since the market value of these stocks may decline if an
anticipated event or benefit does not materialize.
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<PAGE> 22
Unseasoned Issuers. The Fund may invest in securities of unseasoned
issuers. Unseasoned issuers are companies with a record of less than three
years' continuous operation, including the operations of any predecessors and
parents. Investment decisions for these securities may place a greater emphasis
on current or planned product lines and the reputation and experience of the
company's management and less emphasis on fundamental valuation factors than
would be the case for more mature growth companies. In addition, many unseasoned
issuers may be small companies and involve the risks and price volatility
associated with smaller companies.
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
The Fund may (i) enter into repurchase agreements; (ii) purchase securities
on a "when-issued" or delayed delivery basis; (iii) enter into dollar roll
transactions; (iv) engage in the lending of portfolio securities; (v) enter into
futures contracts and options thereon; (vi) write call options and purchase put
and call options on securities; and (vii) purchase or sell foreign currency
forward exchange contracts. For more information about these investment
strategies, restrictions on their use and certain associated risks, see the
related headings under "More Information on Certain Investments and Investment
Strategies."
GLOBAL GROWTH SERIES
Global Growth Series invests primarily in common stocks. The Fund may also
invest in other types of equity securities, such as preferred stocks and
warrants, and in debt obligations. The debt obligations in which the Fund may
invest include a variety of government bonds and corporate debt obligations.
Global Growth Series expects that a large portion of its debt investments will
be high quality government or corporate bonds. High quality debt securities are
securities rated within one of the two highest 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. Government bonds which the Fund may purchase include debt obligations
issued or guaranteed by the U.S. government or foreign governments (including
foreign states, provinces, or municipalities) or their agencies, authorities or
instrumentalities and also 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 which the Fund may purchase include corporate bonds and debt
obligations convertible into equity securities or having attached warrants or
rights to purchase equity securities. The Fund may also 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). No more than 5% of the Fund's net assets may be invested in debt
securities rated lower than Baa or BBB. A description of the Moody's and S&P
ratings is included in Appendix B.
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
The Fund may (i) enter into repurchase agreements; (ii) purchase securities
on a "when-issued" or delayed delivery basis; (iii) enter into dollar roll
transactions; (iv) engage in the lending of portfolio securities; (v) enter into
futures contracts and options thereon; (vi) write call options and purchase put
and call options on securities; (vii) purchase or sell foreign currency forward
exchange contracts; (viii) purchase and write put and call options on foreign
currencies;
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and (ix) sell securities short against the box. For more information about these
investment strategies, restrictions on their use and certain associated risks,
see the related headings under "More Information on Certain Investments and
Investment Strategies."
GLOBAL EQUITY SERIES
Global Equity Series invests, under normal market conditions, at least 65%
of its total assets (exclusive of collateral associated with securities lending)
in common stocks and equity-related securities, such as preferred stocks,
convertible securities and depositary receipts, of U.S. and foreign (including
emerging market) issuers. Up to 100% of the Fund's net assets may be invested in
foreign securities. See "More Information on Certain Investments and Investment
Strategies -- Securities of Foreign Issuers" and "More Information on Certain
Investments and Investment Strategies -- Emerging Markets."
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
The Fund may (i) enter into repurchase agreements; (ii) purchase securities
on a "when-issued" or delayed delivery basis; (iii) engage in the lending of
portfolio securities; (iv) enter into futures contracts and options thereon; (v)
purchase, write or sell options on securities or financial indices; (vi)
purchase or sell foreign currency forward exchange contracts; and (vii) purchase
and write put and call options on foreign currencies. For more information about
these investment strategies, restrictions on their use and certain associated
risks, see the related headings under "More Information on Certain Investments
and Investment Strategies."
LARGE CAP GROWTH SERIES
Large Cap Growth Series invests primarily in the common stocks of a limited
number of large U.S. companies. The Fund normally invests at least 85% of its
total assets (exclusive of collateral associated with securities lending) in the
equity securities of U.S. companies. These are companies (i) organized under
United States law that have their principal office in the United States, and
(ii) the equity securities of which are traded principally in the United States.
Large Cap Growth Series may also: (1) invest up to 20% of its net assets in
convertible securities of companies whose common stocks are eligible for
purchase; (2) invest up to 5% of its net assets in rights or warrants; (3)
invest up to 15% of its total assets in securities of foreign issuers whose
common stocks are eligible for purchase.
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
The Fund may (i) enter into repurchase agreements; (ii) purchase securities
on a "when-issued" or delayed delivery basis; (iii) enter into dollar roll
transactions; (iv) engage in the lending of portfolio securities; (v) enter into
futures contracts and options thereon; (vi) write call options on securities and
purchase and sell put and call options on securities and financial indices; and
(vii) purchase or sell foreign currency forward exchange contracts. For more
information about these investment strategies, restrictions on their use and
certain associated risks, see the related headings under "More Information on
Certain Investments and Investment Strategies."
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INVESTORS GROWTH SERIES
Investors Growth Series invests its assets, except for working cash
balances, in the common stocks and securities convertible into common stocks of
companies which the Fund's subadviser believes offer better than average
prospects for long-term growth. Up to 35% of the Fund's net assets may be
invested in foreign securities, including securities of issuers located in
emerging markets. See "More Information on Certain Investments and Investment
Strategies -- Securities of Foreign Issuers" and "More Information on Certain
Investments and Investment Strategies -- Emerging Markets."
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
The Fund may (i) enter into repurchase agreements; (ii) purchase securities
on a "when-issued" or delayed delivery basis; (iii) engage in the lending of
portfolio securities; (iv) enter into futures contracts and options thereon; (v)
purchase, write or sell options on securities or financial indices; (vi)
purchase or sell foreign currency forward exchange contracts; and (vii) purchase
and write put and call options on foreign currencies. For more information about
these investment strategies, restrictions on their use and certain associated
risks, see the related headings under "More Information on Certain Investments
and Investment Strategies."
GROWTH STOCK SERIES
Growth Stock Series invests primarily in common stocks. The Fund may also
invest in securities convertible into common stocks, and may occasionally invest
limited amounts in other types of securities (such as nonconvertible preferred
and debt securities). Growth Stock Series may invest in both listed and unlisted
securities. The Fund may also invest up to 10% of its total assets in foreign
securities.
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
The Fund may (i) enter into repurchase agreements and (ii) sell securities
short against the box. For information about this investment strategy,
restrictions on its use and certain associated risks, see "More Information on
Certain Investments and Investment Strategies."
AGGRESSIVE GROWTH SERIES
Aggressive Growth Series invests at least 65% of its total assets
(exclusive of collateral associated with securities lending) in common stocks of
emerging growth companies and more established companies whose rates of earnings
growth are expected to accelerate because of special factors. The Fund may, to a
limited extent, seek appreciation in other types of securities such as
convertible securities and warrants when relative values make such purchases
appear attractive. Aggressive Growth Series may invest up to 10% of its total
assets in foreign securities.
For more information on the types of securities in which the Fund may
invest, see "More Information on Certain Investments and Investment Strategies."
The Fund may (i) enter into repurchase agreements; (ii) purchase securities
on a "when-issued" or delayed delivery basis; (iii) enter into dollar roll
transactions; (iv) engage in the
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<PAGE> 25
lending of portfolio securities; (v) enter into futures contracts and options
thereon; (vi) purchase, write or sell options on securities or financial
indices; and (vii) purchase or sell foreign currency forward exchange contracts;
(viii) purchase and write put and call options on foreign currencies; and (ix)
sell securities short against the box. For more information about these
investment strategies, restrictions on their use and certain associated risks,
see the related headings under "More Information on Certain Investments and
Investment Strategies."
MORE INFORMATION ON CERTAIN INVESTMENTS AND INVESTMENT STRATEGIES
COMMON AND PREFERRED STOCKS. Each Fund other than Money Market Series and
U.S. Government Securities Series may invest in common and preferred stocks
(except that Multisector Bond Series does not invest in common stock and S&P 500
Index Series does not invest in preferred stocks). Stocks represent shares of
ownership in a company. Generally, preferred stock has a specified dividend and
ranks after bonds and before common stocks in its claim on income for dividend
payments and on assets should the company be liquidated. After other claims are
satisfied, common stockholders participate in company profits on a pro rata
basis; profits may be paid out in dividends or reinvested in the company to help
it grow. Increases and decreases in earnings are usually reflected in a
company's stock price, so common stocks generally have the greatest appreciation
and depreciation potential of all corporate securities.
CONVERTIBLE SECURITIES. Each Fund other than Money Market Series, U.S.
Government Securities Series and S&P 500 Index Series may invest in debt or
preferred stock convertible into or exchangeable for common stock.
Traditionally, convertible securities have paid dividends or interest at rates
higher than common stocks but lower than non-convertible securities. They
generally participate in the appreciation or depreciation of the underlying
stock into which they are convertible, but to a lesser degree. In recent years,
convertibles have been developed which combine higher or lower current income
with options and other features.
WARRANTS OR RIGHTS. Warrants or rights may be acquired by each Fund (except
Investors Growth Series) in connection with other securities or separately.
Warrants are options to buy a stated number of shares of common stock at a
specified price any time during the life of the warrants (generally two or more
years). Asset Allocation Series, S&P 500 Index Series, Blue Chip Stock Series,
International Stock Series, Mid Cap Stock Series, Small Cap Value Series and
Global Growth Series each may invest up to 5% of their net assets in warrants or
rights. Large Cap Growth Series may invest up to 5% of total assets in warrants
or rights. International Stock Series II may invest up to 10% of its net assets
in warrants or rights.
SECURITIES OF OTHER INVESTMENT COMPANIES. The Funds may purchase the
securities of open-end or closed-end investment companies if such purchases are
in compliance with the 1940 Act. If a Fund invests in securities of other
investment companies, the return on any such investments will be reduced by the
operating expenses, including investment advisory and administrative fees, of
such investment companies. (Such Fund indirectly absorbs its pro rata share of
the other investment companies' expenses.) However, Advisers and the subadvisers
believe that at times the return and liquidity features of these securities will
be more beneficial than other types of securities. Blue Chip Stock Series and
International Stock Series II may invest in shares of the Reserve Investment
Funds, Inc. money market fund managed by T. Rowe Price (Blue Chip Stock Series'
subadviser) and made available to clients of T. Rowe Price. The Reserve
Investment Fund does not charge investment advisory fees and T. Rowe Price
received an exemptive order from the Securities and Exchange Commission that
permits a fund to invest
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up to 25% of total assets in the Reserve Investment Fund. Multisector Bond
Series may invest in shares that have AIM, the Fund's subadviser, or an
affiliate of AIM as an investment adviser ("the Affiliated Money Market Funds"),
provided that such purchases are in compliance with the 1940 Act. With respect
to Multisector Bond Series' purchase of shares of the Affiliated Money Market
Funds, the Fund will pay the advisory fees and other operating expenses of the
Affiliated Money Market Funds.
SHORT-TERM MONEY MARKET INSTRUMENTS. Each Fund 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 Fund 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
Advisers (or a Fund's subadviser, if applicable) to be of comparable quality and
(iv) repurchase agreements relating to the foregoing.
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES. Each Fund may invest in
certificates of deposit. 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.
LETTERS OF CREDIT. Commercial paper and other short-term obligations may be
backed by irrevocable letters of credit issued by banks that assume the
obligation for payment of principal and interest in the event of default by an
issuer. Only banks, the securities of which, in the opinion of Advisers (or a
Fund's subadviser, if applicable), are of investment quality comparable to other
permitted investments of such Fund, may be used for letter of credit-backed
investments.
EXTENDIBLE NOTES. Money Market Series, Diversified Income Series,
Multisector Bond Series, High Yield Series and Asset Allocation Series each are
permitted to invest up to 25% of the value of their 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 time 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
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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 397
days from the date of issuance. If such extendible notes provide for an optional
maturity date of 397 days or less, however, then such notes are deemed by the
Funds 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 Money Market Series not to invest in securities having a
maturity date in excess of 397 days from the date of acquisition. Investment in
extendible notes is not expected to have a material impact on the effective
portfolio maturities of the Funds.
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 Fund 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 the Funds in such extendible
notes are restricted to notes with the same investment ratings as are acceptable
to the Funds with respect to other forms of investment. The creditworthiness of
such issuers is also monitored by Advisers (or the subadviser for Multisector
Bond Series).
FLOATING AND VARIABLE RATE INSTRUMENTS. Certain of the debt obligations
that the Funds may purchase have floating or variable rates of interest. Such
obligations bear interest at rates that are not fixed, but vary with changes in
specified market rates or indices, such as the prime rate, and at specified
intervals. Certain of these obligations may carry a demand feature that would
permit the holder to tender them back to the issuer at par value prior to
maturity. Each Fund limits its purchases of floating and variable rate
obligations to those of the same quality as it otherwise is allowed to purchase.
Advisers (or a Fund's subadviser, if applicable) monitors on an ongoing basis
the ability of an issuer of a demand instrument to pay principal and interest on
demand. A Fund's right to obtain payment at par on a demand instrument can be
affected by events occurring between the date such Fund elects to demand payment
and the date payment is due that may affect the ability of the issuer of the
instrument to make payment when due, except when such demand instruments permit
same-day settlement. To facilitate settlement, these same-day demand instruments
may be held in book entry form at a bank other than the Fund's custodian,
subject to a subcustodian agreement approved by the Fund between the bank and
the Fund's custodian.
The floating and variable rate obligations that the Funds may purchase
include certificates of participation in obligations purchased from banks. A
certificate of participation gives the Fund an undivided interest in the
underlying obligations in the proportion that such Fund's interest bears to the
total principal amount of such obligations. Certain of such certificates of
participation may carry a demand feature that would permit the holder to tender
them back to the issuer prior to maturity. To the extent that floating and
variable rate instruments without demand features are not readily marketable,
they will be subject to the investment restrictions pertaining to investments in
illiquid securities.
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<PAGE> 28
VARIABLE AMOUNT MASTER DEMAND NOTES. Each Fund 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 a Fund at varying market rates of
interest pursuant to arrangements between the Fund, 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 (or a Fund's subadviser, if
applicable) 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
Fund 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 then
outstanding together with interest to the date of payment.
U.S. GOVERNMENT SECURITIES. Each Fund 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-backed 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 little or 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.
U.S. government securities in which the Funds may invest include U.S.
Treasury inflation-protection securities. Inflation-protection securities are
new types of marketable book-entry securities issued by the United States
Department of Treasury ("Treasury") with a nominal return linked to the
inflation rate in prices. Inflation-protection securities are auctioned and
issued on a quarterly basis on the 15th of January, April, July, and October.
Initially, they will be issued as 10-year notes, with other maturities added
thereafter. The index used to measure inflation will be the non-seasonally
adjusted U.S. City Average All Items Consumer Price Index for All Urban
Consumers ("CPI-U").
The value of the principal will be adjusted for inflation, and every six
months the security will pay interest, which will be an amount equal to a fixed
percentage of the inflation-adjusted value of the principal. The final payment
of principal of the security will not be less than the original par amount of
the security at issuance.
The principal of the inflation-protection security will be indexed to the
non-seasonally adjusted CPI-U. To calculate the inflation-adjusted principal
value for a particular valuation date,
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the value of the principal at issuance is multiplied by the index ratio
applicable to that valuation date. The index ratio for any date is the ratio of
the reference CPI applicable to such date to the reference CPI applicable to the
original issue date. Semiannual coupon interest is determined by multiplying the
inflation-adjusted principal amount by one-half of the stated rate of interest
on each interest payment date.
Inflation-adjusted principal or the original par amount, whichever is
larger, will be paid on the maturity date as specified in the applicable
offering announcement. If at maturity the inflation-adjusted principal is less
than the original principal value of the security, an additional amount will be
paid at maturity so that the additional amount plus the inflation-adjusted
principal equals the original principal amount. Some inflation-protection
securities may be stripped into principal and interest components. In the case
of a stripped security, the holder of the stripped principal would receive this
additional amount. The final interest payment, however, will be based on the
final inflation-adjusted principal value, not the original par amount.
The reference CPI for the first day of any calendar month is the CPI-U for
the third preceding calendar month. (For example, the reference CPI for December
1 is the CPI-U reported for September of the same year, which is released in
October.) The reference CPI for any other day of the month is calculated by a
linear interpolation between the reference CPI applicable to the first day of
the month and the reference CPI applicable to the first day of the following
month.
Any revisions the Bureau of Labor Statistics (or successor agency) makes to any
CPI-U number that has been previously released will not be used in calculations
of the value of outstanding inflation-protection securities. In the case that
the CPI-U for a particular month is not reported by the last day of the
following month, the Treasury will announce an index number based on the last
year-over-year CPI-U inflation rate available. Any calculations of the
Treasury's payment obligations on the inflation-protection security that need
that month's CPI-U number will be based on the index number that the Treasury
has announced. If the CPI-U is rebased to a different year, the Treasury will
continue to use the CPI-U series based on the base reference period in effect
when the security was first issued as long as that series continues to be
published. If the CPI-U is discontinued during the period the inflation-
protection security is outstanding, the Treasury will, in consultation with the
Bureau of Labor Statistics (or successor agency), determine an appropriate
substitute index and methodology for linking the discontinued series with the
new price index series. Determinations of the Secretary of the Treasury in this
regard are final.
Inflation-protection securities will be held and transferred in either of
two book-entry systems: the commercial book-entry system (TRADES) and TREASURY
DIRECT. The securities will be maintained and transferred at their original par
amount, i.e., not at their inflation-adjusted value. STRIPS components will be
maintained and transferred in TRADES at their value based on the original par
amount of the fully constituted security.
ACCRUAL BONDS. U.S. Government Securities Series, Diversified Income
Series, Multisector Bond Series, High Yield Series, Asset Allocation Series,
American Leaders Series, Capital Opportunities Series, International Stock
Series, Global Equity Series, Investors Growth Series and Global Growth Series
may invest in certain types of accrual bonds, including zero coupon obligations,
payment-in-kind debentures and deferred payment securities. The holder of an
accrual bond does not receive cash interest during the accrual period of the
bond. High Yield Series may invest up to 25% of its net assets in accrual bonds.
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Zero Coupon Obligations. The Funds which may invest in accrual bonds, may
invest in zero coupon obligations of 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
Funds may invest in either type of zero coupon obligation. A Fund's investment
policies and restrictions applicable to corporate and government securities
shall apply equally to such Fund's investments in zero coupon securities
(including, for example, minimum corporate bond ratings).
Payment-in-Kind Debentures. A payment-in-kind debenture ("PIK") pays
interest in securities rather than cash. Typically, during a specified term
prior to the debenture's maturity, the issuer of a PIK may provide for the
option or the obligation to make interest payments in debentures, common stock
or other instruments (i.e., "in kind" rather than in cash). The type of
instrument in which interest may or will be paid would be known by the Fund at
the time of the investment. A Fund's investment restrictions regarding corporate
bond quality are applicable to investments in PIKs by such Fund as well as to
the securities which may constitute interest payments on PIKs. While PIKs
generate income for generally accepted accounting standards purposes, they do
not generate cash flow and thus could cause a Fund to be forced to liquidate
securities at an inopportune time in order to distribute cash, as required by
the Internal Revenue Code.
Deferred payment securities. With deferred payment securities interest
payments accrue on the security for a predetermined period of time. At the end
of the period, the accumulated cash interest is paid to the holder of the
security. Deferred payment securities are, similar to zero coupon bonds, issued
at a significant discount from face value. The discount approximates the total
amount of interest the bonds will accrue and compound over the period until the
first interest payment date at a rate of interest reflecting the market rate of
the security at the time of issuance.
MORTGAGE-BACKED SECURITIES. Each Fund other than Aggressive Growth Series
may invest in certain types of mortgage-backed securities. One type of
mortgage-backed 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
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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.
U.S. Government Pass-Through Securities. 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. Information on the mortgage-backed securities issued by
these entities is set forth below.
(i) GNMA CERTIFICATES. Certificates of the GNMA ("GNMA Certificates")
evidence an undivided interest in a pool of mortgage loans. GNMA
Certificates differ from bonds in that principal is paid back monthly as
payments of principal, including prepayments, on the mortgages in the
underlying pool are passed through to holders of the GNMA Certificates
representing interests in the pool, rather than returned in a lump sum at
maturity. "Modified pass-through" GNMA Certificates entitle the holder to
receive a share of all interest and principal payments paid or owed to the
mortgage pool, net of fees paid or due to the "issuer" and GNMA, regardless
of whether or not the mortgagor actually makes the payment.
(ii) GNMA GUARANTEE. The National Housing Act authorizes GNMA to
guarantee the timely payment of principal and interest on securities backed
by a pool of mortgages insured by the Federal Housing Administration
("FHA") or the Farmers' Home Administration ("FmHA"), or guaranteed by the
Veterans Administration ("VA"). GNMA is also empowered to borrow without
limitation from the U.S. Treasury, if necessary, to make any payments
required under its guarantee.
(iii) LIFE OF GNMA CERTIFICATES. The average life of a GNMA
Certificate is likely to be substantially less than the stated maturity of
the mortgages underlying the securities. Prepayments of principal by
mortgagors and mortgage foreclosures will usually result in the return of
the greater part of principal investment long before the maturity of the
mortgages in the pool. Foreclosures impose no risk of loss of the principal
balance of a Certificate, because of the GNMA guarantee, but foreclosure
may impact the yield to shareholders because of the need to reinvest
proceeds of foreclosure.
As prepayment rates of individual mortgage pools vary widely, it is
not possible to predict accurately the average life of a particular issue
of GNMA Certificates. However, statistics published by the FHA indicate
that the average life of single family dwelling mortgages with 25- to
30-year maturities, the type of mortgages backing the vast majority of GNMA
Certificates, is approximately 12 years. Prepayments are likely to increase
in periods of falling interest rates. It is customary to treat GNMA
Certificates as 30-year mortgage-backed securities which prepay fully in
the twelfth year.
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(iv) YIELD CHARACTERISTICS OF GNMA CERTIFICATES. The coupon rate of
interest of GNMA Certificates is lower than the interest rate paid on the
VA-guaranteed or FHA-insured mortgages underlying the certificates, by the
amount of the fees paid to GNMA and the issuer.
The coupon rate by itself, however, does not indicate the yield which
will be earned on GNMA Certificates. First, GNMA Certificates may be issued
at a premium or discount, rather than at par, and, after issuance, GNMA
Certificates may trade in the secondary market at a premium or discount.
Second, interest is earned monthly, rather than semi-annually as with
traditional bonds; monthly compounding raises the effective yield earned.
Finally, the actual yield of a GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying it. For example, if
interest rates decline, prepayments may occur faster than had been
originally projected and the yield to maturity and investment income would
be reduced.
(v) FHLMC SECURITIES. "FHLMC" is a federally chartered corporation
created in 1970 through enactment of Title III of the Emergency Home
Finance Act of 1970. Its purpose is to promote development of a nationwide
secondary market in conventional residential mortgages.
The FHLMC issues two types of mortgage pass-through securities,
mortgage participation certificates ("PCs") and guaranteed mortgage
certificates ("GMCs"). PCs resemble GNMA Certificates in that each PC
represents a pro rata share of all interest and principal payments made or
owed on the underlying pool. The FHLMC guarantees timely payment of
interest on PCs and the ultimate payment of principal. Like GNMA
Certificates, PCs are assumed to be prepaid fully in their twelfth year.
GMCs also represent a pro rata interest in a pool of mortgages.
However, these instruments pay interest semi-annually and return principal
once a year in guaranteed minimum payments. The expected average life of
these securities is approximately ten years.
(vi) FNMA SECURITIES. "FNMA" is a federally chartered and privately
owned corporation which was established in 1938 to create a secondary
market in mortgages insured by the FHA. It was originally established as a
government agency and was transformed into a private corporation in 1968.
FNMA issues guaranteed mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each
FNMA Certificate represents a pro rata share of all interest and principal
payments made or owed on the underlying pool. FNMA guarantees timely
payment of interest on FNMA certificates and the full return of principal.
Like GNMA Certificates, FNMA Certificates are assumed to be prepaid fully
in their twelfth year.
Private Pass-Through Securities. 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
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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, the Funds may, consistent with their investment
objectives, policies and restrictions, consider making investments in such new
types of securities.
CMOs, Multi-Class Pass-Through Securities and Other Types of
Mortgage-Backed 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.
Securities in this investment category include, among others, standard
mortgage-related bonds, collateralized mortgage obligations (CMOs) and
multi-class pass-through securities. Mortgage-related bonds are secured by pools
of mortgages, but, unlike pass-through securities, payments to bondholders are
not determined by payments on the mortgages. The bonds consist of a single
class, with interest payable monthly and principal payable on the stated date of
maturity.
U.S. Government Securities Series, Diversified Income Series, Multisector
Bond Series, High Yield Series, Asset Allocation Series, Capital Opportunities
Series, International Stock Series, Global Equity Series and Investors Growth
Series may invest in CMOs and multi-class pass-through securities. CMOs are debt
instruments issued by special purpose entities which are secured by pools of
mortgage loans or other mortgage-backed securities. Multi-class pass-through
securities are interests in a trust composed of mortgage loans or other
mortgage-backed securities. Payments of principal and interest on underlying
collateral provide the funds to pay debt service on the CMO or make scheduled
distributions on the multi-class pass-through security. Multi-class pass-through
securities, CMOs, and classes thereof (including those discussed below) are
examples of the types of financial instruments commonly referred to as
derivatives.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specified
coupon rate and has a stated maturity or final distribution date. Principal
prepayments on collateral underlying a CMO may cause it to be retired
substantially earlier than the stated maturities or final distribution dates.
Interest is paid or accrues on all classes of a CMO on a monthly, quarterly or
semiannual basis. The principal and interest on the underlying mortgages may be
allocated among the several classes of a series of a CMO in many ways. In a
common structure, payments of principal, including any principal prepayments, on
the underlying mortgages are applied according to scheduled cash flow priorities
to classes of the series of a CMO. CMOs are secured by pools of mortgages,
typically in the form of "guaranteed" pass-through certificates such as GNMA,
FNMA, or FHLMC securities. The payments on the collateral securities determine
the payments to the bondholders, but there is not a direct "pass-through" of
payments. CMO's are structured
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into multiple classes, each bearing a different date of maturity. Monthly
payments of principal received from the pool of underlying mortgages, including
prepayments, is first returned to investors holding the shortest maturity class.
Investors holding the longest maturity classes receive principal only after the
shorter maturity classes have been retired.
There are many classes of CMOs. There are "IOs," which entitle the holder
to receive distributions consisting solely or primarily of all or a portion of
the interest in an underlying pool of mortgage loans or mortgage-backed
securities ("Mortgage Assets"). There are also "POs," which entitle the holder
to receive distributions consisting solely or primarily of all or a portion of
the principal of the underlying pool of Mortgage Assets. In addition, there are
"inverse floaters," which have a coupon rate that moves in the reverse direction
to an applicable index, and Z bonds, which are described below.
As to IOs, POs, inverse floaters, and Z bonds, not more than 5% of the net
assets of each of U.S. Government Securities Series, Diversified Income Series,
Multisector Bond Series, High Yield Series, Asset Allocation Series and
International Stock Series will be invested in any one of these items at any one
time, and no more than 10% of the net assets of each of such Fund will be
invested in all such obligations at any one time. Not more than 5% of Global
Growth Series' net assets collectively will be invested in such obligations at
any time.
Inverse floating CMOs are typically more volatile than fixed or adjustable
rate tranches of CMOs. Investments in inverse floating CMOs would be purchased
by a Fund to attempt to protect against a reduction in the income earned on such
Fund's investments due to a decline in interest rates. The Fund would be
adversely affected by the purchase of such CMOs in the event of an increase in
interest rates since the coupon rate thereon will decrease as interest rates
increase, and, like other mortgage-backed securities, the value will decrease as
interest rates increase.
The cash flows and yields on IO and PO classes are extremely sensitive to
the rate of principal payments (including prepayments) on the related Mortgage
Assets. For example, a rapid or slow rate of principal payments may have a
material adverse effect on the yield to maturity of IOs or POs, respectively. If
the underlying Mortgage Assets experience greater than anticipated prepayments
of principal, the holder of an IO may incur substantial losses, even if the IO
class is rated AAA. Conversely, if the underlying Mortgage Assets experience
slower than anticipated prepayments of principal, the yield and market value for
the holder of a PO will be affected more severely than would be the case with a
traditional mortgage-backed security.
However, if interest rates were expected to rise, the value of an IO might
increase and may partially offset other bond value declines, and if rates were
expected to fall, the inclusion of POs could balance lower reinvestment rates.
A Z bond holder is not entitled to receive cash payments until one or more
other classes of the CMO have been paid in full from payments on the mortgage
loans underlying the CMO. During the period in which cash payments are not being
made on the Z tranche, interest accrues on the Z tranche at a stated rate, and
this accrued interest is added to the amount of principal which is due to the
holder of the Z tranche. After the other classes have been paid in full, cash
payments are made on the Z tranche until its principal (including previously
accrued interest which was added to principal, as described above) and accrued
interest at the stated rate have been paid in full. Generally, the date upon
which cash payments begin to be made on a Z tranche depends on the rate at which
the mortgage loans underlying the CMO are prepaid, with a faster
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prepayment rate resulting in an earlier commencement of cash payments on the Z
tranche. Like a zero coupon bond, during its accrual period the Z tranche of a
CMO has the advantage of eliminating the risk of reinvesting interest payments
at lower rates during a period of declining market interest rates. At the same
time, however, and also like a zero coupon bond, the market value of a Z tranche
can be expected to fluctuate more widely with changes in market interest rates
than would the market value of a tranche which pays interest currently. Changes
in market interest rates also can be expected to influence prepayment rates on
the mortgage loans underlying the CMO of which a Z tranche is a part. As noted
above, such changes in prepayment rates will affect the date at which cash
payments begin to be made on a Z tranche, and therefore also will influence its
market value.
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 a
Fund. 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.
REAL ESTATE OR REAL ESTATE INVESTMENT TRUSTS. Diversified Income Series,
Multisector Bond Series, Asset Allocation Series, American Leaders Series, Value
Series, Growth & Income Series, Blue Chip Stock Series II and Small Cap Value
Series may invest in real estate investment trusts ("REITs"), real estate
development and real estate operating companies and other real estate related
businesses. A REIT may focus on particular projects, such as apartment complexes
or shopping centers, or geographic regions, such as the Southeastern United
States, or both. In addition, Value Series may invest up to 10% of its total
assets in REITs, but will invest only in REITs that are publicly distributed.
Growth & Income Series and Value Series currently intend to make any REIT
investments primarily in equity REITs, which are trusts that sell shares to
investors and use the proceeds to invest in real estate or interests in real
estate. Debt REITs invest in obligations secured by mortgages on real property
or interests in real property.
The Funds' investments in real estate securities may be subject to certain
of the same risks associated with the direct ownership of real estate. These
risks include: declines in the value of real estate; risks related to general
and local economic conditions; overbuilding and competition; increases in
property taxes and operating expenses; and variations in rental income. In
addition, REITs may not be diversified. REITs are subject to the possibility of
failing to qualify for tax-free pass-through of income under the Internal
Revenue Code and failing to maintain exemption from the 1940 Act. Also, REITs
may be dependent upon management skill and may be subject to the risks of
obtaining adequate financing for projects on favorable terms.
MUNICIPAL SECURITIES. U.S. Government Securities Series, Diversified Income
Series, Multisector Bond Series and Asset Allocation Series each may invest not
more than 20% of their total assets in municipal securities during periods when
such securities appear to offer more
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attractive returns than taxable securities. Capital Opportunities Series, Global
Equity Series and Investors Growth Series may also invest in municipal
securities.
BRADY BONDS. Capital Opportunities Series, Global Equity Series and
Investors Growth Series may invest in Brady Bonds. Brady Bonds are fixed income
securities that are created through the exchange of existing commercial bank
loans to foreign entities for new obligations in connection with debt
restructuring under a plan introduced by Nicholas G. Brady when he was the U.S.
Secretary of the Treasury. They may be collateralized or uncollateralized and
issued in various currencies (although most are U.S. dollar-denominated) and
they are actively traded in the over-the-counter secondary market. However,
Brady Bonds should be viewed as speculative in light of the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds.
HIGH-YIELD/ HIGH-RISK SECURITIES. Diversified Income Series, Multisector
Bond Series, High Yield Series, Asset Allocation Series, American Leaders Series
and Capital Opportunities Series may invest in securities rated lower than
investment grade (commonly known as "high yield" or "junk" bonds). Participation
in lower-rated securities transactions generally involves greater returns in the
form of higher average yields. However, participation in such transactions
involves greater risks, often related to sensitivity to interest rates, economic
changes, solvency, and relative liquidity in the secondary trading market.
Yields on high yield securities will fluctuate over time. The prices of
high-yielding securities have been found to be less sensitive to interest rate
changes than higher-rated investments, but more sensitive to adverse economic
changes or individual corporate developments. Also, during an economic downturn
or substantial period of rising interest rates highly leveraged issuers may
experience financial stress which would adversely affect their ability to
service their principal and interest payment obligations, to meet projected
business goals, and to obtain additional financing. If the issuer of a security
held by a Fund defaulted, such Fund might incur additional expenses to seek
recovery. In addition, periods of economic uncertainty and changes can be
expected to result in increased volatility of market prices of high-yielding
securities and in the net asset values of Funds investing in such securities.
Furthermore, in the case of high-yielding securities structured as zero coupon
or payment in kind securities, their market prices are affected to a greater
extent by interest rate changes and thereby tend to be more volatile than
securities which pay interest periodically and in cash.
High-yielding securities present risks based on payment expectations. For
example, high-yielding securities may contain redemption or call provisions. If
an issuer exercises these provisions in a declining interest rate market, a Fund
holding the security likely would have to replace it with a lower-yielding
security, resulting in a decreased return for investors. Conversely, a
high-yielding security's value will decrease in a rising interest rate market,
as will the net asset value of a Fund holding such security. If the Funds
experience unexpected net redemptions, this may force them to sell their
high-yielding securities, without regard to their investment merits, thereby
decreasing the asset base upon which the Funds' expenses can be spread and
possibly reducing the rate of return.
To the extent that there is no established secondary market, there may be
thin trading of high-yielding securities. This may adversely affect the ability
of the Board of Directors to accurately value high-yielding securities and a
Fund's ability to dispose of such securities. Securities valuation becomes more
difficult and judgment plays a greater role in valuation because there is less
reliable, objective data available. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the values and
liquidity
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of high-yielding securities, especially in a thinly traded market. Illiquid or
restricted high-yielding securities purchased by the Funds may involve special
registration responsibilities, liabilities and costs, and liquidity and
valuation difficulties.
New laws and proposed new laws could have an adverse impact on the market
for such securities. As examples, recent legislation requires federally-insured
savings and loan associations to divest their investments in high-yielding
securities and pending proposals are designed to limit the use, or tax and other
advantages of high-yielding securities. The new legislation and the proposals,
if enacted, could have an adverse effect on the Funds' net asset values and
investment practices, with the extent of the impact depending upon the
composition of such Funds at that time.
Certain risks are associated with applying credit ratings as a method for
evaluating high-yielding securities. For example, credit ratings evaluate the
safety of principal and interest payments, not market value risk of
high-yielding securities. Since credit rating agencies may fail to timely change
the credit ratings to reflect subsequent events, Advisers (or a Fund's
subadviser, if applicable) continuously monitors the issuers of high-yielding
securities held by these Funds to determine if the issuers will have sufficient
cash flow and profits to meet required principal and interest payments, and to
assure the securities' liquidity so such Funds can meet redemption requests. The
achievement of the investment objectives of such Funds may be more dependent
upon the Advisers' or a subadviser's own credit analysis than is the case for
higher quality bonds.
SECURITIES OF FOREIGN ISSUERS. Multisector Bond Series, International Stock
Series, International Stock Series II, Global Growth Series and Global Equity
Series invest significantly in securities of foreign issuers. Money Market
Series and U.S. Government Securities Series each 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 also may invest in
obligations of foreign banks and foreign branches of domestic and foreign banks,
provided such banks have total assets in excess of $1 billion, and it may invest
up to 15% of its total assets in securities of foreign companies. 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 foreign banks and
their branches and securities of foreign branches of domestic banks. Multisector
Bond Series may invest up to 40% of its total assets in securities of foreign
governments or companies. Investors Growth Series and Capital Opportunities
Series each may invest up to 35% of net assets in foreign securities. Asset
Allocation Series may invest up to 25% of its total asset in foreign securities,
provided that no more than 15% of its total assets may be invested in foreign
securities that are not traded on national foreign securities exchanges or
traded in the United States. Diversified Income Series and High Yield Series may
each invest up to 25% of their net assets in foreign securities. Blue Chip Stock
Series II may invest up to 25% of its total assets in foreign securities. Blue
Chip Stock Series may invest up to 20% of its total assets (excluding reserves)
in foreign securities. Large Cap Growth Series may invest up to 15% of its total
assets in foreign securities. Value Series, Growth & Income Series, Growth Stock
Series, and Aggressive Growth Series each may invest up to 10% of total assets
in securities of foreign governments and companies. Small Cap Value Series may
invest in foreign securities without limitation. Investments in foreign
securities by American Leaders Series are limited to American Depositary
Receipts (see " - Depositary Receipts" below).
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Investing in foreign securities may result in greater risk than that
incurred by investing in domestic securities 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, a Fund
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 Funds. 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 Fund, particularly Multisector Bond Series, International Stock
Series, International Stock Series II, Global Growth Series and Global Equity
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. A significant portion of the
securities held by the Multisector Bond Series, International Stock Series,
International Stock Series II, Global Growth Series and Global Equity Series
will not be registered with the Securities and Exchange Commission ("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 these Funds 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 Funds 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 Multisector Bond Series, International Stock Series, International
Stock Series II, Global Growth Series and Global Equity Series will each invest
significantly 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 each such Fund's 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 a Fund's holdings of
securities denominated in such currency and, therefore, will cause an overall
decline in that Fund's net asset value and any net investment income and capital
gains to be distributed in U.S. dollars to shareholders of that Fund.
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 Multisector Bond Series, International Stock Series, International
Stock Series II, Global Growth Series and Global Equity Series each values its
assets daily in terms of U.S. dollars, each such Fund does not intend to convert
its holdings of foreign currencies into U.S.
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dollars on a daily basis. These Funds 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 a Fund at one rate, while offering a lesser rate of exchange
should the Fund 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 a Fund are uninvested and no return is earned
thereon. The inability of a Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive opportunities.
Inability to dispose of a portfolio security due to settlement problems either
could result in losses to a Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Each Fund will
consider such difficulties when determining the allocation of its assets,
although the Funds do not believe that such difficulties will have a material
adverse effect on their portfolio trading activities.
A Fund's net investment income from foreign issuers may be subject to
non-U.S. withholding taxes, thereby reducing the Fund's net investment income.
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. In addition, obligations of foreign
branches of domestic banks and domestic branches of foreign banks are not
insured by the Federal Deposit Insurance Corporation. Such investments are also
subject to the risk of investing in foreign securities generally, as discussed
above.
EMERGING MARKETS. Each Fund that may invest in foreign securities may
invest in emerging market countries, with the exception of U.S. Government
Securities Series. Global Growth Series is limited to investing up to 45% of its
total assets in emerging market countries. Many emerging market countries have
experienced substantial or, in some periods, extremely high rates of inflation
for many years. Inflation and rapid fluctuations in inflation rates have had and
may continue to have adverse effects on the economies and securities markets of
certain of these countries. In an attempt to control inflation, wage and price
controls have been imposed in certain countries. In many cases, emerging market
countries are among the world's largest debtors to commercial banks, foreign
governments, international financial organizations and other financial
institutions. In recent years, the governments of some of these countries have
encountered difficulties in servicing their external debt obligations, which has
led to defaults on certain obligations and the restructuring of certain
indebtedness.
Emerging markets are countries categorized as emerging markets by the
International Financial Corporation, the World Bank's private sector division.
Such countries may include but
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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.
DEPOSITARY RECEIPTS. The Funds which may invest in foreign securities may
hold equity securities of foreign issuers in the form of American Depositary
Receipts ("ADRs"), Global Depositary Receipts ("GDRs") 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 that evidence ownership of underlying
securities issued by a foreign corporation. Generally, ADRs in registered form
are designed for use in the United States securities markets. For purposes of
the Funds' investment policies, the Funds' investments in ADRs and GDRs will be
deemed to be investments in the equity securities representing securities of
foreign issuers into which they may be converted.
PASSIVE FOREIGN INVESTMENT COMPANIES. The Funds which may invest in foreign
securities may purchase the securities of certain foreign investment funds or
trusts called passive foreign investment companies. Such trusts have been the
only or primary way to invest in certain countries. In addition to bearing their
proportionate share of the trust's expenses (management fees and operating
expenses), shareholders will also indirectly bear similar expenses of such
trusts. Capital gains on the sale of such holdings are considered ordinary
income regardless of how long a Fund held its investment. In addition, a Fund
may be subject to corporate income tax and an interest charge on certain
dividends and capital gains earned from these investments, regardless of whether
such income and gains are distributed to shareholders.
OPTIONS. To reduce fluctuations in net asset value or to increase current
income, Multisector Bond Series, High Yield Series, Asset Allocation Series,
American Leaders Series, Value Series, Capital Opportunities Series, Growth &
Income Series, S&P 500 Index Series, Blue Chip Stock Series, Blue Chip Stock
Series II, International Stock Series, International Stock Series II, Mid Cap
Stock Series, Small Cap Value Series, Global Growth Series, Global Equity
Series, Large Cap Growth Series, Investors Growth Series, Growth Stock Series
and Aggressive Growth Series may:
- sell (write) covered call and secured put options (except that Large
Cap Growth Series may not write put options); and
- purchase call and put options
on securities written by others. These Funds may write and buy options on the
same types of securities that these Funds may purchase directly. However, all
options purchased or written by S&P 500 Index Series and Mid Cap Stock Series
must be listed on a national securities or futures exchange or traded in the
over-the-counter ("OTC") market.
For more information on the limitations that apply to the Funds' investment
in options, see "More Information on Certain Investments and Investment
Strategies--Limitations on Investments in Options, Futures Contracts and Forward
Contracts."
USE OF OPTIONS. Put and call options may be used for a variety of purposes:
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- To Hedge. Options can be used to hedge against loss. For example, if a
portfolio manager wishes to hedge a security that the manager owns
against a decline in price, the manager may purchase a put option on
the underlying security, i.e., purchase the right to sell the security
to a third party at a stated price. If the underlying security then
declines in price, the manager can exercise the put option, thus
limiting the amount of the manager's loss resulting from the decline
in price. Similarly, if the manager intends to purchase a security at
some date in the future, the manager may purchase a call option on the
security today in order to hedge against an increase in its price
before the intended purchase date. The premium paid for a put or call
option plus any transaction costs will reduce the benefit, if any,
realized by a Fund upon exercise or liquidation of the option, and,
unless the price of the underlying security changes sufficiently, the
option may expire without value to the Fund.
- To Speculate. Options also can be used for speculative purposes. For
example, if a portfolio manager believes that the price of stocks
generally is going to rise, the manager may purchase a call option on
a stock index, the components of which are unrelated to the stocks the
manager holds in a Fund or intends to purchase. If the stock index
appreciates sufficiently, the Fund will realize a gain. If the stock
index falls, the Fund will lose the premium paid for the option plus
related transaction costs.
- To Increase Current Income. Finally, a portfolio manager may write
covered call options or secured put options to increase current
income. If the options expire unexercised, the Fund realizes
additional current income equal to the difference between the amount
of the price (premium) received for selling the option and the related
transaction costs.
Each of the Funds that may invest in options may do so for both hedging
purposes and to increase current income. However, Multisector Bond Series, High
Yield Series, Asset Allocation Series, American Leaders Series, Value Series,
Growth & Income Series, Blue Chip Stock Series, Blue Chip Stock Series II,
International Stock Series, International Stock Series II, Mid Cap Stock Series,
Global Growth Series, Growth Stock Series and Aggressive Growth Series may also
enter into options transactions for speculative purposes.
WRITING CALL OPTIONS. When a Fund sells (writes) a call option, it gives a
third party the right to purchase a security from the Fund at the exercise price
for a stated period or on a stated date. A call option written by a Fund is
"covered" if the Fund:
- owns the underlying security covered by the call or has an absolute
and immediate right to acquire that security without additional cash
consideration upon conversion or exchange of other securities held in
its portfolio; or
- holds a call on the same security having the same principal amount as
the call written and the exercise price of the call held (i) is equal
to or less than the exercise price of the call written or (ii) is
greater than the exercise price of the call written if the difference
is maintained and segregated by the Fund in cash and other liquid
assets.
By writing covered call options, a Fund might lose the potential for gain on the
underlying security if the option is exercised. However, Advisers believes that
this technique is a relatively low-risk way to enhance a Fund's return. The
Funds will not write "uncovered" call options.
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WRITING PUT OPTIONS. When a Fund sells (writes) a put option, it gives a
third party the right to sell a security to the Fund at the exercise price for a
stated period or on a stated date. A put option written by a Fund is "secured"
if the Fund:
- segregates cash or other liquid assets with a value equal to the
exercise price of the put; or
- holds a put on the same security having the same principal amount as
the put written and the exercise price of the put held is (a) equal to
or greater than the exercise price of the put written or (b) less than
the exercise price of the put written if the difference is maintained
and segregated by the Fund in cash and other liquid assets.
By writing a put option, a Fund might become obligated to purchase the
underlying security for more than its current market price upon exercise of the
option. The Funds will not write "unsecured" put options.
BUYING CALL OPTIONS. As a holder of a call option, a Fund has the option to
buy the underlying security from the option writer at the exercise price at any
time during the option period or on a stated date. If a Fund buys a call option,
any loss will be limited to the premium paid for the call option and related
transaction costs. A Fund may exercise the call option, permit it to expire, or
sell it. By selling the call option, the Fund eliminates its position.
A Fund may buy call options on securities that it intends to purchase to
limit the risk of a substantial increase in the market price of the security. A
Fund may also buy call options on securities held in its portfolio and on which
it has written call options. Prior to its expiration, a call option may be sold
which eliminates the Fund's position. Profit or loss from such a sale will
depend on whether the amount received is more or less than the premium paid for
the call option plus the related transaction costs.
BUYING PUT OPTIONS. As the holder of a put option, a Fund has the option to
sell the underlying security at the exercise price at any time during the option
period or on a stated date. If a Fund buys a put option, any loss will be
limited to the premium paid for the put option and related transaction costs. A
Fund may exercise the put option, permit it to expire, or sell it. By selling
the put option, the Fund eliminates its position.
A Fund may buy a put option on an underlying security owned by the Fund (a
"protective put") as a hedging technique to protect against an anticipated
decline in the value of the security. This hedge protection is provided only
during the life of the put option when the Fund, as the holder of the put
option, is able to sell the underlying security at the put exercise price,
regardless of any decline in the underlying security's market price. For
example, a put option may be purchased in order to protect unrealized
appreciation of a security when the manager deems it desirable to continue to
hold the security due to tax considerations. The premium paid for the put option
and related transaction costs would reduce any gain realized when the underlying
security is eventually sold.
Each Fund that may invest in options for speculative purposes (listed above
under the heading "Use of Options") may also buy put options at a time when such
Fund does not own the underlying security. By buying put options on a security
it does not own, the Fund seeks to benefit from a decline in the market price of
the underlying security. If the put option is not sold when it has remaining
value, and if the market price of the underlying security remains equal to
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or greater than the exercise price during the life of the put option, the Fund
will lose some or all of the premium it paid to purchase the put option. For the
purchase of a put option to be profitable, the market price of the underlying
security must decline sufficiently below the exercise price to cover the premium
and transaction costs.
OPTIONS ON FINANCIAL INDICES. Multisector Bond Series, Asset Allocation
Series, American Leaders Series, Value Series, Capital Opportunities Series,
Growth & Income Series, S&P 500 Index Series, Blue Chip Stock Series, Blue Chip
Stock Series II, International Stock Series II, Mid Cap Stock Series, Global
Growth Series, Global Equity Series, Large Cap Growth Series, Investors Growth
Series, Growth Stock Series, and Aggressive Growth Series may:
- sell (write) covered call options and secured put options on financial
indices; and
- purchase call and put options on financial indices.
In contrast to an option on a security, an option on a financial index
provides the holder with the option to receive cash settlement upon exercise of
the option, rather than the right to purchase or sell a security. The amount of
the cash settlement is generally equal to:
- the difference between the closing price of the index and the exercise
price of the option, multiplied by
- a fixed "index multiplier".
Thus, unlike an option on a particular security, all settlements are in
cash, and gain or loss depends on price movements in the financial market
generally (or in a particular industry or segment of the market) rather than
price movements in an individual security.
Covered Call Options on Financial Indices. A call option written on a
financial index is "covered" if the Fund:
- holds a diversified portfolio of securities similar to those on which
the underlying index is based. However, a Fund cannot, as a practical
matter, acquire and hold a portfolio containing exactly the same
securities that underlie the index and, as a result, bears a risk that
the value of the securities held will not be perfectly correlated with
the value of the index; or
- holds a call on the same index and in the same principal amount as the
call written where the exercise price of the call held is (a) equal to
or less than the exercise price of the call written or (b) greater
than the exercise price of the call written if the difference is
maintained and segregated by the Fund in cash and other liquid assets.
The Funds will not write "uncovered" call options on financial indices.
Secured Put Options on Financial Indices. A Fund may also "secure" put
options on financial indices by:
- holding a put on the same index and in the same principal amount as
the put written where the exercise price of the put held is (a) equal
to or greater than the exercise price of the put written or (b) less
than the exercise price of the put written if the difference is
maintained and segregated by the Fund in cash and other liquid assets;
or
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- segregating cash or other liquid assets in an amount equal to the
exercise price of the option.
The Funds will not write "unsecured" put options on financial indices.
Additional information about options is contained in Appendix A.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS.
Futures Contracts. Multisector Bond Series, High Yield Series, American
Leaders Series, Capital Opportunities Series, International Stock Series II,
Global Equity Series and Investors Growth Series may enter into interest rate
futures contracts. American Leaders Series, Capital Opportunities Series, Value
Series, Growth & Income Series, S&P 500 Index Series, Blue Chip Stock Series,
Blue Chip Stock Series II, International Stock Series, International Stock
Series II, Mid Cap Stock Series, Small Cap Value Series, Global Growth Series,
Global Equity Series, Large Cap Growth Series, Investors Growth Series and
Aggressive Growth Series may enter into stock index futures contracts.
Multisector Bond Series, High Yield Series, Capital Opportunities Series, Blue
Chip Stock Series, Blue Chip Stock Series II, International Stock Series,
International Stock Series II, Mid Cap Stock Series, Small Cap Value Series,
Global Growth Series, Global Equity Series, Large Cap Growth Series, Investors
Growth Series and Aggressive Growth Series may also enter into foreign currency
futures contracts.
A "purchase" of a futures contract means the undertaking of a contractual
obligation to acquire the securities called for by the contract at a specified
price on a specified date. The purchaser of a futures contract on an index
agrees to take or make delivery of an amount of cash equal to the difference
between a specified dollar multiple of the value of the index on the expiration
date of the contract ("current contract value") and the price at which the
contract was originally struck. No physical delivery of the securities
underlying the index is made.
Purchases or sales of stock index futures contracts may be used to attempt
to protect a Fund's 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 a Fund's current or intended investments in
fixed income or foreign securities. In the event that an anticipated decrease in
the value of a Fund's 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 a Fund's 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 such
Fund. A Fund will incur brokerage fees when it purchases and sells futures
contracts, and it will be required to make and maintain margin deposits. Futures
may also be used to manage fund exposure to changes in securities prices and
foreign currencies; as an efficient means of adjusting fund overexposure to
certain markets; in an effort to enhance income; and as a cash management tool.
Options on Futures Contracts. Each Fund that may enter into futures
contracts may also purchase and write put and call options on such contracts.
The Funds may use such options on futures contracts in connection with their
hedging strategies in lieu of purchasing and writing
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options directly on the underlying securities or purchasing and selling the
underlying futures contracts.
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. The writing of a call option on a futures contract
generates a premium which may partially offset a decline in the value of the
Fund's portfolio assets. By writing a call option, a Fund becomes obligated to
sell a futures contract, which may have a value higher than the exercise price.
Conversely, the writing of a put option on a futures contract generates a
premium, but the Fund becomes obligated to purchase a futures contract, which
may have a lower value than the exercise price. Thus, the loss incurred by a
Fund in writing options on futures contracts may exceed the amount of the
premium received.
For more information of futures contracts and options thereon, see Appendix
A to this Statement of Additional Information.
FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS. Multisector Bond Series, High
Yield Series, Value Series, Capital Opportunities Series, Growth & Income
Series, Blue Chip Stock Series, Blue Chip Stock Series II, International Stock
Series, International Stock Series II, Mid Cap Stock Series, Small Cap Value
Series, Global Growth Series, Global Equity Series, Large Cap Growth Series,
Investors Growth Series and Aggressive Growth Series may purchase or sell
foreign currency forward exchange contracts ("forward contracts") to attempt to
minimize the risk from adverse changes in the relationship between the various
currencies in which each Fund invests. A forward contract is an obligation to
purchase or sell a specific currency for an agreed price at a future date. The
contract is individually negotiated and privately traded by currency traders and
their customers. Each Fund may enter into a forward contract, for example, when
it enters into a contract for the purchase or sale of a security denominated in
a foreign currency in order to "lock in" the price of the security ("transaction
hedge") in a particular currency. Additionally, when a Fund believes that a
foreign currency (for example, the British pound) may suffer a decline against
any other currency or currencies in the Fund (for example, the U.S. dollar), it
may enter into a forward sale contract to sell an amount of the foreign currency
expected to decline (the British pound) that approximates the value of some or
all of the Fund's investment securities denominated in such foreign currency
(the British pound) (a "position hedge"). In such cases, a Fund also may enter
into a forward sale contract to sell a foreign currency for a fixed amount in
another currency (other than the U.S. dollar) where the Fund believes that the
value of the currency to be sold pursuant to the forward sale contract will fall
whenever there is a decline in the value of the currency (other than the U.S.
dollar) in which certain portfolio securities of the Fund are denominated (a
"cross-hedge").
Under certain conditions, Securities and Exchange Commission (the
"Commission") guidelines require investment companies to set aside cash or any
security that is not considered illiquid in a segregated account to cover
forward contracts. As required by Commission guidelines, any Fund that has the
ability to enter into a forward contract for an essentially speculative purpose
will, upon entering into such a transaction, segregate assets to cover such
forward contracts. At the present time, only International Stock Series and
International Stock Series II may enter into speculative forward contracts. A
speculative forward contract is one which, unlike the hedging situations defined
above, does not have an underlying position in a security or securities. The
Funds will not segregate assets to cover forward contracts entered into for
hedging purposes.
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Although forward contracts will be used primarily to protect the Funds from
adverse currency movements, they also involve the risk that anticipated currency
movements would not be accurately predicted.
OPTIONS ON FOREIGN CURRENCIES. Multisector Bond Series, High Yield Series,
Capital Opportunities Series, Blue Chip Stock Series, Blue Chip Stock Series II,
International Stock Series, International Stock Series II, Mid Cap Stock Series,
Global Growth Series, Global Equity Series, Investors Growth Series and
Aggressive 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 these Funds 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 such a Fund's position, it
may forfeit the entire amount of the premium plus related transaction costs.
Options on foreign currencies to be written or purchased by a Fund are traded on
U.S. and foreign exchanges or over-the-counter.
SWAPS, CAPS, COLLARS AND FLOORS. Capital Opportunities Series, Global
Equity Series and Investors Growth Series may enter into swap, cap, collar and
floor transactions. Swaps are privately-negotiated over-the-counter derivative
products in which two parties agree to exchange payment streams calculated in
relation to a rate, index, instrument or certain securities and a particular
"notional amount." As with many of the other derivative products available to
the Funds, the underlying may include an interest rate (fixed or floating), a
currency exchange rate, a commodity price index, and a security, securities
index or a combination thereof. A great deal of flexibility is possible in the
way the product may be structured, with the effect being that the parties may
have exchanged amounts equal to the return on one rate, index or group of
securities for another. For example, in a simple fixed-to-floating interest rate
swap, one party makes payments equivalent to a fixed interest rate, and the
other makes payments equivalent to a specified interest rate index. The Funds
may engage in simple or more complex swap transactions involving a wide variety
of underlyings. The currency swaps that the Funds may enter will generally
involve an agreement to pay interest streams in one currency based on a
specified index in exchange for receiving interest streams denominated in
another currency. Such swaps may involve initial and final exchanges that
correspond to the agreed upon notional amount.
Caps, collars and floors are privately-negotiated option-based derivative
products. The Funds may use one or more of these products in addition to or in
lieu of a swap involving a similar rate or index. As in the case of a put or
call option, the buyer of a cap or floor pays a premium to the writer. In
exchange for that premium, the buyer receives the right to a payment equal to
the differential if the specified index or rate rises above (in the case of a
cap) or falls below (in the case of a floor) a pre-determined strike level. As
in the case of swaps, obligations under caps and floors are calculated based
upon an agreed notional amount, and like most swaps (other than foreign currency
swaps), the entire notional amount is not exchanged and thus is not at risk. A
collar is a combination product in which the same party, such a Fund, buys a cap
from and sells a floor to the other party. As with put and call options, the
amount at risk is limited for the buyer, but, if the cap or floor is not hedged
or covered, may be unlimited for the seller. Under current market practice,
caps, collars and floors between the same two parties are generally documented
under the same "master agreement." In some cases, options and forward agreements
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may also be governed by the same master agreement. In the event of default,
amounts owed under all transactions entered into under, or covered by, the same
master agreement would be netted and only a single payment would be made.
Swaps, caps, collars and floors are credit-intensive products. The Funds
bear the risk of default, i.e., nonpayment by the other party. The guidelines
under which the Funds enter into derivative transactions, along with some
features of the transactions themselves, are intended to reduce these risks to
the extent reasonably practicable, although they cannot eliminate the risks
entirely. Each Fund may enter into swaps only with parties that are deemed
creditworthy by the subadviser thereto. Consistent with current market
practices, the Funds will generally enter into swap transactions on a net basis,
and all swap transactions with the same party will be documented under a single
master agreement to provide for net payment upon default. In addition, the
Funds' obligations under an agreement will be accrued daily (offset against any
amounts owing to the Funds) and any accrued, but unpaid, net amounts owed to the
other party to a master agreement will be covered by the maintenance of a
segregated account consisting of cash or liquid securities.
Interest rate and total rate of return (fixed income or equity) swaps
generally do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate of
return swap defaults, a Fund's risk of loss will consist of the payments that
the Fund is contractually entitled to receive from the other party. This may not
be true for currency swaps that require the delivery of the entire notional
amount of one designated currency in exchange for the other. If there is a
default by the other party, the Funds may have contractual remedies under the
agreements related to the transaction.
LIMITATIONS ON INVESTMENTS IN OPTIONS, FUTURES CONTRACTS AND FORWARD
CONTRACTS. Multisector Bond Series, Blue Chip Stock Series II, International
Stock Series, High Yield Series, Asset Allocation Series, Value Series, Growth &
Income Series, Global Growth Series, Growth Stock Series and Aggressive 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 a Fund would exceed 5% of the value of such Fund's total assets. In
addition, for High Yield Series, Asset Allocation Series, Value Series, Growth &
Income Series, Global Growth Series, Growth Stock Series and Aggressive Growth
Series, the aggregate value of a Fund's 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 Fund. 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,
each such Fund intends to limit its investment in futures during the coming year
so that the aggregate value of the Fund's assets subject to futures contracts
will not exceed 5% of the value of its net assets.
S&P 500 Index Series and Mid Cap Stock Series will not purchase or write an
OTC option if, as a result of such transaction, the sum of (i) the market value
of outstanding OTC options purchased by the Fund, (ii) the market value of the
underlying securities covered by outstanding OTC call options written by the
Fund, and (iii) the market value of all other assets of the Fund that are
illiquid or are not otherwise readily marketable, would exceed 15% of the net
assets of the Fund, taken at market value. However, if an OTC option is sold by
the Fund to a primary U.S. Government securities dealer recognized by the
Federal Reserve Bank of New York and the Fund has the unconditional contractual
right to repurchase such OTC option from the
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dealer at a predetermined price, then the Fund will treat as illiquid such
amount of the underlying securities as is equal to the repurchase price less the
amount by which the option is "in-the-money" (the difference between current
market value of the underlying security and the option's strike price). The
repurchase price with primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option plus the
amount by which the option is "in-the-money."
S&P 500 Index Series and Mid Cap Stock Series will not purchase puts,
calls, straddles, spreads or any combinations thereof, if as a result of such
purchase the value of the Fund's aggregate investment in such securities would
exceed 5% of the Fund's total assets.
S&P 500 Index Series will not enter into futures contracts to the extent
that its outstanding obligations under these contracts would exceed 10% of the
Fund's total assets.
For Blue Chip Stock Series and International Stock Series II, in connection
with options on securities, the total market value of securities against which
the Fund has written call or put options may not exceed 25% of the Fund's total
assets. In addition, Blue Chip Stock Series and International Stock Series II
will not commit individually more than 5% of their total assets to premiums when
purchasing call or put options.
Large Cap Growth Series may write covered call options on its securities up
to 15% of its total assets, and may purchase and sell call and put options on
common stock written by others up to, for all options, 10% of its total assets.
To the extent that any Fund enters into futures contracts and options on
futures contracts that are not for bona fide hedging purposes (as defined by the
Commodity Futures Trading Commission), the aggregate initial margin and premiums
on these positions (excluding the amount by which options are "in-the-money")
may not exceed 5% of the Fund's net assets.
RISKS OF TRANSACTIONS IN OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS.
The use of options, futures contracts and forward contracts involves 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 a Fund's hedging strategy
unsuccessful and could result in losses. The use of these transactions for other
than hedging purposes involves greater risk. In addition, there can be no
assurance that a liquid secondary market will exist for any contract purchased
or sold, and a Fund 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 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.
REPURCHASE AGREEMENTS. Each Fund 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
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upon date, interest rate, and price. Generally, repurchase agreements are of
short duration, usually less than a week, but on occasion for longer periods.
Fund investments in repurchase agreements with a maturity of more than seven
days are subject to the Funds' limitations regarding restricted and illiquid
securities. In investing in repurchase agreements, a Fund's 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 Fund 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 Fund 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 Fund could suffer a
loss. If the Fund owns underlying securities following a default on the
repurchase agreement, the Fund will be subject to risk associated with changes
in the market value of such securities. The Funds' 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 a repurchase agreement (including any accrued interest), the respective Fund
will promptly receive additional collateral (so the total collateral is in an
amount at least equal to the repurchase price plus accrued interest). U.S.
Government Securities Series will only execute repurchase agreements in which
the underlying security meets the criteria of such Fund's investment policies.
U.S. Government Securities Series will limit transactions involving repurchase
agreements to domestic commercial banks and/or recognized dealers in United
States government securities believed by Advisers to present minimum credit
risks.
REVERSE REPURCHASE AGREEMENTS. Multisector Bond Series, American Leaders
Series, Capital Opportunities Series, S&P 500 Index Series, Blue Chip Stock
Series, Blue Chip Stock Series II, International Stock Series II, Mid Cap Stock
Series, Global Equity Series and Investors Growth Series each may enter into
reverse repurchase agreements to meet redemption requests where the liquidation
of portfolio securities is deemed to be inconvenient or disadvantageous,
although Blue Chip Stock Series and International Stock Series II do not
currently intend to make such investments. Reverse repurchase agreements are
ordinary repurchase agreements in which a Fund is the seller of, rather than the
investor in, securities, and agrees to repurchase them at an agreed upon time
and price. Use of a reverse repurchase agreement may be preferable to a regular
sale and later repurchase of the securities because it avoids certain market
risks and transaction costs. A reverse repurchase agreement may be viewed as a
type of borrowing by a Fund.
DELAYED DELIVERY TRANSACTIONS. All Funds except Money Market Series and
Growth Stock 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 a Fund enters into a transaction on a when-issued or forward commitment
basis, a segregated account consisting of cash or any security that is not
considered restricted or illiquid, 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
40
<PAGE> 50
settlement, no payment is made for the securities and, thus, no interest accrues
to the purchaser from the transaction. If a Fund 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 the Funds to hedge against anticipated changes in interest
rates and prices.
The purchase of securities on a when-issued, delayed delivery, or forward
commitment basis exposes the Funds 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 Fund's net asset value to the extent that the Fund
purchases securities on a when-issued, delayed delivery, or forward commitment
basis while remaining substantially fully invested. There is also a risk that
the securities may not be delivered or that a Fund may incur a loss or will have
lost the opportunity to invest the amount set aside for such transaction in the
segregated asset account. As to each Fund, no more than 20% of its 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).
DOLLAR ROLLS. In connection with their ability to purchase securities on a
when-issued or forward commitment basis, each Fund other than Money Market
Series, Capital Opportunities Series, Global Equity Series, Investors Growth
Stock Series and Growth Stock Series may enter into "dollar rolls" in which a
Fund sells securities for delivery in the current month and simultaneously
contracts with the same counterparty to repurchase similar (same type, coupon
and maturity) but not identical securities on a specified future date. Each Fund
gives up the right to receive principal and interest paid on the securities
sold. However, each Fund would benefit to the extent of any difference between
the price received for the securities sold and the lower forward price for the
future purchase plus any fee income received. Unless such benefits exceed the
income and capital appreciation that would have been realized on the securities
sold as part of the dollar roll, the use of this technique will diminish the
investment performance of each Fund compared with what such performance would
have been without the use of dollar rolls. Each Fund will hold and maintain in a
segregated account until the settlement date cash or any security that is not
considered restricted or illiquid in an amount equal to the value of the
when-issued or forward commitment securities. The benefits derived from the use
of dollar rolls may depend, among other things, upon Adviser's (or the
subadviser's) ability to predict interest rates correctly. There is no assurance
that dollar rolls can be successfully employed. In addition, the use of dollar
rolls by a Fund while remaining substantially fully invested increases the
amount of the Fund's assets that are subject to market risk to an amount that is
greater than the Fund's net asset value, which could result in increased
volatility of the price of the Fund's shares.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, all Series may lend their portfolio securities. Currently, U.S.
Government Securities Series, Diversified Income Series, Asset Allocation
Series, Value Series, Growth & Income Series, S&P 500 Index Series, Blue Chip
Stock Series, International Stock Series II, Global Growth Series, Growth Stock
Series and Aggressive Growth Series are doing so. Such loans, which will be made
principally to broker-dealers, 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,
41
<PAGE> 51
determined daily, of the securities loaned. Such Funds will receive amounts
equal to dividends or interest on the securities loaned. These Funds will also
earn income for having made the loan. Currently applicable regulatory
requirements limit such lending to not more than 33 1/3% of the value of each
such Fund's total assets (for each such Fund, total assets include the amount
lent as well as the collateral securing such loans). 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 such Fund's investment in the
securities loaned.
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
Advisers (or the subadviser, if there is one for the Fund) to be of good
standing and will not be made unless, in the judgment of Advisers (or the
subadviser), the consideration to be earned from such loans would justify the
risk.
RESTRICTED AND ILLIQUID SECURITIES. Each Fund may invest up to 15% of its
net assets in illiquid securities, except Money Market Series which can invest
10% of its net assets in such securities. A security is considered illiquid if
it cannot be sold in the ordinary course of business within seven days at
approximately the price at which it is valued. Illiquid securities may offer a
higher yield than securities which are more readily marketable, but they may not
always be marketable on advantageous terms.
The sale of illiquid securities often requires more time and results in
higher brokerage charges or dealer discounts and other selling expenses than
does the sale of securities eligible for trading on national securities
exchanges or in the over-the-counter markets. A Fund may be restricted in its
ability to sell such securities at a time when Advisers or a subadviser deems it
advisable to do so. In addition, in order to meet redemption requests, a Fund
may have to sell other assets, rather than such illiquid securities, at a time
which is not advantageous.
Restricted securities are securities which were originally sold in private
placements and which have not been registered under the Securities Act of 1933
(the "1933 Act"). Such securities generally have been considered illiquid, since
they may be resold only subject to statutory restrictions and delays or if
registered under the 1933 Act. In 1990, however, the SEC adopted Rule 144A under
the 1933 Act, which provides a safe harbor exemption from the registration
requirements of the 1933 Act for resales of restricted securities to "qualified
institutional buyers," as defined in the rule. The result of this rule has been
the development of a more liquid and efficient institutional resale market for
restricted securities. Thus, restricted securities are no longer necessarily
illiquid. The Funds may therefore invest in Rule 144A securities and treat them
as liquid when they have been determined to be liquid by the Board of Directors
or its delegate subject to the oversight of and pursuant to procedures adopted
by the Board of Directors. Under these procedures, factors taken into account in
determining the liquidity of a security include: (a) the frequency of trades and
quotes for the security; (b) the number of dealers willing to purchase or sell
the security and the number of other potential purchasers; (c) dealer
undertakings to make a market in the security; and (d) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). Similar determinations may be made with respect to commercial paper
issued in reliance on the so-called "private placement" exemption from
registration under Section 4(2) of the 1933 Act and interest-only and
principal-
42
<PAGE> 52
only classes of mortgage-related securities issued by the U.S. government or its
agencies or instrumentalities.
BORROWINGS. Each Fund may borrow money to the extent set forth below under
"Investment Restrictions." None of the Funds will borrow for leverage purposes.
Interest paid on borrowings will decrease the net earnings of a Fund and will
not be available for investment.
SEGREGATED ACCOUNTS. To comply with the 1940 Act, a Fund engaging in
certain transactions involving options, futures, reverse repurchase agreements,
delayed delivery 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, or any security that is not considered
restricted or illiquid.
SHORT SALES AGAINST THE BOX. Each Fund may sell a security short to the
extent such Fund 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." If a Fund
enters into a short sale against the box, it is required to segregate securities
equivalent in kind and amount to the securities sold short (or securities
convertible or exchangeable into such securities) and is required to hold such
securities while the short sale is outstanding. A Fund will incur transaction
costs, including interest, in connection with opening, maintaining and closing
short sales against the box.
RATINGS. After purchase by any Fund, a security may cease to be rated or
its rating may be reduced below the minimum required for purchase by such Fund.
Neither event will require a sale of such security by a Fund. To the extent the
ratings may change as a result of changes in the rating organizations or the
rating systems, each Fund will attempt to use comparable ratings as standards
for investments in accordance with the investment policies contained in the
Prospectus and the Statement of Additional Information. The ratings of Standard
& Poor's Ratings Services and Moody's Investors Service, Inc. are described in
Appendix B attached hereto.
PORTFOLIO TURNOVER
A Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by the
monthly average of the value of portfolio securities owned by the Fund during
the same fiscal year. "Portfolio securities" for purposes of this calculation do
not include securities with a maturity date of 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 portfolio securities for a
particular year were equal to the average monthly value of the portfolio
securities owned during such year.
Multisector Bond Series (194%), Asset Allocation Series (178%), Value
Series (211%), Growth Stock Series (175%) and Aggressive Growth Series (264%)
had portfolio turnover rates in excess of 100% during the fiscal year ended
December 31, 1999. Factors contributing to the higher portfolio turnover rates
(rates in excess of 100%) included general market volatility; repositioning of
the Funds' portfolios by new management; for each Fund, except Multisector Bond
Series and Asset Allocation Series, attempts to maintain the median market
capitalization targets; and the need to sell holdings to meet redemption
activity in the Funds. While higher turnover rates (100% or more) may result in
increased transaction costs, the Funds' managers
43
<PAGE> 53
attempt to have the benefits of these transactions outweigh the costs, although
this cannot be assured.
INVESTMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions, which are set
forth below. Any investment restriction which is denoted as "fundamental" may be
changed only by the approval of a majority of a Fund's shareholders. In this
situation, majority means the lesser of (i) 67% of the Fund's outstanding shares
present at a meeting of the holders if more than 50% of the outstanding shares
are present in person or by proxy or (ii) more than 50% of the Fund's
outstanding shares. The insurance laws and regulations of various states as well
as the Internal Revenue Code of 1986 and the regulations thereunder may from
time to time impose additional restrictions on the Funds' investments.
Any investment policy or restriction in the Prospectus or this Statement of
Additional Information which involves a maximum percentage of securities or
assets, except those dealing with borrowing, 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 results therefrom.
DIVERSIFICATION
As a fundamental policy, each Fund operates as a "diversified" investment
company as defined under the 1940 Act, which means that it must meet the
following requirements:
At least 75% of the value of the Fund's 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 Fund and to not more than 10% of the outstanding voting securities
of such issuer.
The insurance laws and regulations of various states impose additional
diversification requirements on the Funds. 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 each Fund 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 Fund's total assets. In addition, the Internal Revenue Code of
1986, as amended, imposes certain diversification requirements on the
investments of segregated asset accounts underlying variable annuity and life
insurance contracts.
FUNDAMENTAL INVESTMENT RESTRICTIONS--APPLICABLE TO EACH SERIES
The following investment restrictions are fundamental and may be changed
only by the approval of shareholders. No Fund will:
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<PAGE> 54
(1) Borrow money or issue senior securities, except as permitted under the
Investment Company Act of 1940, as amended, and as interpreted or modified from
time to time by any regulatory authority having jurisdiction.
(2) Concentrate its investments in a particular industry, as that term is
used in the Investment Company Act of 1940, as amended, and as interpreted or
modified from time to time by any regulatory authority having jurisdiction. For
purposes of this limitation, the U.S. Government, and state or municipal
governments and their political subdivisions are not considered members of any
industry. In addition, for Money Market Series only, this limitation does not
apply to investments in domestic banks.
(3) Act as an underwriter of securities of other issuers, except to the
extent that, in connection with the disposition of portfolio securities, it may
be deemed an underwriter under applicable laws.
(4) Purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments, but this shall not prevent the Fund from
investing in securities or other instruments backed by real estate or interests
therein or in securities of companies that deal in real estate or mortgages.
(5) Purchase physical commodities or contracts relating to physical
commodities.
(6) Make loans except as permitted under the Investment Company Act of
1940, as amended, and as interpreted or modified from time to time by any
regulatory authority having jurisdiction.
NONFUNDAMENTAL INVESTMENT RESTRICTIONS--APPLICABLE TO EACH SERIES UNLESS
OTHERWISE NOTED
The following investment restriction may be changed without shareholder
approval. No Fund will:
ILLIQUID SECURITIES
(1) Invest more than 15% of their net assets (10% for Money Market Series)
in illiquid securities.
OPTIONS, FUTURES AND FORWARD CONTRACTS
(2) High Yield Series, Asset Allocation Series, Value Series, Growth &
Income Series, Global Growth Series, Growth Stock Series and Aggressive Growth
Series will not 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 Fund would exceed 5% of the value of the total
assets of the Fund or (b) the Fund's 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 Fund. (This restriction does not apply to securities
purchases on a when-issued, delayed delivery, or forward commitment basis.)
45
<PAGE> 55
(3) International Stock 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 Fund would exceed 5% of the value of
the total assets of the Fund. (This restriction does not apply to securities
purchases on a when-issued, delayed delivery or forward commitment basis.)
(4) S&P 500 Index Series and Mid Cap Stock Series will not purchase puts,
calls, straddles, spreads and any combination thereof if by reason thereof the
value of its aggregate investment in such classes of securities would exceed 5%
of its total assets except that: (a) this limitation shall not apply to standby
commitments, and (b) this limitation shall not apply to the Fund's transactions
in futures contracts and related options.
(5) Large Cap Growth Series will not sell a call option written by it if,
as a result of the sale, the aggregate of the Fund's portfolio securities
subject to outstanding call options (valued at the lower of the option price or
market value of such securities) would exceed 15% of the value of the Fund's
total assets.
(6) Large Cap Growth Series will not invest more than 10% of its total
assets in put and call options (including options on market indices).
(7) Large Cap Growth Series will not purchase or sell options on stock
index futures contracts.
(8) Large Cap Growth Series will not purchase or sell a stock index future
if, immediately thereafter, more than 30% of its total assets would be hedged by
stock index futures.
CONVERTIBLE SECURITIES
(9) Large Cap Growth Series will not invest more than 20% of the value of
its total assets in convertible securities.
RIGHTS AND WARRANTS
(10) Large Cap Growth Series will not invest more than 5% of the value of
its total assets in rights or warrants that entitle the holder to buy equity
securities.
FOREIGN SECURITIES
(11) Large Cap Growth Series will not invest more than 15% of the value of
its total assets in securities of foreign issuers.
MANAGEMENT OF THE FUNDS
Under Minnesota law, the Board of Directors of Fortis Series has overall
responsibility for managing Fortis Series in good faith, in a manner reasonably
believed to be in the best interests of the company and with the care an
ordinarily prudent person would exercise in similar circumstances. This
management may not be delegated. The Articles of Incorporation limit the
liability of directors to the fullest extent permitted by law.
46
<PAGE> 56
The names, addresses, principal occupations and other affiliations of
directors and executive officers of Fortis Series are listed below. Unless
stated otherwise, all positions have been held at least five years. Each
director and officer also serves as a director or officer of all investment
companies managed by Advisers (the "Fund Complex"). The Fund Complex currently
consists of one closed-end and eight open-end investment companies.
<TABLE>
<CAPTION>
POSITION WITH
NAME AND ADDRESS AGE THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
----------------- ----- --------- -----------------------------------------
<S> <C> <C> <C>
Richard W. Cutting 69 Director Certified public accountant and financial consultant.
137 Chapin Parkway
Buffalo, New York
Allen R. Freedman* 60 Director Director, Fortis, Inc.; prior to July 2000, Chairman and
One Chase Manhattan Plaza CEO of Fortis, Inc., and Managing Director of Fortis
New York, New York International, N.V.; director of Systems and Computer
Technology Corporation.
Dr. Robert M. Gavin 60 Director President, Cranbrook Education Community; prior to July
380 Lone Pine Road 1996, President, Macalester College, St. Paul, MN.
Bloomfield, Michigan
Jean L. King 56 Director President, Communi-King, a communications consulting
12 Evergreen Lane firm, St. Paul, MN.
St. Paul, Minnesota
Dean C. Kopperud* 48 President and Chief Executive Officer and a Director of Advisers;
500 Bielenberg Drive Director Chief Executive Officer, President and a Director of
Woodbury, Minnesota Investors; Chief Executive Officer and President of
Fortis Financial Group; a Director of Fortis
Benefits Insurance Company and Senior Vice
President of Fortis Insurance Company.
Phillip O. Peterson 55 Director Mutual Fund industry consultant; Partner of KPMG LLP,
11155 Kane Trail through June 1999.
Northfield, Minnesota
Robb L. Prince 59 Director Financial and employee benefit consultant; prior to July
5108 Duggan Plaza 1995, Vice President and Treasurer, Jostens, Inc., a
Edina, Minnesota producer of products and services for youth,
education, sports award, and recognition markets;
director of Analysts International Corporation.
Leonard J. Santow 64 Director Principal, Griggs & Santow, Inc., economic and financial
One State Street 5th Floor consultants
New York, New York
Noel F. Schenker 46 Director Marketing consultant; prior to 1996, Senior Vice
1908 W. 49th Street President, Marketing and Strategic Planning,
Minneapolis, Minnesota Rollerblade, Inc.
</TABLE>
47
<PAGE> 57
<TABLE>
<CAPTION>
POSITION WITH
NAME AND ADDRESS AGE THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
----------------- ----- --------- -----------------------------------------
<S> <C> <C> <C>
Dr. Lemma W. Senbet 53 Director The William E. Mayer Professor of Finance and Chair,
4435 Van Munching Hall Finance Department, University of Maryland, College
College Park, Maryland Park, MD; consultant, international financial
institutions.
Joseph M. Wikler 58 Director Investment consultant and private investor; prior to
12520 Davan Drive 1994, Director of Research, Chief Investment Officer,
Silver Spring, Maryland Principal and a Director, The Rothschild Co., and
investment adviser, Baltimore, MD.
Gary N. Yalen 58 Vice President President and Chief Investment Officer of Advisers
One Chase Manhattan Plaza (since 1995) and Senior Vice President, Investments, of
New York, New York Fortis, Inc.; prior to 1996, President and Chief
Investment Officer, Fortis Asset Management, a former
division of Fortis, Inc.
Howard G. Hudson 63 Vice President Executive Vice President and Head of Fixed Income
One Chase Manhattan Plaza Investments of Advisers since 1995; prior to 1996,
New York, New York Senior Vice President, Fixed Income, Fortis Asset
Management.
Lucinda S. Mezey 53 Vice President Executive Vice President and Head of Equity Investments
One Chase Manhattan Plaza of Advisers since October 1997; from 1995 to October
New York, New York 1997, Chief Investment Officer, Alex Brown Capital
Advisory and Trust Co., Baltimore, MD.
James S. Byrd 49 Vice President Executive Vice President of Advisers.
90 South 7th Street
Minneapolis, Minnesota
Nicholas L.M. de Peyster 33 Vice President Vice President of Advisers.
One Chase Manhattan Plaza
New York, New York
Diane M. Gotham 42 Vice President Vice President of Advisers since 1998; from 1994 to
90 South 7th Street 1998, securities analyst for Advisers.
Minneapolis, Minnesota
Maroun M. Hayek 52 Vice President Vice President of Advisers since 1995; prior to 1996,
One Chase Manhattan Plaza Vice President, Fixed Income, Fortis Asset Management.
New York, New York
Robert C. Lindberg 47 Vice President Vice President of Advisers.
One Chase Manhattan Plaza
New York, New York
</TABLE>
48
<PAGE> 58
<TABLE>
<CAPTION>
POSITION WITH
NAME AND ADDRESS AGE THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
----------------- ----- --------- -----------------------------------------
<S> <C> <C> <C>
Charles L. Mehlhouse 58 Vice President Vice President of Advisers; prior to March 1996,
One Chase Manhattan Plaza portfolio manager, Marshall & Ilsley Bank Corporation,
New York, New York Milwaukee, WI.
Kevin J. Michels 49 Vice President Vice President of Advisers since 1995; prior to 1996,
One Chase Manhattan Plaza Vice President, Administration, Fortis Asset Management.
New York, New York
Christopher J. Pagano 37 Vice President Senior Vice President of Advisers since January 2000;
One Chase Manhattan Plaza from March 1996 until 2000, Vice President of Advisers;
New York, New York from 1995 to March 1996, government strategist, Merrill
Lynch, New York, NY.
Kendall C. Peterson 44 Vice President Vice President of Advisers since August 1999; from 1985
One Chase Manhattan Plaza to July 1999, Vice President and portfolio manager at
New York, New York Prudential Insurance Company of America, Newark, NJ.
Michael J. Romanowski 50 Vice President Vice President of Advisers since 1998; from October 1995
One Chase Manhattan Plaza to March 1998, portfolio manager, Value Line, New York,
New York, New York NY; prior to October 1995, securities analyst, Conning & Co.,
Hartford, CT.
Christopher J. Woods 40 Vice President Vice President of Advisers since 1995; prior to 1996
One Chase Manhattan Plaza Vice President, Fixed Income, Fortis Asset Management.
New York, New York
Robert W. Beltz, Jr. 51 Vice President Vice President--Securities Operations of Advisers and of
500 Bielenberg Drive Investors.
Woodbury, Minnesota
Peggy L. Ettestad 43 Vice President Senior Vice President, Operations of Advisers since
500 Bielenberg Drive March 1997; prior to March 1997, Vice President, G.E.
Woodbury, Minnesota Capital Fleet Services, Minneapolis, MN.
Tamara L. Fagely 42 Vice President and Vice President of Advisers and of Investors since 1998;
500 Bielenberg Drive Treasurer prior to 1998, Second Vice President of Advisers and
Woodbury, Minnesota Investors.
Dickson W. Lewis 51 Vice President Senior Vice President, Marketing and Sales of Advisers
500 Bielenberg Drive and of Investors since July 1997; from 1993 to July
Woodbury, Minnesota 1997, President and Chief Executive Officer,
Hedstrom/Blessing, Inc., Minneapolis, MN.
David A. Peterson 58 Vice President Vice President and Assistant General Counsel, Fortis
500 Bielenberg Drive Benefits Insurance Company.
Woodbury, Minnesota
</TABLE>
49
<PAGE> 59
<TABLE>
<CAPTION>
POSITION WITH
NAME AND ADDRESS AGE THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
----------------- ----- --------- -----------------------------------------
<S> <C> <C> <C>
Scott R. Plummer 41 Vice President Vice President, Associate General Counsel and Assistant
500 Bielenberg Drive Secretary of Advisers.
Woodbury, Minnesota
Rhonda J. Schwartz 42 Vice President Since January 1996, Senior Vice President and General
500 Bielenberg Drive Counsel of Advisers, Vice President and General Counsel,
Woodbury, Minnesota Life and Investment Products of Fortis Insurance Company
and Senior Vice President and General Counsel of
Fortis Benefits Insurance Company, FFG Division;
from 1994 to January 1996, Vice President, General
Counsel and Secretary of Fortis, Inc.
Melinda S. Urion 47 Vice President Senior Vice President and Chief Financial Officer of
500 Bielenberg Drive Advisers since 1997; from 1995 to 1997, Senior Vice
Woodbury, Minnesota President of Finance and Chief Financial Officer,
American Express Financial Corporation; prior to
November 1995, corporate controller, American
Express Financial Corporation.
Michael J. Radmer 55 Secretary Partner, Dorsey & Whitney LLP, Fortis Series' General
220 South Sixth Street Counsel.
Minneapolis, Minnesota
</TABLE>
-----------------------------
* Mr. Kopperud is an "interested person" (as defined under the 1940 Act) of
Advisers and Fortis Series because he holds certain positions including
serving as Chief Executive Officer and a director of Advisers. Mr. Freedman
is an "interested person" of Advisers and Fortis Series primarily because
he holds a position as Director of Fortis, Inc., the parent company of
Advisers.
Each director who is not affiliated with Advisers or Investors receives a
monthly fee of $700 from Fortis Series, $100 per meeting attended from Fortis
Series, and $100 per committee meeting attended from Fortis Series (and
reimbursement of travel expenses to attend meetings). Each such director also
receives a monthly fee, a meeting fee and a committee meeting fee from each fund
in the Fund Complex for which they are a director. The following table sets
forth the aggregate compensation received by each director from Fortis Series
during the fiscal year ended December 31, 1999, as well as the total
compensation received by each director from the Fund Complex during the calendar
year ended December 31, 1999. Mr. Freedman and Mr. Kopperud, who were both
affiliated with Advisers and Investors during this period, did not receive any
compensation. Mr. Peterson and Dr. Senbet became members of the Board in June
2000 and did not receive compensation from the Fund Complex during the period
represented. No executive officer receives any compensation from the Funds.
50
<PAGE> 60
<TABLE>
<CAPTION>
Aggregate
Compensation from Total Compensation from
Director Fortis Series Fund Complex*
------------------------------------------------------------------------------------------
<S> <C> <C>
Richard W. Cutting $10,800 $31,250
Dr. Robert M. Gavin $10,800 $31,250
Jean L. King $10,600 $29,250
Edward M. Mahoney** $10,800 $31,250
Robb L. Prince $10,800 $31,250
Leonard J. Santow $14,212 $33,850
Noel F. Schenker $ 5,700 $26,150
Joseph M. Wikler $14,300 $34,750
</TABLE>
* The Fund Complex consists of one closed-end and eight open-end investment
companies managed by Advisers.
** Mr. Mahoney retired from the Board effective January 1, 2000.
During the fiscal year ended December 31, 1999, Fortis Series paid
$202,586 in legal fees and expenses to a law firm of which the Funds' Secretary
is a partner.
Directors Gavin, Kopperud, Prince and Schenker 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 meet at least twice a year.
PRINCIPAL HOLDERS OF SECURITIES
As of March 31, 2000, less than 1% of the outstanding shares of Fortis
Series were attributable to contracts owned of record or beneficially by the
directors and executive officers as a group. The directors and executive
officers otherwise do not own any of the outstanding shares of Fortis Series.
As of March 31, 2000, no person was a record holder or, to the
knowledge of Fortis Series, a beneficial owner of more than 5% of the
outstanding shares of any Fund, except as set forth below:
<TABLE>
<CAPTION>
Fund Percent of
Name and Address of Outstanding
Shareholder Number of Shares Shares
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Diversified Income Series Fortis Benefits Ins. Co. ("FBIC") 8,682,707 98.41%
500 Bielenberg Dr.
Woodbury MN 55125
Growth Stock Series FBIC 22,860,507 99.68%
Asset Allocation Series FBIC 29,588,650 99.47%
Money Market Series FBIC 8,884,146 99.10%
US Government Securities Series FBIC 12,462,489 98.89%
Global Growth Series FBIC 14,046,373 99.46%
Aggressive Growth Series FBIC 10,822,785 98.93%
Growth & Income Series FBIC 13,296,570 96.89%
High Yield Series FBIC 6,932,420 97.43%
International Stock Series II FBIC 4,499,372 97.21%
International Stock Series FBIC 8,619,912 98.14%
Multisector Bond Series FBIC 1,895,563 97.91%
Value Series FBIC 5,637,200 96.90%
</TABLE>
51
<PAGE> 61
<TABLE>
<S> <C> <C> <C>
S&P 500 Index Series FBIC 18,097,226 96.80%
Blue Chip Stock Series FBIC 12,893,059 97.60%
Mid Cap Stock Series FBIC 2,542,635 98.13%
Large Cap Growth Series FBIC 6,596,868 96.28%
Small Cap Value Series FBIC 4,091,284 98.32%
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
GENERAL
Fortis Advisers, Inc. ("Advisers") has been the investment adviser and
manager of Fortis Series since its inception. Fortis Investors, Inc.
("Investors") acts as the Funds' underwriter. Each acts pursuant to written
agreements periodically approved by the directors or shareholders. The address
of each is that of the Funds. As of December 31, 1999, Advisers managed
thirty-three investment company portfolios with combined net assets of
approximately $8.2 billion.
Each Fund pays Advisers a monthly fee for providing investment advisory
services. The services provided by Advisers include:
- General management of all Funds.
- Investment management for those Funds that do not have a subadviser.
- Ultimate responsibility (subject to oversight by Fortis Series' Board of
Directors) to oversee any subadvisers hired to manage all or a portion of
any of the Funds and recommend the hiring, termination and replacement of
subadvisers. In this role Advisers acts as a "Manager of Managers."
Fortis Series has received an exemptive order from the Securities and
Exchange Commission that permits Advisers to appoint new subadvisers, with
approval by Fortis Series' Board of Directors and without obtaining approval
from those contract holder's that participate in the applicable Fund. Within 90
days after hiring any new subadviser, affected contract holders will receive all
information about the new sub-advisory relationship that would have been
included if a proxy statement had been required. Advisers will not enter into a
sub-advisory agreement with an affiliated subadviser unless contract holders
approve such agreement.
The specific conditions of the exemptive order are as follows:
1. Before Fortis Series may rely on the exemptive order, the operation of
Fortis Series under a Manager of Managers structure must be approved by a
majority of the outstanding voting securities. This approval was received
in a shareholder meeting held August 12, 1999.
2. Fortis Series must disclose in its prospectus the existence, substance and
effect of the exemptive order. In addition, Fortis Series must hold itself
out to the public as employing the Manager of Managers structure. The
prospectus will prominently disclose that Advisers has ultimate
responsibility (subject to oversight by the Board of Directors) to oversee
the subadvisers and recommend their hiring, termination and replacement.
3. Within ninety (90) days of the hiring of any new subadviser, the contract
holders participating in the relevant Fund will be furnished all
information about the new subadviser that would be included in a proxy
statement, except as modified by the order to permit Aggregate Fee
Disclosure. This information will include Aggregate Fee Disclosure and any
change in such disclosure caused by the addition of a new subadviser.
Advisers will meet this condition by
52
<PAGE> 62
providing contract holders with an information statement meeting the
requirements of Regulation 14C, Schedule 14C, and Item 22 of Schedule 14A
under the 1934 Act, except as modified by the order to permit Aggregate Fee
Disclosure.
4. Advisers will not enter into a sub-advisory agreement with any Affiliated
Subadviser without that sub-advisory agreement, including the compensation
to be paid thereunder, being approved by contract holders.
5. At all times, a majority of the Board of Directors of Fortis Series will be
directors who are not "interested persons," as that term is defined in
Section 2(a)(19) of the 1940 Act, of the company ("Independent Directors"),
and the nomination of new or additional Independent Directors will be at
the discretion of the then-existing Independent Directors.
6. When a subadviser change is proposed for a Fund with an Affiliated
Subadviser, the Board of Directors, including a majority of the Independent
Directors, will make a separate finding, reflected in the Board of
Directors' minutes, that the change is in the best interests of the Fund
and the contract holders participating in that Fund and does not involve a
conflict of interest from which Advisers or the Affiliated Subadviser
derives an inappropriate advantage.
7. Advisers will provide general management services to Fortis Series and the
Funds, including overall supervisory responsibility for the general
management and investment of each Fund's securities portfolio, and, subject
to review and approval by the Board of Directors, will: (a) set each Fund's
overall investment strategies; (b) evaluate, select and recommend
subadvisers to manage all or a part of a Fund's assets; (c) allocate and,
when appropriate, reallocate a Fund's assets among multiple subadvisers;
(d) monitor and evaluate the investment performance of subadvisers; and (e)
implement procedures reasonably designed to ensure that the subadvisers
comply with the relevant Fund's investment objective, policies and
restrictions.
8. No director or officer of Fortis Series or directors or officers of
Advisers will own directly or indirectly (other than through a pooled
investment vehicle that is not controlled by such person) any interest in
any Subadviser except for (i) ownership of interests in Advisers or any
entity that controls, is controlled by or is under common control with
Advisers; or (ii) ownership of less than 1% of the outstanding securities
of any class of equity or debt of a publicly-traded company that is either
a subadviser or any entity that controls, is controlled by or is under
common control with a subadviser.
9. Fortis Series will include in its registration statement the Aggregate Fee
Disclosure.
10. Independent counsel knowledgeable about the 1940 Act and the duties of
Independent Directors will be engaged to represent the Independent
Directors of the Fund. The selection of such counsel will be within the
discretion of the then-existing Independent Directors.
11. Advisers will provide the Board of Directors, no less than often than
quarterly, with information about Advisers' profitability on a per-Fund
basis. Such information will reflect the impact on profitability of the
hiring or termination of any subadviser during the applicable quarter.
12. When a subadviser is hired or terminated, Advisers will provide the Board
of Directors with information showing the expected impact on Advisers'
profitability.
53
<PAGE> 63
CONTROL AND MANAGEMENT OF ADVISERS AND INVESTORS
Fortis, Inc. ("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 financial services company
that provides specialty insurance and investment products to individuals,
businesses, associations and other financial services organizations in the
United States. Fortis is a part of a worldwide group of companies active in the
fields of insurance, banking and investments. Fortis is jointly owned by Fortis
(NL) N.V. of The Netherlands and Fortis (B) of Belgium.
Fortis (NL) N.V. is a diversified financial services company
headquartered in Utrecht, The Netherlands, where its insurance operations began
in 1847. Fortis (B) is a diversified financial services company headquartered in
Brussels, Belgium, where its insurance operations began in 1824. Fortis (NL)
N.V. and Fortis (B) own a group of companies active in insurance, banking and
financial services, and real estate development in The Netherlands, Belgium, the
United States, Western Europe, and the Pacific Rim.
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
Advisers acts as investment adviser and manager of each Fund under
separate Investment Advisory and Management Agreements. These agreements are
individually referred to as an "Agreement" and collectively referred to as
"Agreements." The Agreements will terminate automatically in the event of their
assignment. In addition, the Agreements are terminable at any time, without
penalty, by the Board of Directors or, with respect to any particular Fund, by
vote of a majority of the outstanding voting securities of such Fund, on not
more than 60 days' written notice to Advisers, and by Advisers on 60 days'
notice to Fortis Series. Unless sooner terminated, each 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 Fund, by vote of a majority of the
outstanding voting securities of such Fund, 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 Agreements provide for the payment of investment advisory and
management fees by the Funds calculated as described in the following table.
<TABLE>
<CAPTION>
Investment
Advisory and
Fund Average Net Assets Management Fee
---- ------------------ --------------
<S> <C> <C>
Money Market Series For the first $500 million .30%
For assets over $500 million .25%
U.S. Government Securities Series For the first $50 million .50%
For assets over $50 million .45%
Diversified Income Series For the first $50 million .50%
For assets over $50 million .45%
Multisector Bond Series For the first $100 million .75%
For assets over $100 .65%
High Yield Series For the first $250 million .50%
</TABLE>
54
<PAGE> 64
<TABLE>
<S> <C> <C>
For assets over $250 million .45%
Asset Allocation Series For the first $250 million .50%
For assets over $250 million .45%
American Leaders Series For the first $35 million .90%
$35 million - $100 million .75%
For assets over $100 million .65%
Value Series For the first $100 million .70%
For assets over $100 million .60%
Capital Opportunities Series For the first $200 million .90%
$200 million - $500 million .85%
For assets over $500 million .80%
Growth & Income Series For the first $100 million .70%
For assets over $100 million .60%
S&P 500 Index Series All levels of assets .40%
Blue Chip Stock Series For the first $100 million .90%
For assets over $100 million .85%
Blue Chip Stock Series II For the first $200 million .95%
For assets over $200 million .90%
International Stock Series For the first $100 million .85%
For assets over $100 million .80%
International Stock Series II For the first $100 million .90%
For assets over $100 million .85%
Mid Cap Stock Series For the first $100 million .90%
For the next $150 million .85%
For assets over $250 million .80%
Small Cap Value Series For the first $50 million .90%
For assets over $50 million .85%
Global Growth Series For the first $500 million .70%
For assets over $500 million .60%
Global Equity Series For the first $200 million 1.00%
$200 million - $500 million .95%
For assets over $500 million .90%
Large Cap Growth Series For the first $100 million .90%
$100 million - $200 million .85%
For assets over $200 million .80%
Investors Growth Series For the first $200 million .90%
$200 million - $500 million .85%
For assets over $500 million .80%
Growth Stock Series For the first $100 million .70%
For assets over $100 million .60%
Aggressive Growth Series For the first $100 million .70%
For assets over $100 million .60%
</TABLE>
During the fiscal years ended December 31, 1997, 1998 and 1999, the Funds paid
the following investment advisory and management fees to Advisers.
<TABLE>
<CAPTION>
FUND 1997 1998 1999
---- ---- ---- ----
<S> <C> <C> <C>
Money Market $191,433 $194,182 $274,499
U.S. Government Securities 687,529 673,637 689,891
Diversified Income 488,855 521,184 518,738
</TABLE>
55
<PAGE> 65
<TABLE>
FUND 1997 1998 1999
---- ---- ---- ----
<S> <C> <C> <C>
Multisector Bond 149,694 163,906 191,654
High Yield 258,195 338,252 355,332
Asset Allocation 2,102,625 2,471,163 2,887,514
American Leaders * * *
Value 230,143 531,886 638,668
Capital Opportunities * * *
Growth & Income 1,250,461 1,816,200 1,971,921
S&P 500 Index 251,081 707,922 1,359,937
Blue Chip Stock 407,113 1,131,224 2,030,551
Blue Chip Stock II * * *
International Stock 571,117 782,792 979,010
International Stock II 406,583 546,257 614,231
Mid Cap Stock (1) * 49,482 162,691
Small Cap Value (1) * 61,548 248,146
Global Growth 2,416,410 2,487,275 2,486,130
Global Equity * * *
Large Cap Growth (1) * 63,457 443,837
Investors Growth * * *
Growth Stock 4,268,503 4,378,864 4,716,919
Aggressive Growth 735,430 871,318 1,209,725
-----------------------------------
* Not in existence during this period.
(1) Inception date: May 1, 1998.
</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.
SUB-ADVISORY AGREEMENTS
Multisector Bond Series, American Leaders Series, Capital Opportunities
Series, S&P 500 Index Series, Blue Chip Stock Series, Blue Chip Stock Series II,
International Stock Series, International Stock Series II, Mid Cap Stock Series,
Small Cap Value Series, Global Equity Series, Large Cap Growth Series and
Investors Growth Series have retained subadvisers under investment sub-advisory
agreements and for Small Cap Value Series the subadviser has entered into a
sub-management agreement with a manager (such agreements are collectively
referred to as the "Sub-Advisory Agreements"). Each Sub-Advisory Agreement will
terminate automatically upon the termination of the Investment Advisory and
Management Agreement
56
<PAGE> 66
between Fortis Series and Advisers, and in the event of its assignment. In
addition, the Sub-Advisory Agreements are terminable at any time, without
penalty, by the Board of Directors, by Advisers or by a vote of the majority of
the applicable Fund's outstanding voting securities on 60 days' written notice
to such Fund's subadviser and by a subadviser on 60 days' written notice to
Advisers. Unless sooner terminated, the Sub-Advisory Agreements shall continue
in effect from year to year if approved at least annually by the Board of
Directors of Fortis Series or by a vote of a majority of the outstanding voting
securities of the applicable Fund, provided that in either event such
continuance is also approved by the vote of a majority of the directors who are
not interested persons of any party to the Sub-Advisory Agreements, cast in
person at a meeting called for the purpose of voting on such approval.
For their services, the subadvisers receive a fee from Advisers (such
amounts are payable out of the advisory fees received by Advisers for the same
period and are not in addition to such amounts). From its advisory fee, Advisers
pays fees to each of the subadvisers calculated as described below:
<TABLE>
<CAPTION>
Fund Subadviser Annual Average Net Assets Sub-Advisory Fee
---- ---------- ------------------------- ----------------
<S> <C> <C> <C>
Multisector Bond Series AIM For the first $200 million .450%
For assets over $200 million .400%
American Leaders Series Federated For the first $35 million .500%
$35 million-$100 million .350%
For assets over $100 million .250%
Capital Opportunities Series MFS For the first $200 million .500%
$200-$500 million .450%
For assets over $500 million .400%
S&P 500 Index Series Dreyfus All levels of assets .170%
Blue Chip Stock Series T. Rowe Price For the first $100 million .500%
$100 million-$200 million .450%
Blue Chip Stock Series II AIM For the first $200 million .550%
For assets over $200 million .500%
International Stock Series Lazard For the first $100 million .450%
For assets over $100 million .375%
International Stock Series II (1) Price International For the first $20 million .750%
$20-$50 million .600%
$50-$200 million .500%
For assets over $200 million .500%
Mid Cap Stock Series Dreyfus For the first $100 million .500%
$200-$500 million .450%
For assets over $500 million .400%
Small Cap Value Series Berger For the first $50 million .500%
For assets over $50 million .450%
Global Equity Series MFS For the first $200 million .600%
$200-$500 million .550%
For assets over $500 million .500%
Large Cap Growth Series Alliance For the first $100 million .500%
For the next $100 million .450%
For assets over $200 million .400%
Investors Growth Series MFS For the first $200 million .500%
$200-$500 million .450%
For assets over $500 million .400%
</TABLE>
57
<PAGE> 67
(1) Once the Fund exceeds $200 million in average daily net assets, the entire
sub-advisory fee will become an annual rate of .500% of the Fund's average daily
net assets.
For the Small Cap Value Series, Berger LLC pays Perkins, Wolf,
McDonnell & Company (the "Manager") an amount equal to .25 of 1% of the Fund's
first $50 million of average daily net assets and .225 of 1% of the Fund's net
assets in excess of $50 million.
During the fiscal years ended December 31, 1997, 1998 and 1999,
Advisers paid advisory fees to the subadvisers of the following Funds in the
amounts set forth below. American Leaders Series, Capital Opportunities Series,
Blue Chip Stock Series II, Global Equity Series and Investors Growth Series were
not in existence during such periods.
<TABLE>
<CAPTION>
Fund 1997 1998 1999
---- ---- ---- ----
<S> <C> <C> <C>
Multisector Bond $69,898 $76,489 $89,438
S&P 500 Index 105,647 300,867 577,973
Blue Chip Stock 209,455 551,946 1,098,527
International Stock 302,356 414,873 510,475
International Stock II 225,590 303,415 341,160
Mid Cap Stock(1) * 26,668 90,384
Small Cap Value(1) * 34,193 137,859
Large Cap Growth(1) * 35,254 246,576
----------------------
* Not in existence during this period.
(1) Inception date: May 1, 1998.
</TABLE>
EXPENSES
Expenses that relate exclusively to a particular Fund, such as
custodian charges and registration fees for shares, are charged to that Fund.
Other expenses of Fortis Series are allocated between the Funds 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. Out of its advisory fee, but not in excess of those fees, Advisers will
reimburse Fortis Series for each Fund's expenses from the date of the initial
public offering until the date a Fund's aggregate net assets first reach
$10,000,000, to the extent that the aggregate expenses of the Fund (including
the investment management and advisory fees for such Fund, but excluding
interest, taxes, brokerage fees and commissions) exceed an amount equal, on an
annual basis, to the percentage of the average daily net assets of the Fund.
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
58
<PAGE> 68
reserves the absolute right to discontinue any of such reimbursement programs at
any time without notice to Fortis Series.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Advisers or, where applicable, a Fund's subadviser, selects and (where
applicable) negotiates commissions with broker-dealers who execute trades for
the Funds. In selecting a broker-dealer to execute an equity trade, Advisers or
the subadviser primarily considers whether the broker-dealer can provide best
execution on the trade including best price for a security. Other factors that
Advisers or the subadviser considers when selecting a broker-dealer for an
equity trade include:
- competitive commissions commensurate with the value of research
products and services provided to Advisers or the subadviser;
- consistently good service quality;
- adequate capital position;
- broad market coverage;
- continuous flow of information concerning bids and offers;
- the ability to complete, clear and settle trades in a timely and
efficient manner;
- capital usage;
- specialized expertise;
- access to new issues; and
- the ability to handle large blocks of stock discreetly.
For a Fund exclusively composed of debt, rather than equity securities,
portfolio transactions are effected with dealers without the payment of
brokerage commissions, but at net prices which usually include a spread or
markup. The volume of business done with a broker-dealer for fixed income trades
is based to a large extent on the availability and competitive price of the
fixed income securities that fit the strategy of the fixed income portfolio.
Best execution, the quality of research, making of secondary markets and other
services are also determining factors for the allocation of business when buying
and selling fixed income securities. If a broker-dealer charging a higher
commission or offering a larger spread is more reliable or provides better
execution than a broker-dealer charging a lower commission or offering a smaller
spread, then Advisers or the subadviser may select the broker-dealer charging a
higher commission or offering a larger spread for a particular equity or fixed
income trade.
Advisers or the subadviser may direct orders to broker-dealers who
furnish research products and services to Advisers or the subadviser as long as
the broker-dealers meet the selection criteria outlined above. The research
products and services supplement Advisers' or the subadviser's own research and
enable Advisers or the subadviser to obtain the views and information of others
prior to making investment decisions for the Funds. The following table sets
forth the amount and percentage of commissions paid by certain Funds during the
fiscal year ended December 31, 1999 to broker-dealers who provided research
products and services to Advisers or the Fund's subadviser. Funds not listed did
not pay any such commissions.
59
<PAGE> 69
<TABLE>
<CAPTION>
Amount of Commissions
Paid to Broker-Dealers
Fund Providing Research
--------------------------- ----------------------------------
<S> <C>
Asset Allocation Series $ 106,276
Value Series 73,824
Growth & Income Series 82,722
Global Growth Series 18,300
Growth Stock Series 206,903
Aggressive Growth Series 18,754
</TABLE>
Advisers and the subadvisers believe that most research services
obtained by them generally benefit several or all of the investment companies,
insurance company accounts and private accounts which they manage, as opposed to
solely benefiting one specific managed fund or account. Receipt of these
research services reduces Advisers' and the subadvisers' expenses. Such research
services include advice, both directly and in writing, as to the value of the
securities; the advisability of investing in, purchasing, or selling securities;
the availability of securities, or purchasers or sellers of securities; and
analysis and reports concerning issues, industries, securities, economic factors
and trends, portfolio strategy, and the performance of accounts. Examples of
some of the research products and services that were furnished to Advisers in
1999 include:
- hard copy securities research services;
- securities research software database services;
- electronic securities trading networks; and
- statistical services useful to mutual fund directors and account
representatives in evaluating the relative performance of mutual
fund portfolios;
- computerized stock quotation systems and related feeds from stock
exchanges.
If a broker-dealer furnishes Advisers or a subadviser with non-research
products and services, Advisers or the subadviser will pay the broker-dealer for
such products and services. No client brokerage will be used to pay for
non-research products and services.
Advisers or the respective subadviser will authorize a Fund 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
or such subadviser 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 Adviser's or the subadviser's overall responsibilities with
respect to the accounts to which Advisers or the subadviser exercises investment
discretion. In 1999, the Funds generally paid higher commissions than those
obtainable from other broker-dealers in return for research products and
services. Berger LLC has informal agreements in place with several
broker-dealers that relate to equity trades directed by Berger LLC. Under these
agreements, the brokers pay for services which assist the investment manager
(Berger LLC) in making investment decisions. The brokers are obligated to
achieve best execution and the commission rates charged by the brokers are
comparable to those charged by brokers with which there is no such agreement. A
Fund may receive research in connection with selling concessions and
designations in fixed price offerings in which such Fund participates. Advisers
and the subadvisers have not entered and will not enter
60
<PAGE> 70
into any agreement with a broker-dealer that would prevent Advisers or the
subadvisers from obtaining best execution on a trade.
The Funds paid brokerage commissions during the periods and in the
amounts listed below:
<TABLE>
<CAPTION>
FUND 1997 1998 1999
---- ---- ---- ----
<S> <C> <C> <C>
Asset Allocation $ 311,739 $ 688,253 $ 1,416,313
American Leaders * * *
Value 119,158 490,162 458,252
Capital Opportunities * * *
Growth & Income 114,941 222,420 750,312
S&P 500 Index 60,463 61,675 48,561
Blue Chip Stock 46,609 99,364 161,581
Blue Chip Stock II * * *
International Stock 145,900 192,277 148,908
International Stock II 47,973 79,680 63,766
Mid Cap Stock (1) * 17,763 32,971
Small Cap Value (1) * 47,894 113,779
Global Growth 485,715 475,037 677,603
Global Equity * * *
Large Cap Growth (1) * 16,464 78,878
Investors Growth * * *
Growth Stock 311,310 1,178,542 1,971,488
Aggressive Growth 47,456 130,650 277,929
-----------------------------------
* Not in existence during this period.
(1) Inception date: May 1, 1998.
</TABLE>
Money Market Series, U.S. Government Securities Series, Diversified
Income Series, Multisector Bond Series and High Yield Series did not pay any
brokerage commissions for the fiscal years ended December 31, 1997, 1998 or
1999.
The Funds will not effect any brokerage transactions in their portfolio
securities with any broker-dealer affiliated directly or indirectly with
Advisers or any subadviser, unless such transactions, including the frequency
thereof, the receipt of commissions payable in connection therewith, and the
selection of the affiliated broker-dealer effecting such transactions are not
unfair or unreasonable to the shareholders of the Funds. International Stock
Series II (while operating as Global Asset Allocation Series) paid an affiliate
of the Fund's subadviser commissions in the amount of $0, $3,266 and $1,698 for
the fiscal years ended December 31, 1997, 1998 and 1999, respectively. No
commissions were paid by any other Fund to any affiliate of Advisers or a
subadviser during the fiscal years ended December 31, 1997, 1998 and 1999.
From time to time, the Funds may acquire the securities of their
regular brokers or dealers or parent companies of such brokers or dealers. The
Funds acquired the following securities of their regular brokers or dealers or
parent companies of such brokers or dealers during the fiscal year ended
December 31, 1999:
61
<PAGE> 71
<TABLE>
<CAPTION>
Value of Value of
Securities Securities
Owned at Owned at
Name of Issuer Year End Name of Issuer Year End
-------------- -------- -------------- --------
<S> <C> <C> <C>
MONEY MARKET SERIES GROWTH & INCOME SERIES
American Express Credit Corp. $ 4,481,375 U.S.Bank (N.A.) $13,656,663
American General Finance Corp. $ 4,449,688
Chevron Oil USA, Inc. $ 4,977,133 S&P 500 INDEX SERIES
CIT Group Holdings, Inc. $ 4,591,848 Bear Stearns & Co. $ 177,284
Ford Motor Credit Co. $ 4,285,101 Merrill Lynch & Co., Inc. $ 1,052,100
Household Finance Corp. $ 3,987,924 Morgan Stanley Dean Witter Corp. $ 2,700,116
IBM Credit Corp. $ 5,180,236 Paine Webber Group, Inc. $ 194,063
Merrill Lynch & Co., Inc. $ 4,580,266 U.S. Bank (N.A.) $ 4,953,224
U.S. Bank (N.A.) $ 6,019,020 U.S. Bancorp $ 592,241
U.S. GOVERNMENT SECURITIES SERIES BLUE CHIP STOCK SERIES
U.S. Bank (N.A.) $ 5,635,738 Bank of America Corp. $ 998,731
Chase Manhattan Corp. $ 1,771,275
DIVERSIFIED INCOME SERIES Morgan Stanley Dean Witter Corp. $ 2,369,650
Bear Stearns & Co. $ 1,472,781
Donaldson, Lufkin & Jenrette INTERNATIONAL STOCK SERIES
Securities $ 1,961,607
Merrill Lynch & Co., Inc. $ 1,763,986 U.S. Bank (N.A.) $ 3,562,400
Paine Webber Group, Inc. $ 487,102
U.S. Bank (N.A.) $ 606,186 MID CAP STOCK SERIES
Paine Webber Group, Inc. $ 58,219
MULTISECTOR BOND SERIES U.S. Bank (N.A.) $ 660,132
U.S. Bank (N.A.) $ 777
SMALL CAP VALUE SERIES
HIGH YIELD SERIES U.S. Bank (N.A.) $ 536,159
U.S. Bank (N.A.) $ 1,914,679
GLOBAL GROWTH SERIES
INTERNATIONAL STOCK SERIES II U.S. Bank (N.A.) $14,236,894
ABN Bank $ 327,450
Merrill Lynch & Co., Inc. $ 108,682 LARGE CAP GROWTH SERIES
U.S. Bank (N.A.) $ 2,977,676 Ford Motor Co. $ 849,656
U.S. Bancorp $ 282,178 General Electric Co. $ 108,325
Westpac Banking Corp., Ltd. $ 468,585 Merrill Lynch & Co. $ 768,200
Morgan Stanley Dean Witter Corp. $ 3,054,850
ASSET ALLOCATION SERIES U.S. Bank (N.A.) $ 1,921,021
Bear Stearns & Co. $ 1,472,781 U.S. Bancorp $ 180,975
Merrill Lynch & Co., Inc. $ 2,478,077
Morgan Stanley Dean Witter Corp. $ 4,425,250 GROWTH STOCK SERIES $ 8,739,703
Paine Webber Group, Inc. $ 974,205 U.S. Bank (N.A.)
U.S. Bank (N.A.) $21,088,289
AGGRESSIVE GROWTH SERIES
VALUE SERIES U.S. Bank (N.A.) $13,015,899
U.S. Bank (N.A.) $ 1,086,770
</TABLE>
62
<PAGE> 72
Although investment decisions for each Fund are made independently from
those of the other Funds or those of other funds or private accounts managed by
Advisers, sometimes the same security is suitable for more than one fund or
private account. If and when two or more funds or private 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 fund or private account. The simultaneous purchase or sale of the same
securities by a Fund and another fund or account may have a detrimental effect
on the Fund, as this may affect the price paid or received by the Fund or the
size of the position obtainable by the Fund.
Advisers has developed written trade allocation procedures for its
management of the securities trading activities of its clients. Advisers manages
multiple portfolios, both public (mutual funds) and private. The purpose of the
trade allocation procedures is to treat the portfolios fairly and reasonably in
situations where the amount of a security that is available is insufficient to
satisfy the volume or price requirements of each portfolio that is interested in
purchasing that security. Generally, when the amount of securities available in
a public offering or the secondary market is insufficient to satisfy the
requirements for the interested portfolios, the procedures require a pro rata
allocation based upon the amounts initially requested by each portfolio manager.
In allocating trades made on combined basis, each participating portfolio will
receive the same average price for the securities purchased or sold.
Because a pro rata allocation may not always adequately accommodate all
facts and circumstances, the procedures provide for exceptions to allocate
trades on a basis other than pro rata. Adjustments may be made, for example, as
a result of: (i) the cash position of the portfolios involved in the
transaction; (ii) the relative importance of the security to a portfolio in
seeking to achieve its investment objective; or (iii) the size of the
portfolios.
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.
Fortis Series currently has twenty-three Funds, each constituting 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 Fund to which
the stock of that series relates and will have no interest in the assets of any
other Fund. In the event of liquidation, each share of a Fund would have the
same rights to dividends and assets as every other share of that Fund.
Each share of a Fund has one vote (with proportionate voting for
fractional shares) irrespective of the relative net asset value of the Funds'
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 Fund, the shares of the
affected Fund vote as a separate series. An example of such an issue would be a
fundamental investment restriction pertaining to only one Fund.
63
<PAGE> 73
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.
PRICING OF SHARES
On December 31, 1999, each Fund's net asset value per share was
calculated as shown below. Net asset values are not shown for American Leaders
Series, Capital Opportunities Series, Blue Chip Stock Series II, Global Equity
Series and Investors Growth Series, which had not yet commenced operations as of
such date.
<TABLE>
<S> <C>
MONEY MARKET SERIES
Net Assets ($ 124,104,615) = Net Asset Value per Share ($11.20)
---------------------------
Shares Outstanding (11,079,259)
U. S. GOVERNMENT SECURITIES SERIES
Net Assets ($ 138,657,928) = Net Asset Value per Share ($10.13)
--------------------------
Shares Outstanding (13,692,934)
DIVERSIFIED INCOME SERIES
Net Assets ($ 101,153,150) = Net Asset Value per Share ($10.91)
--------------------------
Shares Outstanding (9,273,517)
MULTISECTOR BOND SERIES
Net Assets ($ 24,925,576) = Net Asset Value per Share ($10.26)
--------------------------
Shares Outstanding (2,428,631)
HIGH YIELD SERIES
Net Assets ($68,166,099) = Net Asset Value per Share ($ 9.09)
-------------------------
Shares Outstanding (7,496,362)
ASSET ALLOCATION SERIES
Net Assets ($ 679,956,712) = Net Asset Value per Share ($22.78)
---------------------------
Shares Outstanding (29,847,054)
VALUE SERIES
Net Assets ($ 94,583,132) = Net Asset Value per Share ($15.65)
---------------------------
Shares Outstanding (6,043,086)
</TABLE>
64
<PAGE> 74
<TABLE>
<S> <C>
GROWTH & INCOME SERIES
Net Assets ($317,185,745) = Net Asset Value per Share ($21.94)
-------------------------
Shares Outstanding (14,456,313)
S&P 500 INDEX SERIES
Net Assets ($ 424,773,389) = Net Asset Value per Share ($22.66)
---------------------------
Shares Outstanding (18,744,635)
BLUE CHIP STOCK SERIES
Net Assets ($ 284,229,269) = Net Asset Value per Share ($21.93)
---------------------------
Shares Outstanding (12,958,021)
INTERNATIONAL STOCK SERIES
Net Assets ($ 143,969,027) = Net Asset Value per Share ($17.94)
---------------------------
Shares Outstanding (8,027,243)
INTERNATIONAL STOCK SERIES II
Net Assets ($ 66,066,698) = Net Asset Value per Share ($13.17)
--------------------------
Shares Outstanding (5,016,325)
MID CAP STOCK SERIES
Net Assets ($ 24,799,507) = Net Asset Value per Share ($10.68)
--------------------------
Shares Outstanding (2,321,799)
SMALL CAP VALUE SERIES
Net Assets ($ 39,170,590) = Net Asset Value per Share ($10.20)
--------------------------
Shares Outstanding (3,838,536)
GLOBAL GROWTH SERIES
Net Assets ($ 474,180,301) = Net Asset Value per Share ($34.72)
---------------------------
Shares Outstanding (13,656,496)
LARGE CAP GROWTH
Net Assets ($ 87,061,024) = Net Asset Value per Share ($15.05)
---------------------------
Shares Outstanding (5,783,459)
GROWTH STOCK SERIES
Net Assets ($1,044,727,994) = Net Asset Value per Share ($45.14)
---------------------------
Shares Outstanding (23,144,916)
AGGRESSIVE GROWTH SERIES
Net Assets ($ 333,157,939) = Net Asset Value per Share ($33.79)
---------------------------
Shares Outstanding (9,859,699)
</TABLE>
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
close of regular trading (currently 3:00 P.M. Central Time) 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
65
<PAGE> 75
trading. Generally, the net asset value of each Fund's 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, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. Additionally, net asset value need not be
determined for a Fund (i) on days on which changes in the value of the Fund's
portfolio securities will not materially affect the current net asset value of
the Fund's shares; or (ii) on days during which no shares of the Fund are
tendered for redemption and no orders to purchase or sell shares of the Fund are
received by Fortis Series.
Investments in securities traded on a national securities exchange or
on the NASDAQ National Market System are valued at the last reported sales
price. Securities for which the over-the-counter market quotations are readily
available are valued on the basis of the last current bid price. An outside
pricing service may be utilized to provide such valuations. For fixed income
securities, the pricing service may employ electronic data processing techniques
and/or a matrix system to determine valuations using methods which include
consideration of yields or prices of bonds of comparable quality, type of issue,
coupon, maturity and rating indications as to value from dealers, and general
market conditions. Securities for which quotations are not readily available are
valued at fair value as determined in good faith by management under supervision
of the Board of Directors. Short-term investments, with maturities of less than
60 days of maturity, are valued at amortized cost, with the exception of Money
Market Series. Pursuant to Rule 2a-7 under the Investment Company Act of 1040,
Money Market Series' investments are valued at amortized cost which assumes a
constant amortization to maturity of discount or premium.
REDEMPTION OF SHARES
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 the 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.
TAXATION
The Funds have qualified and intend to continue to qualify as regulated
investment companies under the Internal Revenue Code of 1986, as amended (the
"Code"). As long as each Fund so qualifies, it is not taxed on the income it
distributes to shareholders. Generally, in order to qualify as a regulated
investment company, a Fund must derive at least 90% 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. 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 Fund will generally be treated as a separate
entity for federal tax purposes. Therefore, each Fund 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
66
<PAGE> 76
capital gains (or losses) and distributions necessary to relieve the Fund of any
federal income tax liability.
Pursuant to the Code, each Fund will be subject to a nondeductible
excise tax for each calendar year equal to 4% 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 Fund pays income tax. In
order to avoid the imposition of this excise tax, each Fund generally must
declare dividends by the end of a calendar year representing 98% of the Fund's
ordinary income for the calendar year and 98% 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 Fund 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
Fund 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 Fund 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 a Fund invests in zero coupon obligations upon their issuance, such
obligations will have original issue discount in the hands of such Fund.
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. If a Fund acquires an already issued zero coupon
bond from another holder, the bond will have original issue discount in the
Fund's hands, equal to the difference between the "adjusted issue price" of the
bond at the time the Fund acquires it (that is, the original issue price of the
bond plus the amount of original issue discount accrued to date) and its stated
redemption price at maturity. In each case, a Fund is required to accrue as
ordinary interest income a portion of such original issue discount even though
such Fund receives no cash currently as interest payments on the obligation.
Similarly, in the case of PIKs, the Funds are 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.
Because each Fund is required to distribute substantially all of its
net investment income (including accrued original issue discount and interest
income attributable to PIKs) in order to be taxed as a regulated investment
company, a Fund having such income may be required to distribute an amount
greater than the total cash income the Fund actually receives. Accordingly, in
order to make the required distribution, the Fund may be required to borrow or
liquidate securities.
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<PAGE> 77
For Federal income tax purposes the Funds had the following capital
loss carryovers at December 31, 1999, which, if not offset by subsequent capital
gains, will expire in 2000 through 2008. 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 $ 56,052
U.S. Government Securities Series $ 19,603,587
Diversified Income Series $ 11,253,332
Multisector Bond Series $ 610,193
High Yield Series $ 10,900,636
</TABLE>
UNDERWRITER
Investors has entered into an Underwriting Agreement for the sale and
distribution of the Funds' shares. 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 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 INFORMATION
The Funds may refer to or advertise average annual total returns and
cumulative returns, and may compare such figures to recognized indices. Certain
Funds may provide yield calculations. Any advertisement of a Fund's performance
will be accompanied by performance of the Separate Account being advertised. All
such yield and total return quotations are based on historical earnings and are
not intended to indicate future performance. The return on and principal value
of an investment in any Fund will fluctuate, so that shares when redeemed may be
worth more or less than their original cost.
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:
CTR = ( ERV - P ) 100
-------
P
68
<PAGE> 78
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 gain 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.
The following table sets forth the cumulative total return of each Fund
(other than American Leaders Series, Capital Opportunities Series, Blue Chip
Stock Series II, Global Equity Series and Investors Growth Series, which had not
commenced operations prior to the date of this Statement of Additional
Information) for the period from inception through December 31, 1999.
<TABLE>
<CAPTION>
CUMULATIVE
FUND TOTAL RETURN
---- ------------
<S> <C>
Money Market Series (1) 101.24%
U.S. Government Securities Series (1) 130.11%
Diversified Income Series (3) 135.02%
Multisector Bond Series (6) 29.37%
High Yield Series (5) 38.16%
Asset Allocation Series (2) 336.36%
Value Series (7) 66.80%
Growth & Income Series (5) 156.65%
S&P 500 Index Series (7) 133.14%
Blue Chip Stock Series (7) 126.64%
International Stock Series (6) 110.87%
International Stock Series II (6) 72.77%
Mid Cap Stock Series (8) 7.76%
Small Cap Value Series (8) 9.01%
Global Growth Series (4) 269.78%
Large Cap Growth Series (8) 50.90%
Growth Stock Series (1) 550.77%
Aggressive Growth Series (5) 252.77%
----------------------------
(1) Inception date: March 24, 1987.
(2) Inception date: May 1, 1987.
(3) Inception date: May 2, 1988.
(4) Inception date: May 1, 1992.
(5) Inception date: May 2, 1994.
(6) Inception date: January 3, 1995.
(7) Inception date: May 1, 1996.
(8) Inception date: May 1, 1998.
</TABLE>
Average annual total return is the average annual compounded rate of
return on a hypothetical $1,000 investment made at the beginning of the
advertised period. Average annual total return figures are computed according to
the following formula:
P(1+T)(n) = ERV
69
<PAGE> 79
<TABLE>
<CAPTION>
Average Annual Total Returns
----------------------------
10 years/Since
Fund 1 year 5 years Inception
---- ------ ------- ---------
<S> <C> <C> <C>
Money Market Series 4.96% 5.30% 5.02%
U.S. Government Securities Series -1.94% 7.17% 6.61%
Diversified Income Series -1.68% 7.11% 7.25%
Multisector Bond Series (3) -7.53% 5.28% 5.29%
High Yield Series (2) 1.17% 6.84% 5.87%
Asset Allocation Series 19.56% 18.80% 13.69%
Value Series (4) 8.96% * 14.97%
Growth & Income Series (2) 10.72% 20.33% 18.10%
S&P 500 Index Series (4) 20.34% * 25.97%
Blue Chip Stock Series (4) 19.88% * 25.00%
International Stock Series (3) 23.99% 16.09% 16.12%
International Stock Series II (3) -0.87% 11.56% 11.58%
Mid Cap Stock Series (5) 10.97% * 4.58%
Small Cap Value Series (5) 15.34% * 5.31%
Global Growth Series (1) 57.68% 23.86% 18.60%
Large Cap Growth Series (5) 27.22% * 27.97%
Growth Stock Series 55.17% 25.28% 17.45%
Aggressive Growth Series (2) 109.25% 29.17% 24.92%
-----------------------------------------------------------
* Not applicable
(1) Inception date: May 1, 1992
(2) Inception date: May 2, 1994
(3) Inception date: January 3, 1995
(4) Inception date: May 1, 1996
(5) Inception date: May 1, 1998
</TABLE>
U.S. Government Securities Series, Diversified Income Series,
Multisector Bond Series, High Yield Series and Asset Allocation Series may quote
30-day yield figures. A Fund's 30-day yield refers to the income generated by an
investment over a 30-day (or one month) period. It is calculated by dividing the
net investment income per share (as defined under Securities and Exchange
Commission rules) earned during the computation period by the maximum offering
price per share on the last day of the period, according to the following
formula. The result is then annualized using a formula that provides for
semiannual compounding of income.
Yield = 2 [(a-b + 1)(6) - 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.
70
<PAGE> 80
The Funds' yields for the 30-day period ended December 31, 1999, were:
<TABLE>
<CAPTION>
Fund Yield
---------------------------------------- -------------
<S> <C>
U.S. Government Securities Series 6.01%
Diversified Income Series 7.53%
Multisector Bond Series 4.18%
High Yield Series 10.00%
</TABLE>
Money Market Series may quote its current and effective yields for a
seven-day 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:
Effective Yield = [ (Base Period Return +1) power of 365/7 ] -1
Money Market Series' yield and effective yield for the seven days ended
December 31, 1999, were 5.53% and 5.68%, respectively.
The Funds 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, 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 the current yield is not
necessarily representative of future results.
Comparative performance information also may be used from time to time
in advertising. Advertisements may compare the Funds' performance to that of
various unmanaged market indices, or may include performance data compiled by
outside organizations such as Lipper Analytical Services, Inc.,
CDA/Wiesenberger, other entities or organizations or publications which track
the performance of investment companies.
OTHER SERVICE PROVIDERS
U.S. Bank National Association, 601 Second Avenue South, Minneapolis,
MN 55480 acts as custodian of each Fund's assets and portfolio securities.
Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, MN 55402, is the
independent General Counsel for the Funds.
71
<PAGE> 81
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
interest 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 recessionary 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
The Funds have filed with the Securities and Exchange Commission,
Washington, DC 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, NW, Washington, DC, and copies thereof may be obtained from the
Commission at prescribed rates.
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FINANCIAL STATEMENTS
The audited financial statements as of December 31, 1999, as set forth
in Fortis Series' 1999 Annual Report to Shareholders, are incorporated herein by
reference. The audited financial statements are provided in reliance on the
report of KPMG LLP, 4200 Norwest Center, Minneapolis, Minnesota 55402,
independent auditors of Fortis Series, and given on the authority of such firm
as experts in accounting and auditing.
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APPENDIX A
DESCRIPTION OF FUTURES, OPTIONS AND FORWARD CONTRACTS
OPTIONS ON SECURITIES
An option on a security provides the purchaser ("holder") with the
option 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 non-refundable 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" or "secured."
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 that 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 indices 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
Commission. 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 indices of securities only
through a registered broker-dealer that is a member of the exchange on which the
option is traded.
In addition, options on securities and options on indices 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 INDICES
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 purchaser of the option receives this cash settlement amount if the closing
level of the 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 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.
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The index underlying an index option 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 on narrower
market indices, such as the Standard & Poor's 100 Index, or on indices of
securities of particular industry groups, such as those of oil and gas or
technology companies. An index assigns relative values to the securities
included in the index and the index fluctuates with changes in the market values
of the securities 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 maybe 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 Commodities Futures Trading
Commission ("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, 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.
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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 effecting 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 Funds
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.
FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS
A foreign currency forward exchange contract (a "forward 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. Forward 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
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interbank market generally act as principals in taking the opposite side of
their customers' positions in forward contracts, and ordinarily charge a mark-up
commission which may be included in the cost of the forward contract. In
addition, market-makers may require their customers to deposit collateral upon
entering into a forward 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 forward 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 a Fund's
position, unless the institution acts as broker and is able to find another
counter party willing to enter into the transaction with the Fund. Where no such
counter party 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 a Fund could be required to retain options
purchased or written until exercise, expiration or maturity. This in turn could
limit the Fund's 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 Funds will therefore be subject to the
risk of default by, or the bankruptcy
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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 Funds' ability to enter
into desired hedging transactions. The Funds will enter into an over-the-counter
transaction only with parties whose creditworthiness has been reviewed and found
satisfactory by Advisers or, if applicable, the Fund's subadviser.
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APPENDIX B
COMMERCIAL PAPER, CORPORATE BOND
AND PREFERRED STOCK RATINGS
COMMERCIAL PAPER RATINGS
Standard & Poor's Rating Services. 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.
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CORPORATE BOND RATINGS
Note: Standard & Poor's Ratings Services ratings from "AA" to "CCC" may
be modified by the addition of a plus or minus sign to show relative standing
within the major rating categories. Moody's Investors Service, Inc. applies
numerical modifiers 1, 2 and 3 in each generic rating classification from "Aa"
to "B." The modifier "1" indicates that the applicable company ranks in the
higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the applicable company
ranks in the lower end of its generic rating category.
Standard & Poor's Ratings Services. 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
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
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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.
"NO" 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
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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 RATINGS
Note: Standard & Poor's Corporation ratings from "AA" to "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories. Moody's Investors Service, Inc. applies
numerical modifiers 1, 2 and 3 in each generic rating classification from "Aa"
to "B." The modifier "1" indicates that the applicable company ranks in the
higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the applicable company
ranks in the lower end of its generic rating category.
Standard & Poor's Ratings Services. 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
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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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