<PAGE>
As filed with the Securities and Exchange Commission on October 18, 2000
Registration No. 33-13954
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ________ [ ]
Post-Effective Amendment No. 31 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 32 [X]
(Check appropriate box or boxes)
Pacific Select Fund
(Exact Name of Registrant as Specified in Charter)
700 Newport Center Drive, P.O. Box 7500, Newport Beach, CA 92660
(Address of Principal Executive Offices ) (Zip Code)
Registrant's Telephone Number, including Area Code: (949) 219-6767
Robin Yonis
Assistant Vice President and Investment Counsel of
Pacific Life Insurance Company
700 Newport Center Drive
Post Office Box 9000
Newport Beach, CA 92660
(Name and Address of Agent for Service)
Copies to:
Jeffrey S. Puretz, Esq.
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20006-2401
Approximate Date of Proposed Public Offering ___________________________________
It is proposed that this filing will become effective (check appropriate box)
[_] immediately upon filing pursuant to paragraph (b)
[_] on August 28, 2000 pursuant to paragraph (b)
---------
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[X] on January 2, 2001 pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
================================================================================
<PAGE>
SUPPLEMENT DATED JANUARY 2, 2001
PACIFIC SELECT FUND TO THE PROSPECTUS DATED MAY 1, 2000
This supplement gives you information about certain
investment options available under your variable
annuity contract or variable life insurance policy.
This supplement tells you about 11 new Pacific Select
Fund portfolios, two of which started on October 2,
2000. It also provides information about changes to two
other portfolios. All of these portfolios are listed
below. Remember to review the fund prospectus for other
important information.
PORTFOLIOS AND PORTFOLIO MANAGERS
(listed alphabetically by portfolio manager)
<TABLE>
<S> <C>
Blue Chip Portfolio A I M
Aggressive Growth Portfolio A I M
Aggressive Equity Portfolio Alliance Capital
Financial Services Portfolio INVESCO
Health Sciences Portfolio INVESCO
This supplement
must be preceded or Technology Portfolio INVESCO
accompanied by the
Pacific Select Fund Telecommunications Portfolio INVESCO
prospectus dated
May 1, 2000. Strategic Value Portfolio Janus
Focused 30 Portfolio Janus
International Value Portfolio Lazard
Capital Opportunities MFS
Portfolio
Mid-Cap Growth Portfolio MFS
Global Growth Portfolio MFS
</TABLE>
<PAGE>
This supplement changes the fund's prospectus effective
January 2, 2001 to reflect the information below. It
also restates information contained in supplements
dated August 28, 2000 and October 2, 2000.
--------------------------------------------------------
The Fund consists About the portfolios is amended by adding pages of this
of 31 portfolios supplement describing the 11 new portfolios and
replaces pages 6, 7, 36 and 37 of the prospectus
describing the Aggressive Equity and International
Value Portfolios. An Overview of the Pacific Select
Fund is amended by adding information regarding the 11
new portfolios to the chart, replacing information
regarding the Aggressive Equity and International Value
Portfolios, and replacing the commentary along side the
chart with the language contained in this supplement.
References to the fund's 21 portfolios throughout the
prospectus are changed to refer to 31 portfolios. The
Bond and Income Portfolio is no longer available and
references to that portfolio are deleted. The name
Mercury Asset Management is changed to Mercury Advisors
throughout the prospectus.
--------------------------------------------------------
Your guide to this The paragraph Performance of comparable accounts is
prospectus changed to read: For portfolios with less than 1 year
of performance history as of May 1, 2000, Performance
of comparable accounts, if available, may be found
following each portfolio's description in About the
portfolios. For portfolios with new managers or less
than 2 years of performance history, Performance of
comparable accounts, if available, may be found
following the section Managing the Pacific Select Fund.
2
<PAGE>
<TABLE>
<S> <C>
An overview of the Pacific Select Fund 4
-------------------------------------------
About the portfolios
Blue Chip Portfolio 6
Aggressive Growth Portfolio 8
Aggressive Equity Portfolio 10
Financial Services Portfolio 12
Health Sciences Portfolio 14
Technology Portfolio 16
Telecommunications Portfolio 18
Strategic Value Portfolio 20
Focused 30 Portfolio 22
International Value Portfolio 24
Capital Opportunities Portfolio 26
Mid-Cap Growth Portfolio 28
Global Growth Portfolio 30
-------------------------------------------
Managing the Pacific Select Fund
About the portfolio managers 32
Fees and expenses paid by the fund 34
-------------------------------------------
Performance of comparable accounts 35
-------------------------------------------
</TABLE>
Pacific Select Fund is only available as the underlying investment fund for
variable life insurance and annuity products issued or administered by Pacific
Life Insurance Company and Pacific Life & Annuity Company (PL&A). Pacific Life
Insurance Company is licensed to solicit life insurance and annuity products in
all states except New York. Product availability and features may vary by
state. PL&A's individual life insurance policies are approved for sale in New
York only. Neither company is responsible for the insurance or annuity
obligations of the other.
3
<PAGE>
AN OVERVIEW OF THE PACIFIC SELECT FUND
This table is a summary of the goals, investments and risks of each of the 31
portfolios, (13 of which are described below in this supplement). It's designed
to help you understand the differences between the portfolios, the risks
associated with each, and how risk and investment goals relate.
The performance of all of the Pacific Select Fund portfolios is affected by
changes in the economy and financial markets. The portfolios are also affected
by other kinds of risks, depending on the types of securities they invest in.
There's also the possibility that investment decisions portfolio managers make
will not accomplish what they were designed to achieve, or that the portfolio
will not achieve its investment goal.
Equity securities historically have offered the potential for greater long-term
growth than most fixed income securities, but they also tend to have larger and
more frequent changes in price, which means there's a greater risk you could
lose money over the short term. The prices of a company's equity securities
change in response to many factors including the company's historical and
prospective earnings, the value of its assets, general economic conditions,
interest rates, investor perceptions and market liquidity.
Fixed income securities are affected primarily by the financial condition of
the companies that have issued them, and by changes in interest rates.
In addition, foreign equity and fixed income securities may be affected by
exchange rate changes, political and economic circumstances throughout the
world, and relatively lower liquidity compared to U.S. securities.
<TABLE>
<CAPTION>
PORTFOLIO AND MANAGER THE PORTFOLIO'S INVESTMENT GOAL
<C> <S>
Blue Chip Portfolio Long-term growth of capital. Current income is of secondary
A I M importance.
Aggressive Growth Portfolio Long-term growth of capital.
A I M
Aggressive Equity Portfolio Capital appreciation.
Alliance Capital
Financial Services Portfolio Long-term growth of capital.
INVESCO
Health Sciences Portfolio Long-term growth of capital.
INVESCO
Technology Portfolio Long-term growth of capital.
INVESCO
Telecommunications Portfolio High total return.
INVESCO
Strategic Value Portfolio Long-term growth of capital.
Janus
Focused 30 Portfolio Long-term growth of capital.
Janus
International Value Portfolio Long-term capital appreciation primarily through investment
Lazard in equity securities of corporations domiciled in countries
other than the U.S.
Capital Opportunities Portfolio Long-term growth of capital.
MFS
Mid-Cap Growth Portfolio Long-term growth of capital.
MFS
Global Growth Portfolio Capital appreciation.
MFS
</TABLE>
4
<PAGE>
Each of the portfolios may lend up to 33 1/3% of its assets to seek additional
income. In connection with such lending there is a risk of delay in return of
the securities loaned or possible loss of rights in collateral should the
borrower become insolvent. However, all loans must be secured.
Unless otherwise noted, each portfolio which invests principally in equity
securities may temporarily change its investment strategies if the portfolio
manager believes economic conditions make it necessary to try to protect the
portfolio from potential loss. In that case, or for management of cash
balances, the portfolios may invest in U.S. government securities, higher-
quality corporate fixed income securities, mortgage related and asset-backed
securities, or money market instruments, which may prevent the portfolio from
achieving its investment goal.
Many of the investment techniques and strategies discussed in the prospectus,
including this supplement, and in the Statement of Additional Information (SAI)
are discretionary, which means that portfolio managers can decide if they want
to use them or not. Portfolio managers may also use investment techniques or
make investments in securities that are not part of a portfolio's principal
investment strategy. A portfolio's stated investment goal, (as shown in the
second column to the right), cannot be changed without the approval of
shareholders. Investment policies may be changed from time to time by the
fund's board of trustees.
You'll find more information about each portfolio's recent strategies and
holdings in the most recent report to shareholders, and a more detailed
discussion of each portfolio's investments, strategies and risks in the SAI.
Please turn to the back cover of the fund prospectus for information about how
to get copies of these documents.
<TABLE>
<CAPTION>
THE PORTFOLIO'S MAIN INVESTMENTS THE PORTFOLIO'S MAIN RISKS
<C> <S>
Equity securities of "blue chip" Price volatility and other risks that accompany an
companies--typically large companies investment in equity securities.
that are well established in their
respective industries.
Equity securities of small- and Price volatility and other risks that accompany an
medium-sized growth companies. investment in small emerging growth companies and medium-
sized companies. Particularly sensitive to price swings
during periods of economic uncertainty.
Equity securities of small emerging- Price volatility and other risks that accompany an
growth companies and medium-sized investment in small emerging-growth companies and medium-
companies. sized companies. Particularly sensitive to price swings
during periods of economic uncertainty.
Equity securities in the financial Price volatility and other risks that accompany an
services sector. Such companies investment in equity securities in financial services
include banks, insurance companies, companies. Particularly sensitive to price swings because of
brokerage firms and other finance- concentration of investments in a narrow industry sector.
related firms.
Equity securities in the health Price volatility and other risks that accompany an
sciences sector. Such as companies investment in equity securities in health services
that develop, produce or distribute companies. Particularly sensitive to price swings because of
products or services related to concentration of investments in a narrow industry sector.
health care.
Equity securities in the technology Price volatility and other risks that accompany an
sector. Such companies include investment in equity securities in technology companies.
biotechnology, communications, Particularly sensitive to price swings because of
computers, electronics, Internet concentration of investments in a narrow industry sector.
telecommunications, networking,
robotics and video.
Equity securities in the Price volatility and other risks that accompany an
telecommunications sector. Such as investment in equity securities in telecommunications
companies that offer telephone companies. Particularly sensitive to price swings because of
service, wireless communications, concentration of investments in a narrow industry sector.
satellite communications, television
and movie programming, broadcasting
and Internet access.
Equity securities with the potential Price volatility and other risks that accompany an
for long-term growth of capital. investment in equity securities. Particularly sensitive to
price swings because the portfolio is classified as "non-
diversified"--it may hold securities from a fewer number of
issuers than a diversified portfolio.
Equity securities of a large number Price volatility and other risks that accompany an
of companies of any size. investment in equity securities. Particularly sensitive to
price swings because the portfolio is classified as "non-
diversified"--it may hold securities from a fewer number of
issuers than a diversified portfolio.
Equity securities of companies of Price volatility and other risks that accompany an
any size located in developed investment in foreign equities. Sensitive to currency
countries outside of the U.S. exchange rates, international political and economic
conditions and other risks that affect foreign securities.
Equity securities with the potential Price volatility and other risks that accompany an
for long-term growth of capital. investment in equity securities.
Equity securities of medium-sized Price volatility and other risks that accompany an equity
companies believed to have above- investment in medium-sized companies. The portfolio is
average growth potential. classified as "non-diversified"--it may hold securities from
a fewer number of issuers than a diversified portfolio,
making it particularly sensitive to price swings.
Equity securities of any size located Price volatility and other risks that accompany an
within and outside of the U.S. investment in equity securities. May be particularly
sensitive to currency exchange rates, international
political and economic conditions and other risks that
affect foreign securities. The portfolio is classified as
"non-diversified"--it may hold securities from a fewer
number of issuers than a diversified portfolio, making it
particularly sensitive to price swings.
</TABLE>
5
<PAGE>
ABOUT THE PORTFOLIOS BLUE CHIP PORTFOLIO
This portfolio is not available for:
. Pacific Corinthian variable annuity contracts
. Pacific Select variable life insurance policies.
[LOGO] --------------------------------------------------
The portfolio's This portfolio seeks long-term growth of capital.
investment goal Current income is of secondary performance.
[LOGO] --------------------------------------------------
What the portfolio This portfolio's principal investment strategy is to
invests in invest at least 65% of its total assets in the common
stocks of blue chip companies, including foreign
securities. Blue chip companies are those companies
that the portfolio managers believe have the potential
for above-average growth in earnings and that are well-
established in their respective industries.
When the portfolio managers believe securities other
than common stocks offer the opportunity for long-term
growth of capital and current income, they may invest
in U.S. government securities, convertible securities
and high-quality debt securities.
The portfolio managers consider whether to sell a
particular security when they believe the security no
longer has above-average growth potential.
[LOGO] --------------------------------------------------
Risks you should be The Blue Chip Portfolio principally invests in equity
aware of securities, which may go up or down in value, sometimes
rapidly and unpredictably. While equities may offer the
potential for greater long-term growth than most fixed
income securities, they generally have higher
volatility. The portfolio may be affected by the
following risks, among others:
. price volatility - the value of the portfolio changes
as the prices of the investments it holds go up or
down.
This portfolio may . risks of foreign investing - foreign investments may
invest up to 25% of be riskier than U.S. investments for many reasons,
its assets in including changes in currency exchange rates,
foreign securities. unstable political and economic conditions, a lack of
adequate and timely company information, differences
in the way securities markets operate, relatively
lower market liquidity, less stringent financial
reporting and accounting standards and controls, less
secure foreign banks or securities depositories than
those in the U.S., and foreign controls on
investment.
6
<PAGE>
BLUE CHIP PORTFOLIO
[LOGO] -------------------------------------------------
Who manages the Monika H. Degan, CFA, is an investment officer and
portfolio senior portfolio manager at A I M and has been
associated with A I M and/or its affiliates since 1995.
[LOGO OF A I M Before joining A I M she was an analyst with Shell Oil
CAPITAL APPEARS Co. Pension Trust. Monika has 9 years of investment
HERE] experience and a BA and an MBA from the University of
Houston.
The Blue Chip
Portfolio is Jonathan C. Schoolar, CFA, is senior vice president of
managed by A I M A I M and heads the large-cap growth investment
Capital Management, management unit. Jonathan has been associated with
Inc. (A I M). A I M and/or its affiliates since 1986, has 17 years of
You'll find more investment experience and a BA from the University of
about A I M on page Texas.
32.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
PERFORMANCE OF COMPARABLE ACCOUNTS
--------------------------------------------------------------------------------
<S> <C>
This portfolio has This chart does not show you the performance of the
no historical Blue Chip Portfolio -- it shows the performance of a
performance to similar account managed by A I M.
report because it
started on January Annual total returns since 1990 and average annual
2, 2001. total returns for the periods ending June 30, 2000.
--------------------------------------------------
The chart to the A I M Blue Chip
right shows the Fund, Class A,
historical A I M Blue adjusted to reflect
performance of the Chip Fund, estimated fees and
A I M Blue Chip Class A expenses of the Blue S&P 500
Fund, Class A. This Period (%) Chip Portfolio (%) Index (%)
fund has investment -----------------------------------------------------
objectives, <S> <C> <C> <C>
policies and 6/30/00/1/ 3.59 3.68 (0.42)
strategies that 1999 25.65 26.12 21.04
are substantially 1998 30.42 30.96 28.58
similar to those of 1997 31.91 32.60 33.36
the Blue Chip 1996 23.75 24.29 22.96
Portfolio. 1995 32.00 32.65 37.58
1994 4.66 5.12 1.32
1993 4.61 4.97 10.08
1992 2.64 3.07 7.62
1991 30.32 31.23 30.47
1990 3.01 3.62 (3.11)
1 year 18.74 19.11 7.25
5 years 25.33 25.85 23.81
10 years 17.82 18.36 17.79
-----------------------------------------------------
</TABLE>
The performance /1/ Total returns through June 30, 2000, not
shows the annualized.
historical track
record of the A I M The first column (after "Period") shows performance of
Blue Chip Fund the A I M Blue Chip Fund, Class A after advisory fees
and is not intended and operating expenses of the A I M Blue Chip Fund have
to imply how the been deducted.
Blue Chip Portfolio
has performed or The second column shows the gross performance of the
will perform. Total A I M Blue Chip Fund, Class A, adjusted to reflect the
returns represent estimated fees and expenses of the Blue Chip Portfolio.
past performance of
the A I M Blue Chip The third column shows performance of the S&P 500
Fund, Class A and Index, an index of the stocks of approximately 500
not the Blue Chip large-capitalization U.S. companies, for the same
Portfolio. periods. Results include reinvested dividends.
Returns do not
reflect fees and
expenses associated
with any variable
annuity contract or
variable life
insurance policy,
and would be lower
if they did.
7
<PAGE>
ABOUT THE PORTFOLIOS AGGRESSIVE GROWTH PORTFOLIO
This portfolio is not available for:
. Pacific Corinthian variable annuity contracts
. Pacific Select variable life insurance policies.
[LOGO] --------------------------------------------------
The portfolio's This portfolio seeks long-term growth of capital.
investment goal
[LOGO] --------------------------------------------------
What the portfolio The portfolio's principal investment strategy is to
invests in invest in common stocks of companies whose earnings the
portfolio managers expect to grow more than 15% per
A company's year. The portfolio will invest in securities of small-
"capitalization" is and medium-sized growth companies. The portfolio
a measure of its managers focus on companies they believe are likely to
size. benefit from new and innovative products, services or
Capitalization is processes as well as those that have experienced above-
calculated by average, long-term growth in earnings and have
multiplying the excellent prospects for future growth. The portfolio
current share price managers consider whether to sell a particular security
by the number of when any of those factors materially changes.
shares held by
investors.
[LOGO] --------------------------------------------------
Risks you should be The Aggressive Growth Portfolio principally invests in
aware of equity securities, which may go up or down in value,
sometimes rapidly and unpredictably. While equities may
offer the potential for greater long-term growth than
most fixed income securities, they generally have
higher volatility. The portfolio may be affected by the
following risks, among others:
. price volatility - the value of the portfolio changes
as the prices of its investments go up or down. This
portfolio invests in companies that the team thinks
have the potential for above average growth, which
may give the portfolio a higher risk of price
volatility than a portfolio that invests principally
in equities that are "undervalued".
Small emerging growth companies may be more
susceptible to larger price swings than large
companies because they may have fewer financial
resources, limited product and market diversification
and many are dependent on a few key managers. Emerging
growth companies and companies in cyclical industries
may be particularly susceptible to rapid price swings
during periods of economic uncertainty.
. liquidity - investments in smaller companies have a
greater risk of being or becoming less liquid than
other markets. Liquidity is the ability to sell
securities at a fair price within a reasonable time.
This portfolio may . risks of foreign investing - foreign investments may
invest up to 25% of be riskier than U.S. investments for many reasons,
its assets in including changes in currency exchange rates,
foreign investments unstable political and economic conditions, a lack of
that are adequate and timely company information, differences
principally traded in the way securities markets operate, relatively
outside the U.S. lower market liquidity, less stringent financial
reporting and accounting standards and controls, less
secure foreign banks or securities depositories than
those in the U.S., and foreign controls on
investment.
8
<PAGE>
AGGRESSIVE GROWTH PORTFOLIO
[LOGO] --------------------------------------------------
Who manages the Ryan E. Crane, CFA, has been a portfolio manager at
portfolio A I M since 1999 and has been associated with A I M
and/or its affiliates since 1994. Ryan has 6 years of
[LOGO OF AIM investment experience and a BS from the University of
CAPITAL APPEARS Houston.
HERE]
Robert M. Kippes is a senior portfolio manager of A I M
The Aggressive and has been associated with A I M and/or its
Growth Portfolio is affiliates since 1989. Robert has 11 years of
managed by A I M investment experience and has a BA from Stephen F.
Capital Management, Austin University.
Inc. (A I M).
You'll find more
about A I M on page
32.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
PERFORMANCE OF COMPARABLE ACCOUNTS
----------------------------------------------------------------------------------------------------
<S> <C>
This portfolio has This chart does not show you the performance of the
no historical Aggressive Growth Portfolio -- it shows the performance
performance to of a similar account managed by A I M.
report because it
started on January
2, 2001.
Annual total returns since 1990 and average annual
The chart to the total returns for the periods ending June 30, 2000
right shows the
historical ---------------------------------------------------------------------------
performance of A I M Aggressive Growth
A I M Aggressive Fund, Class A, adjusted to
Growth Fund. This reflect estimated fees and
Fund has investment A I M Aggressive Growth expenses of the Aggressive Russell 2500
objectives, Period Fund, Class A (%) Growth Portfolio (%) Index (%)
policies and ---------------------------------------------------------------------------
strategies that <S> <C> <C> <C>
are substantially 6/30/00/1/ 21.46 21.55 5.69
similar to those of 1999 44.98 45.42 24.15
the Aggressive 1998 4.99 5.05 0.38
Growth Portfolio. 1997 12.24 12.37 24.36
1996 14.34 14.53 19.03
The performance 1995 41.51 41.96 31.70
shows the 1994 17.18 17.35 (1.06)
historical track 1993 32.03 32.29 16.54
record of the A I M 1992 21.34 21.73 16.19
Aggressive Growth 1991 63.90 68.84 46.70
Fund and is not 1990 (6.50) (6.37) (14.88)
intended to imply 1 year 64.59 65.21 18.34
how the Aggressive 5 years 22.00 22.24 17.03
Growth Portfolio 10 years 24.42 24.72 15.57
has performed or ---------------------------------------------------------------------------
will perform. Total /1/ Total returns through June 30, 2000, not annualized.
returns represent
past performance of The first column (after "Period") shows performance of
the A I M the A I M Aggressive Growth Fund, Class A after
Aggressive Growth advisory fees and operational expenses of the A I M
Fund and not the Aggressive Growth Fund, Class A have been deducted.
Aggressive
Growth Portfolio. The second column shows the gross performance of the
A I M Aggressive Growth Fund, Class A, adjusted to
Returns do not reflect the estimated fees and expenses of the
reflect fees and Aggressive Growth Portfolio.
expenses associated
with any variable The third column shows performance of the Russell 2500
annuity contract or Index, an index consisting of 2,500 of the smallest
variable life companies in the Russell 3000 Index, for the same
insurance policy, periods. Results include reinvested dividends.
and would be lower
if they did.
</TABLE>
9
<PAGE>
ABOUT THE PORTFOLIOS AGGRESSIVE EQUITY PORTFOLIO
This portfolio is not available for:
. Pacific Corinthian variable annuity contracts.
[LOGO] -------------------------------------------------
The portfolio's This portfolio seeks capital appreciation. No
investment goal consideration is given to income.
[LOGO] -------------------------------------------------
What the portfolio This portfolio's principal investment strategy is to
invests in invest in small emerging-growth companies and medium-
sized companies, but it may also invest in larger, more
A company's well-established companies. It tends to emphasize
"capitalization" is companies that have a total market capitalization of up
a measure of its to $5 billion. The portfolio focuses primarily on U.S.
size. companies, but may invest in companies located outside
Capitalization is of the U.S.
calculated by
multiplying the Investments principally include common stock, as well
current share price as preferred stocks, fixed income securities, some of
by the number of which can be converted to equity securities, and
shares held by warrants.
investors.
Price to earnings The portfolio management team looks for rapidly growing
ratio (P/E) is one companies that are expected to meet or exceed growth
way of measuring and/or operating targets set by the team, and that are
the value of a showing improving fundamentals and/or favorable
company. It's earnings momentum. Within these guidelines, the team
simply the price of principally looks for three kinds of companies:
a stock divided by
its estimated or . undervalued companies, whose shares are being sold at
actual earnings per a discount relative to the shares of similar
share. A high P/E companies, and that the team believes are likely to
ratio could exceed growth expectations
indicate a high
level of investor . developmental stage companies, such as technology and
confidence in the biotechnology companies, whose current stock prices
company. do not fairly reflect the value of research and whose
development efforts are aimed at generating
attractive future financial returns
. companies in mature or cyclical industries that are
displaying greater than average growth
characteristics.
Before investing in a company, the team usually meets
with the company's management team, customers,
competitors and suppliers, and may consult with
external industry analysts. The team also analyzes the
company's cash flow trends to try to determine its
financial stability and the reliability of its
projected earnings. The portfolio management team may
buy index options to try to increase returns, and use
options and other derivatives to offset changes in
currency exchange rates.
[LOGO] -------------------------------------------------
Risks you should be The Aggressive Equity Portfolio principally invests in
aware of equity securities, which may go up or down in value,
sometimes rapidly and unpredictably. While equities may
Companies that are offer the potential for greater long-term growth than
in their most fixed income securities, they generally have
developmental higher volatility. The portfolio may be affected by the
stages may have a following risks, among others:
greater degree of
price volatility . price volatility - the value of the portfolio changes
than more as the prices of its investments go up or down. This
established portfolio invests in companies that the team thinks
companies because have the potential for above average growth, which
there's less may give the portfolio a higher risk of price
evidence that their volatility than a portfolio that invests principally
research and in equities that are "undervalued."
development efforts
will result in Small emerging growth companies may be more
future growth. susceptible to larger price swings than larger
companies because they may have fewer financial
resources, limited product and market diversification
and many are dependent on a few key managers. Emerging
growth companies and companies in cyclical industries
may be particularly susceptible to rapid price swings
during periods of economic uncertainty.
This portfolio may . risks of foreign investing - foreign investments may
invest up to 20% of be riskier than U.S. investments for many reasons,
its assets in including changes in currency exchange rates,
foreign investments unstable political and economic conditions, a lack of
that are adequate and timely company information, differences
principally traded in the way securities markets operate, relatively
outside the U.S. lower market liquidity, less stringent financial
reporting and accounting standards and controls, less
secure foreign banks or securities depositories than
those in the U.S., and foreign controls on
investment.
10
<PAGE>
AGGRESSIVE EQUITY PORTFOLIO
[LOGO] --------------------------------------------------
Risks you should be . risks of using derivatives - this portfolio may use
aware of index options and other investment techniques to help
(continued) it achieve its investment goal. There's always a risk
that these techniques could reduce returns or
increase the portfolio's volatility.
[LOGO] -------------------------------------------------
How the portfolio Year by year total return (%)
has performed as of December 31 each year/1/,/2/
The bar chart shows
how the portfolio's
performance has
varied since its
inception.
The table below the [GRAPH OF AGGRESSIVE EQUITY PORTFOLIO APPEARS HERE]
bar chart compares
the portfolio's 96 97 98 99
performance with ---- ---- ----- -----
the Russell 2500 7.86 3.78 13.22 27.35
Index, an index of
the stocks of
approximately 2,500 Best and worst quarterly performance during this period:
mid-capitalization 4th quarter 1999: 24.91%; 3rd quarter 1998: (15.27)%
U.S. companies and
the Russell 2500 Average annual total return Since inception
Growth Index, an as of December 31, 1999 1 year 3 years (April 1, 1996)
index of the stocks ----------------------------------------------------------
of approximately Aggressive Equity
1600 small to mid- Portfolio/2/ 27.35% 14.38% 13.60%
capitalization U.S. Russell 2500 Index 24.15% 15.72% 15.95%
companies Russell 2500 Growth 55.48% 22.53% 17.11%
displaying faster Index
than average
growth. /1/ Total return for 1996 is for the period from April
1, 1996 (commencement of operations) to December
Returns do not 31, 1996.
reflect fees and /2/ Alliance Capital Management L.P. began managing the
expenses associated portfolio on May 1, 1998 and some investment
with any variable policies changed at that time. Another firm managed
annuity contract or the portfolio before that date.
variable life
insurance policy,
and would be lower
if they did.
Looking at how a
portfolio has
performed in the
past is important -
but it's no
guarantee of how it
will perform in the
future.
[LOGO] -------------------------------------------------
Who manages the Bruce K. Aronow, CFA, senior vice president of Alliance
portfolio Capital, is team leader of the Small-Cap Growth equity
portfolio management team. He joined Alliance Capital
[LOGO OF ALLIANCE in 1999 as vice president and portfolio manager. Before
CAPITAL APPEARS joining Alliance Capital he was responsible for
HERE] research and portfolio management of the small-cap
consumer and auto-transportation sectors at INVESCO.
The Aggressive Bruce has 12 years of investment experience and a BA
Equity Portfolio is from Colgate University.
managed by a team
of portfolio Mark A. Attalienti is vice president of Alliance
managers at Capital. Before joining Alliance Capital in 1999, he
Alliance Capital was an analyst with Chase Asset Management. Mr.
Management L.P. Attalienti has 11 years of investment experience and a
(Alliance Capital). BA from Muhlenberg College.
You'll find more
about Alliance N. Kumar Kirpalani, CFA, is vice president of Alliance
Capital in the fund Capital. Before joining Alliance Capital in 1999, he
prospectus. was an analyst with INVESCO (NY) and its predecessor
firm, Chancellor Capital Management (Chancellor). Mr.
Kirpalani has 19 years of investment experience, a
B. Tech degree from the Indian Institute of Technology
and an MBA from the University of Chicago.
Samantha S. Lau, CFA, is vice president of Alliance
Capital. Before joining Alliance Capital in 1999, she
was an analyst with INVESCO (NY) and its predecessor
firm, Chancellor. Ms. Lau has 6 years of investment
experience and a BS from the Wharton School of the
University of Pennsylvania.
Michael W. Doherty is vice president of Alliance
Capital. Mr. Doherty's responsibilities include
maintaining and updating quantitative models used by
the portfolio management team, providing research
assistance and portfolio administration. Before joining
Alliance Capital in 1999, he was a research assistant
and portfolio administrator with INVESCO (NY), and its
predecessor firm, Chancellor. Mr. Doherty has 18 years
of investment experience.
11
<PAGE>
ABOUT THE PORTFOLIOS FINANCIAL SERVICES PORTFOLIO
This portfolio is not available for:
. Pacific Corinthian variable annuity contracts
. Pacific Select variable life insurance policies.
[LOGO] -------------------------------------------------
The portfolio's This portfolio seeks long-term growth of capital.
investment goal
[LOGO] -------------------------------------------------
What the portfolio This portfolio's principal strategy is to invest in
invests in equity securities in the financial services sector.
The financial services sector includes banks, insurance
companies, brokerage firms, asset management firms,
government sponsored agencies, and other investment-
related or finance-related companies.
A company is considered part of the financial services
sector if:
. at least 50% of its gross income or its net sales
come from activities in the sector; or
. at least 50% of its assets are devoted to producing
revenues from the sector; or
. based upon other information, the portfolio manager
determines that a company's primary business is
within the sector.
The portfolio manager uses a bottom-up investment
approach, focusing on company fundamentals and growth
prospects when selecting securities. The manager
emphasizes companies it believes are strongly managed
and will generate above-average growth rates for the
next 3 - 5 years. The portfolio manager will invest in
securities it believes will rise in price faster than
other securities.
The manager focuses on markets and industries where
leadership is concentrated in a few companies, and
generally does not invest in slower-growing markets or
industries. The manager looks for market-driven
companies they believe have superior technology to
deliver products and services that match customer
needs.
The manager will also invest in options and other
investments whose values are based upon the values of
equity securities.
[LOGO] -------------------------------------------------
Risks you should be The Financial Services Portfolio principally invests in
aware of equity securities, which may go up or down in value
sometimes rapidly and unpredictably. While equities may
offer the potential for greater long-term growth than
most fixed income securities, they generally have
higher volatility. The portfolio may also be affected
by the following risks, among others:
The financial . industry concentration risk - since the portfolio
services sector is invests principally in only one industry, it is
subject to subject to greater risk of loss as a result of
extensive adverse economic, business or other developments than
government if its investments were diversified across different
regulation, which industry sectors.
may change
frequently and . price volatility - the value of the portfolio changes
impact the as the prices of its investments go up or down. This
portfolio portfolio may invest in small companies. The market
significantly. prices of smaller companies tend to rise and fall
more rapidly and have larger price swings than larger
companies because they may have fewer financial
resources, limited product and market diversification
and many are dependent on a few key managers.
. liquidity - investments in smaller companies have a
greater risk of being or becoming less liquid than
other markets. Liquidity is the ability to sell
securities at a fair price within a reasonable time.
. interest rate risk - securities prices of financial
services companies are generally interest rate
sensitive. The profitability of business in this
sector depends heavily upon the availability and cost
of money, and may fluctuate significantly in response
to changes in interest rates as well as changes in
general economic conditions.
This portfolio may . risks of foreign investing - foreign investments may
invest up to 25% of be riskier than U.S. investments for many reasons,
its assets in including changes in currency exchange rates,
foreign securities, unstable political and economic conditions, a lack of
including emerging adequate and timely company information, differences
market countries. in the way securities markets operate, relatively
ADRs and Canadian lower market liquidity, less stringent financial
issuers are reporting and accounting standards and controls, less
excluded for secure foreign banks or securities depositories than
purposes of this those in the U.S., and foreign controls on
limitation. investment.
12
<PAGE>
FINANCIAL SERVICES PORTFOLIO
[LOGO] -------------------------------------------------
Risks you should be . emerging countries risk - investment in emerging
aware of market countries (such as Latin America, Asia, Middle
(continued) East, Eastern Europe and Africa) may be riskier than
in developed markets, for many reasons including
smaller market capitalizations, greater price
volatility, less liquidity, higher degree of
political and economic instability, less governmental
regulation of the financial industry and markets, and
less stringent reporting and accounting standards and
controls.
Investment in securities of Eastern European countries,
including in particular, Russia, and other emerging
market countries, also involve risk of loss resulting
from problems in share registration and custody.
. risks of using derivatives - this portfolio may use
options, futures contracts and other investment
techniques to help it achieve its investment goal.
There's always a risk that these techniques could
reduce returns or increase the portfolio's
volatility.
[LOGO] -------------------------------------------------
Who manages the Jeffrey G. Morris, CFA, is vice president of INVESCO.
portfolio He joined INVESCO in 1992. Jeffrey has a BS from
Colorado State University and an MS from the University
[LOGO OF INVESCO of Colorado.
FUNDS APPEARS HERE]
Adam Levy is an analyst at INVESCO. He joined the firm
The Financial in 1998. Adam has a BA from the University of Michigan
Services Portfolio and an MBA from Cornell University.
is managed by
INVESCO Funds
Group, Inc.
(INVESCO). You'll
find more about
INVESCO on page 32.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
PERFORMANCE OF COMPARABLE ACCOUNTS
---------------------------------------------------------------------------------------------
<S> <C>
This portfolio has This chart does not show you the performance of the Financial Services
no historical per- Portfolio -- it shows the performance of similar accounts managed by
formance because it INVESCO
started on January
2, 2001.
The chart to the Annual total returns since 1990 and average annual total returns for
right shows the the periods ending June 30, 2000.
historical
performance of the ----------------------------------------------------------------------
INVESCO Financial INVESCO Financial
Services Composite. Services Composite,
Each of the two adjusted to reflect
mutual fund estimated fees and
accounts in the INVESCO Financial expenses of the Financial S&P 500
composite Period Services Composite (%) Services Portfolio (%) Index (%)
has investment ----------------------------------------------------------------------
objectives, 6/30/00/1/ 0.36 0.41 (0.42)
policies and 1999 0.74 0.76 21.04
strategies that 1998 13.45 13.40 28.58
are substantially 1997 44.79 44.88 33.36
similar to those of 1996 30.29 30.39 22.96
the Financial 1995 39.81 40.23 37.58
Services Portfolio. 1994 (5.89) (6.00) 1.32
1993 18.52 18.51 10.08
1992 26.76 26.84 7.62
1991 74.04 74.66 30.47
1990 (7.19) (6.27) (3.11)
1 year (3.69) (3.66) 7.25
5 years 21.02 21.11 23.81
10 years 21.24 21.40 17.79
----------------------------------------------------------------------
</TABLE>
The composite /1/ Total returns though June 30, 2000, not annualized.
performance shows
the historical The first column (after "Period") shows performance of
track record of the the INVESCO Financial Services Composite after average
portfolio manager advisory fees and other expenses charged to the
and is not intended accounts in the composite have been deducted. The fees
to imply how the and expenses of the composite include investment
Financial Services advisory fees, custody fees and other expenses normally
Portfolio has paid by mutual funds and which the Financial Services
performed or will Portfolio will pay.
perform. Total
returns represent The second column shows the gross performance of the
past performance of composite, adjusted to reflect the estimated fees and
the INVESCO expenses of the Financial Services Portfolio.
Financial Services
Composite and not The third column shows performance of the S&P 500
the Financial Index, an index of the stocks of approximately 500
Services Portfolio. large-capitalization U.S. companies, for the same
periods. Results include reinvested dividends.
Returns do not
reflect fees and
expenses associated
with any variable
annuity contract or
variable life
insurance policy,
and would be lower
if they did.
13
<PAGE>
ABOUT THE PORTFOLIOS HEALTH SCIENCES PORTFOLIO
This portfolio is not available for:
. Pacific Corinthian variable annuity contracts
. Pacific Select variable life insurance policies.
[LOGO] -------------------------------------------------
The portfolio's This portfolio seeks long-term growth of capital.
investment goal
[LOGO] -------------------------------------------------
What the portfolio This portfolio's principal strategy is to invest in
invests in equity securities of companies in the health sciences
sector.
These companies develop, produce or distribute products
or services related to health care. Such companies
include, but are not limited to, medical equipment or
supplies, pharmaceuticals, health care facilities, and
applied research and development of new products or
services.
A company is considered part of the health sciences
sector if:
. at least 50% of its gross income or its net sales
come from activities in the sector; or
. at least 50% of its assets are devoted to producing
revenues from the sector; or
. based upon other information, the portfolio manager
determines that its primary business is within the
sector.
The portfolio manager uses a bottom-up investment
approach, focusing on company fundamentals and growth
prospects when selecting securities. The manager
emphasizes companies it believes are strongly managed
and will generate above-average growth rates for the
next 3 - 5 years. The portfolio manager will invest in
securities it believes will rise in price faster than
other securities.
The manager focuses on markets and industries where
leadership is concentrated in a few companies, and
generally does not invest in slower-growing markets or
industries. The manager looks for market-driven
companies they believe have superior technology to
deliver products and services that match customer
needs.
In selecting securities, the portfolio manager seeks to
balance the portfolio with a blend of well-established
health care companies and faster-growing, more dynamic
companies.
Well established health care companies that typically
provide liquidity and earnings are generally expected
to be core holdings of the portfolio. For the rest of
the portfolio, the manager will target innovative
companies it believes have strong management and which
have new products or are increasing their share of
existing products.
The manager will also invest in options and other
investments whose values are based upon the values of
equity securities.
[LOGO] -------------------------------------------------
Risks you should be The Health Sciences Portfolio principally invests in
aware of equity securities, which may go up or down in value
sometimes rapidly and unpredictably. While equities may
offer the potential for greater long-term growth than
most fixed income securities, they generally have
higher volatility. The portfolio may also be affected
by the following risks, among others:
The health sciences . industry concentration risk - since the portfolio
sector is subject invests principally in only one industry, it is
to extensive subject to greater risk of loss as a result of
government adverse economic, business or other developments than
regulation, which if its investments were diversified across different
may change industry sectors.
frequently and
impact the . price volatility - the value of the portfolio changes
portfolio as the prices of its investments go up or down. This
significantly. portfolio may invest in small companies. The market
prices of smaller companies tend to rise and fall
more rapidly and have larger price swings than larger
companies because they may have fewer financial
resources, limited product and market diversification
and many are dependent on a few key managers.
. liquidity - investments in smaller companies have a
greater risk of being or becoming less liquid than
other markets. Liquidity is the ability to sell
securities at a fair price within a reasonable time.
. regulatory impact - many faster-growing health care
companies have limited operating histories and their
potential profitability may be dependent on
regulatory approval of their products, which
increases the volatility of these companies'
securities prices.
Many companies and/or their development of new
products are funded or subsidized by governments or
governmental agencies. Withdrawal or curtailment of
such support could lower the profitability and market
prices of such companies. Changes in government
regulation could also have an adverse impact.
Continuing technological advances may mean rapid
obsolescence of products and services.
14
<PAGE>
HEALTH SCIENCES PORTFOLIO
[LOGO] -------------------------------------------------
Risks you should be . risks of foreign investing - foreign investments may
aware of be riskier than U.S. investments for many reasons,
(continued) including changes in currency exchange rates,
unstable political and economic conditions, a lack of
This portfolio may adequate and timely company information, differences
invest up to 25% of in the way securities markets operate, relatively
its assets in lower market liquidity, less stringent financial
foreign securities, reporting and accounting standards and controls, less
including emerging secure foreign banks or securities depositories than
markets countries. those in the U.S., and foreign controls on
ADRs and Canadian investment.
issuers are
excluded for . emerging countries risk - investment in emerging
purposes of this market countries (such as Latin America, Asia, Middle
limitation. East, Eastern Europe and Africa) may be riskier than
in developed markets, for many reasons including
smaller market capitalizations, greater price
volatility, less liquidity, higher degree of
political and economic instability, less governmental
regulation of the financial industry and markets, and
less stringent reporting and accounting standards and
controls.
Investment in securities of Eastern European
countries, including in particular, Russia, and other
emerging market countries, also involve risk of loss
resulting from problems in share registration and
custody.
. risks of using derivatives - this portfolio may use
options, futures contracts and other investment
techniques to help it achieve its investment goal.
There's always a risk that these techniques could
reduce returns or increase the portfolio's
volatility.
[LOGO] --------------------------------------------------
Who manages the John R. Schroer, CFA, is senior vice president and
portfolio director of research. He is also vice president of
INVESCO Global Health Sciences Fund. He joined INVESCO
in 1992. Before joining INVESCO he was an assistant
[LOGO OF INVESCO vice president of Trust Company of the West. John has
FUNDS APPEARS HERE] 10 years of investment experience, and a BS and MBA
from the University of Wisconsin.
The Health Sciences
Portfolio is Francisco Salva, is director of private placements. He
managed by INVESCO. joined INVESCO in 2000. He has a BA from Brown
You'll find more University and an MS from the London School of
about INVESCO on Economics.
page 32.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
PERFORMANCE OF COMPARABLE ACCOUNTS
-----------------------------------------------------------------------------------------------
This portfolio has This chart does not show you the performance of the
no historical Health Sciences Portfolio -- it shows the performance
performance because of similar accounts managed by INVESCO
it started on
January 2, 2001. Annual total returns since 1990 and average annual
total returns for the periods ending June 30, 2000.
The chart to the ------------------------------------------------------------------------
right shows the INVESCO Health Sciences
historical Composite, adjusted to
performance of the reflect estimated fees and
INVESCO Health INVESCO Health Sciences expenses of the Health S&P 500
Sciences Composite. Period Composite (%) Sciences Portfolio (%) Index (%)
Each of the two ------------------------------------------------------------------------
mutual fund <S> <C> <C> <C>
accounts in the 6/30/00/1/ 16.20 16.30 (0.42)
composite has 1999 0.62 0.64 21.04
investment 1998 43.40 43.74 28.58
objectives, 1997 18.45 18.49 33.36
policies and 1996 11.41 11.25 22.96
strategies that 1995 58.89 58.90 37.58
are substantially 1994 0.94 0.89 1.32
similar to those of 1993 (8.41) (8.51) 10.08
the Health Sciences 1992 (13.74) (14.05) 7.62
Portfolio. 1991 91.82 92.48 30.47
1990 25.74 25.91 (3.11)
1 year 23.21 23.53 7.25
5 years 24.30 24.40 23.81
10 years 19.19 19.17 17.79
------------------------------------------------------------------------
</TABLE>
The composite /1/ Total returns through June 30, 2000, not annualized.
performance shows
the historical The first column (after "Period") shows performance of
track record of the the INVESCO Health Sciences Composite after average
portfolio manager advisory fees and other expenses charged to the
and is not intended accounts in the composite have been deducted. The fees
to imply how the and expenses of the composite include investment
Health Sciences advisory fees, custody fees and other expenses normally
Portfolio has paid by mutual funds and which the Health Sciences
performed or will Portfolio will pay.
perform. Total
returns represent The second column shows the gross performance of the
past performance of composite, adjusted to reflect the estimated fees and
the INVESCO Health expenses of the Health Sciences Portfolio.
Sciences Composite
and not the Health The third column shows performance of the S&P 500
Sciences Portfolio. Index, and index of the stocks of approximately 500
large-capitalization U.S. companies, for the same
Returns do not periods. Results include reinvested dividends.
reflect fees and
expenses associated
with any variable
annuity contract or
with any variable
life insurance policy,
and would be lower
if they did.
15
<PAGE>
ABOUT THE PORTFOLIOS TECHNOLOGY PORTFOLIO
This portfolio is not available for:
. Pacific Corinthian variable annuity contracts
. Pacific Select variable life insurance policies.
[LOGO] -------------------------------------------------
The portfolio's This portfolio seeks long-term growth of capital.
investment goal
[LOGO] -------------------------------------------------
What the portfolio This portfolio's principal strategy is to invest in
invests in equity securities in the technology-related sector.
Such companies include, but are not limited to, applied
technology, biotechnology, communications, computers,
electronics, Internet, IT services and consulting,
software, telecommunications equipment and services,
office and factory automation, networking, robotics and
video.
A company is considered part of the technology sector
if:
. at least 50% of its gross income or its net sales
come from activities in the sector; or
. at least 50% of its assets are devoted to producing
revenues from the sector; or
. based upon other information, the portfolio manager
determines that its primary business is within the
sector.
The portfolio manager uses a bottom-up investment
approach, focusing on company fundamentals and growth
prospects when selecting securities. The manager
emphasizes companies it believes are strongly managed
and will generate above-average growth rates for the
next 3 - 5 years. The portfolio manager will invest in
securities it believes will rise in price faster than
other securities.
The manager focuses on markets and industries where
leadership is concentrated in a few companies, and
generally does not invest in slower-growing markets or
industries. The manager looks for market-driven
companies they believe have superior technology to
deliver products and services that match customer
needs.
A core portion of the portfolio is expected to be
invested in market-leading technology companies that
the portfolio manager believes will maintain or improve
their market share regardless of overall economic
conditions. These companies are usually large,
established firms that are leaders in their field and
have a strategic advantage over many of their
competitors. The remainder of the portfolio will
consist of faster-growing, more volatile technology
companies that the portfolio manager believes to be
emerging leaders in their fields.
The manager will also invest in options and other
investments whose values are based upon the values of
equity securities.
[LOGO] -------------------------------------------------
Risks you should be The Technology Portfolio principally invests in equity
aware of securities, which may go up or down in value sometimes
rapidly and unpredictably. The portfolio may also be
affected by the following risks, among others:
Many of the . industry concentration risk - since the portfolio
products and invests principally in only one industry, it is
services in the subject to greater risk of loss as a result of
technology industry adverse economic, business or other developments than
are subject to if its investments were diversified across different
rapid obsolescence, industry sectors.
which may lower the
market value of the . price volatility - the value of the portfolio changes
securities of the as the prices of its investments go up or down. This
companies in this portfolio may invest in small companies. The market
sector. prices of smaller companies tend to rise and fall
more rapidly and have larger price swings than larger
companies because they may have fewer financial
resources, limited product and market diversification
and many are dependent on a few key managers.
. liquidity - investments in smaller companies have a
greater risk of being or becoming less liquid than
other markets. Liquidity is the ability to sell
securities at a fair price within a reasonable time.
16
<PAGE>
TECHNOLOGY PORTFOLIO
[LOGO] -------------------------------------------------
Risks you should be . risks of foreign investing - foreign investments may
aware of be riskier than U.S. investments for many reasons,
(continued) including changes in currency exchange rates,
unstable political and economic conditions, a lack of
This portfolio may adequate and timely company information, differences
invest up to 25% of in the way securities markets operate, relatively
its assets in lower market liquidity, less stringent financial
foreign securities, reporting and accounting standards and controls, less
including emerging secure foreign banks or securities depositories than
market countries. those in the U.S., and foreign controls on
ADRs and Canadian investment.
issuers are
excluded for . emerging countries risk - investment in emerging
purposes of this market countries (such as Latin America, Asia, Middle
limitation. East, Eastern Europe and Africa) may be riskier than
in developed markets, for many reasons including
smaller market capitalizations, greater price
volatility, less liquidity, higher degree of
political and economic instability, less governmental
regulation of the financial industry and markets, and
less stringent reporting and accounting standards and
controls.
Investment in securities of Eastern European countries,
including in particular, Russia, and other emerging
market countries, also involve risk of loss resulting
from problems in share registration and custody.
. risks of using derivatives - this portfolio may use
options, futures contracts and other investment
techniques to help it achieve its investment goal.
There's always a risk that these techniques could
reduce returns or increase the portfolio's
volatility.
[LOGO] -------------------------------------------------
Who manages the William R. Keithler, CFA, is senior vice president and
portfolio director of sector management. He rejoined INVESCO in
1998. He previously worked at INVESCO from 1986 to 1993
[LOGO OF INVESCO before joining Berger Associates in 1993. William has
FUNDS APPEARS HERE] 18 years of investment experience, a BA from Webster
College and an MFS from the University of Wisconsin.
The Technology
Portfolio is
managed by INVESCO
Funds Group, Inc.
(INVESCO). You'll
find more about
INVESCO on page 32.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
PERFORMANCE OF COMPARABLE ACCOUNTS
----------------------------------------------------------------------------------------------------
<S> <C>
This portfolio has This chart does not show you the performance of the
no historical Technology Portfolio -- it shows the performance of
performance because similar accounts managed by INVESCO
it started on
January 2, 2001. Annual total returns since 1990 and average annual
total returns for the periods ending June 30, 2000.
The chart to the -------------------------------------------------------------------------------
right shows the INVESCO Technology
historical Composite, adjusted to
performance of the reflect estimated fees and
INVESCO Technology INVESCO expenses of the Technology S&P 500
Composite. Each of Period Technology Composite (%) Portfolio (%) Index (%)
the two mutual fund ------------------------------------------------------------------------------
accounts in the <S> <C> <C> <C>
composite has 6/30/00/1/ 15.50 15.42 (0.42)
investment 1999 144.92 146.35 21.04
objectives, 1998 30.10 30.44 28.58
policies and 1997 8.84 8.76 33.36
strategies that 1996 21.75 21.80 22.96
are substantially 1995 45.80 46.18 37.58
similar to those of 1994 5.27 5.31 1.32
the Technology 1993 15.03 15.15 10.08
Portfolio. 1992 18.79 18.93 7.62
1991 76.98 77.80 30.47
1990 8.57 8.74 (3.11)
1 year 111.85 112.63 7.25
5 years 41.41 41.70 23.81
10 years 31.64 31.67 17.79
------------------------------------------------------------------------------
</TABLE>
The composite /1/ Total returns through June 30, 2000, not
performance shows annualized.
the historical
track record of the The first column (after "Period") shows performance of
portfolio manager the INVESCO Technology Composite after average advisory
and is not intended fees and other expenses charged to the accounts in the
to imply how the composite have been deducted. The fees and expenses of
Technology the composite include investment advisory fees, custody
Portfolio has fees and other expenses normally paid by mutual funds
performed or will and which the Technology Portfolio will pay.
perform. Total
returns represent The second column shows the gross performance of the
past performance of composite, adjusted to reflect the estimated fees and
the INVESCO expenses of the Technology Portfolio.
Technology
Composite and not The third column shows performance of the S&P 500
the Technology Index, an index of the stocks of approximately 500
Portfolio. large-capitalization U.S. companies, for the same
periods. Results include reinvested dividends.
Returns do not
reflect fees and
expenses associated
with any variable
annuity contract or
variable life
insurance policy, and
would be lower if they
did.
17
<PAGE>
ABOUT THE PORTFOLIOS TELECOMMUNICATIONS PORTFOLIO
This portfolio is not available for:
. Pacific Corinthian variable annuity contracts
. Pacific Select variable life insurance policies.
[LOGO] -------------------------------------------------
The portfolio's This portfolio seeks high total return.
investment goal
[LOGO] -------------------------------------------------
What the portfolio This portfolio's principal strategy is to invest in
invests in equity securities of companies engaged in the
telecommunications sector. The companies may be located
in the U.S. or around the world.
These companies include, but are not limited to, those
that design, develop, manufacture, distribute, or sell
communication services and equipment and companies that
are involved in supplying equipment or services to such
companies, such as companies that offer telephone
service, wireless communications, satellite
communications, television and movie programming,
broadcasting and Internet access.
A company is considered part of the telecommunications
sector if:
. at least 50% of its gross income or its net sales
come from activities in the sector; or
. at least 50% of its assets are devoted to producing
revenues from the sector; or
. based upon other information, the portfolio manager
determines that a company's primary business is
within the sector.
The portfolio manager uses a bottom-up investment
approach, focusing on company fundamentals and growth
prospects when selecting securities. The manager
emphasizes companies it believes are strongly managed
and will generate above-average growth rates for the
next 3 - 5 years. The portfolio manager will invest in
securities it believes will rise in price faster than
other securities.
The manager focuses on markets and industries where
leadership is concentrated in a few companies, and
generally does not invest in slower-growing markets or
industries. The manager looks for market-driven
companies they believe have superior technology to
deliver products and services that match customer
needs.
The portfolio manager selects stocks based on its
analysis of projected total returns for companies. The
manager analyzes country specific factors that might
affect stock performance or influence company
valuation.
Normally, the Fund will invest primarily in companies
located in at least three different countries, although
U.S. issuers are expected to dominate the portfolio
often. The portfolio manager emphasizes investment in
companies it believes are strongly managed market
leaders, with a lesser weighting on smaller, faster
growing companies that offer new products or services
and/or are increasing their market share.
The manager will also invest in options and other
investments whose values are based upon the values of
equity securities.
[LOGO] -------------------------------------------------
Risks you should be The Telecommunications Portfolio principally invests in
aware of equity securities, which may go up or down in value,
sometimes rapidly and unpredictably. While equities may
offer the potential for greater long-term growth than
most fixed income securities, they generally have
higher volatility. The portfolio may also be affected
by the following risks, among others:
. industry concentration risk - since the portfolio
invests principally in only one industry, it is
subject to greater risk of loss as a result of
adverse economic, business or other developments than
if its investments were diversified across different
industry sectors.
. price volatility - the value of the portfolio changes
as the prices of its investments go up or down. This
portfolio may invest in small companies. The market
prices of smaller companies tend to rise and fall
more rapidly and have larger price swings than larger
companies because they may have fewer financial
resources, limited product and market diversification
and many are dependent on a few key managers.
. liquidity - investments in smaller companies have a
greater risk of being or becoming less liquid than
other markets. Liquidity is the ability to sell
securities at a fair price within a reasonable time.
18
<PAGE>
TELECOMMUNICATIONS PORTFOLIO
[LOGO] -------------------------------------------------
Risks you should be . risks of foreign investing - foreign investments may
aware of be riskier than U.S. investments for many reasons,
(continued) including changes in currency exchange rates,
unstable political and economic conditions, a lack of
This portfolio may adequate and timely company information, differences
invest without in the way securities markets operate, relatively
limit in foreign lower market liquidity, less stringent financial
securities, reporting and accounting standards and controls, less
including emerging secure foreign banks or securities depositories than
market countries. those in the U.S., and foreign controls on
investment.
. emerging countries risk - investment in emerging
market countries (such as Latin America, Asia, Middle
East, Eastern Europe and Africa) may be riskier than
in developed markets, for many reasons including
smaller market capitalizations, greater price
volatility, less liquidity, higher degree of
political and economic instability, less governmental
regulation of the financial industry and markets, and
less stringent reporting and accounting standards and
controls.
Investment in securities of Eastern European countries,
including in particular, Russia, and other emerging
market countries, also involve risk of loss resulting
from problems in share registration and custody.
. risks of using derivatives - this portfolio may use
options, futures contracts and other investment
techniques to help it achieve its investment goal.
There's always a risk that these techniques could
reduce returns or increase the portfolio's
volatility.
[LOGO] -------------------------------------------------
Who manages the Brian B. Hayward, CFA, is senior vice president of
portfolio INVESCO. He joined the firm in 1997. Before joining
INVESCO he was a senior equity analyst at Mississippi
[LOGO OF INVESCO Valley Advisors. Brian has 15 years of investment
FUNDS APPEARS HERE] experience, and a BA and MA from the University of
Missouri.
The
Telecommunications
Portfolio is
managed by INVESCO
Funds Group, Inc.
(INVESCO). You'll
find more about
INVESCO on page 32.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
PERFORMANCE OF COMPARABLE ACCOUNTS
-------------------------------------------------------------------------------------------------------
<S> <C>
This portfolio has This chart does not show you the performance of the Telecommunications Portfolio
no historical -- it shows the performance of similar accounts managed by INVESCO
performance because
it started on Annual total returns since 1990 and average annual total returns for the periods
January 2, 2001. ending June 30, 2000.
----------------------------------------------------------------------------
INVESCO Telecommunications
The chart to the Composite, adjusted to
right shows the reflect estimated fees and
historical INVESCO expenses of the
performance of the Telecommunications Telecommunications S&P 500
INVESCO Period Composite (%) Portfolio (%) Index (%)
Telecommunications -------------------------------------------------------------------------------
Composite. Each of 6/30/00/1/ 8.73 8.67 (0.42)
the two mutual fund 1999 144.09 145.59 21.04
accounts in the 1998 40.99 41.71 28.58
composite has 1997 30.29 31.18 33.36
investment 1996 16.81 17.53 22.96
objectives, 1995 27.37 28.48 37.58
policies and 1 year 75.20 75.79 7.25
strategies that 3 years 61.71 62.52 19.68
are substantially 5 years 44.77 45.62 23.81
similar to those of since inception 8/1/94 40.94 41.85 23.87
the ----------------------------------------------------------------------------
Telecommunications
Portfolio.
</TABLE>
The composite /1/ Total returns through June 30, 2000, not
performance shows annualized.
the historical
track record of the The first column shows performance of the INVESCO
portfolio manager Telecommunications Composite after average advisory
and is not intended fees and other expenses charged to the accounts in the
to imply how the composite have been deducted. The fees and expenses of
Telecommunications the composite include investment advisory fees, custody
Portfolio has fees and other expenses normally paid by mutual funds
performed or will and which the Telecommunications Portfolio will pay.
perform. Total
returns represent The second column shows the gross performance of the
past performance of composite, adjusted to reflect the estimated fees and
the INVESCO expenses of the Telecommunications Portfolio.
Telecommunications
Composite and not The third column shows performance of the S&P 500
the Index. Results include reinvested dividends.
Telecommunications
Portfolio.
Returns do not
reflect fees and
expenses associated
with any variable
annuity contract or
variable life
insurance policy,
and would be lower
if they did.
19
<PAGE>
ABOUT THE PORTFOLIOS STRATEGIC VALUE PORTFOLIO
This portfolio is not available for:
. Pacific Corinthian variable annuity contracts
. Pacific Select variable life insurance policies.
[LOGO] --------------------------------------------------
The portfolio's This Portfolio seeks long-term growth of capital.
investment goal
[LOGO] --------------------------------------------------
What the portfolio The portfolio invests primarily in domestic and foreign
invests in equity securities, (which may include preferred stocks,
common stocks, warrants and securities convertible into
A P/E ratio is the common or preferred stocks) with the potential for
relationship long-term growth of capital using a "value" approach.
between the price
of a stock and its The approach emphasizes investments in companies that
earnings per share. the portfolio manager believes are undervalued relative
This figure is to their intrinsic worth. The portfolio manager
determined by measures value as a function of price/earnings (P/E)
dividing a stock's ratios and price/free cash flow.
market price by the
company's earnings The portfolio manager will typically seek attractively
per share amount. valued companies that are improving their free cash
Price/free cash flow and improving their returns on invested capital.
flow is the These companies may also include special situations
relationship companies that are experiencing management changes
between the price and/or are temporarily out of favor.
of the stock and
the company's The portfolio manager applies a "bottom-up" approach in
available cash from choosing investments. In other words, he looks for
operations minus companies with earnings growth potential that may not
capital be recognized by the market at large. If the portfolio
expenditures. manager is unable to find such investments, a
significant portion of the Portfolio's assets may be in
This portfolio cash or similar investments.
invests in high
yield or "junk" Foreign securities are generally selected on a stock-
bonds, which are by-stock basis without regard to any defined allocation
given a low credit among countries or geographic regions. However, certain
rating by Moody's factors such as expected levels of inflation,
(Ba and lower), or government policies influencing business conditions,
Standard & Poor's the outlook for currency relationships, and prospects
(BB and lower), or for economic growth among countries, regions or
have not been geographic areas may warrant greater consideration in
rated, but are of selecting foreign securities. There are no limitations
comparable quality. on the countries in which the Portfolio may invest and
High yield bonds the Portfolio may at times have significant foreign
are considered to exposure.
be mostly
speculative in The Portfolio may also invest in debt securities and
nature. indexed/structured securities, purchase securities on a
when-issued, delay delivery or forward commitment
basis, and purchase high-yield ("junk") bonds.
The portfolio manager may use options, futures and
other techniques to try to increase returns or to try
to hedge against changes in interest rates or market
declines. The manager may also use forward foreign
currency contracts or derivatives to hedge against
changes in currency exchange rates.
[LOGO] --------------------------------------------------
Risks you should be The Strategic Value Portfolio principally invests in
aware of equity securities, which may go up or down in value,
sometimes rapidly and unpredictably. While equities may
offer the potential for greater long-term growth than
most fixed income securities, they generally have
higher volatility. The portfolio may also be affected
by the following risks, among others:
. non-diversified - the portfolio is considered "non-
diversified" because it may invest in securities of a
fewer number of issuers than other portfolios. This
increases the risk that its value could go down
because of poor performance of a single investment or
small number of investments.
. price volatility - the value of the portfolio changes
as the prices of its investments go up or down. This
portfolio may invest in small and medium-sized
companies, which may be more susceptible to greater
price swings than larger companies because they may
have fewer financial resources, limited product and
market diversification and many are dependent on a
few key managers.
20
<PAGE>
STRATEGIC VALUE PORTFOLIO
[LOGO] -------------------------------------------------
Risks you should be . risks of foreign investing - foreign investments may
aware of be riskier than U.S. investments for many reasons,
(continued) including changes in currency exchange rates,
unstable political and economic conditions, a lack of
This Portfolio may adequate and timely company information, differences
invest without in the way securities markets operate, relatively
limit in foreign lower market liquidity, less stringent financial
equity and debt reporting and accounting standards and controls, less
securities and up secure foreign banks or securities depositories than
to 35% of its those in the U.S., and foreign controls on
assets in high- investment.
yield or "junk"
bonds. . credit risk - the portfolio could lose money if the
issuer of a fixed income security is unable to meet
its financial obligations or goes bankrupt. This
portfolio may be subject to more credit risk than
certain other portfolios, because it invests in high
yield or "junk" bonds. The value of the portfolio may
fall when interest rates rise.
. changes in interest rates - the value of the
portfolio's investments may fall when interest rates
rise. This portfolio may be sensitive to changes in
interest rates because it may invest in fixed income
securities with intermediate and long terms to
maturity.
. inability to sell securities - high-yield/high-risk
bonds may be less liquid than higher quality
investments. The portfolio could lose money if it
cannot sell a security at the time and price that
would be most beneficial to the portfolio. A security
whose credit rating has been lowered may be
particularly difficult to sell.
. risks of using derivatives - this portfolio may use
options, futures contracts and other investment
techniques to help it achieve its investment goal.
There's always a risk that these techniques could
reduce returns or increase the portfolio's
volatility.
[LOGO] -------------------------------------------------
Who manages the David Decker, CFA, vice president of Janus Capital
portfolio Corporation, joined Janus in 1992, and is portfolio
manager and executive vice president of Janus Special
[LOGO OF JANUS Situations Fund, Janus Strategic Value Fund and Janus
APPEARS HERE] Aspen Series Strategic Value Portfolio. He also manages
private accounts with a similar strategic value
The Strategic Value strategy as well as other institutional funds. David is
Portfolio is an assistant portfolio manager of Janus Fund and Janus
managed by Janus Aspen Series Growth Portfolio. He graduated cum laude
Capital Corporation from Tufts University with a bachelor's degree in
(Janus). You'll economics and political science and obtained an MBA in
find more about finance from the Fuqua School of Business at Duke
Janus in the fund University.
prospectus.
21
<PAGE>
ABOUT THE PORTFOLIOS FOCUSED 30 PORTFOLIO
This Portfolio is not available for:
. Pacific Corinthian variable annuity contracts
. Pacific Select variable life insurance policies.
[LOGO] --------------------------------------------------
The portfolio's This Portfolio seeks long-term growth of capital.
investment goal
[LOGO] --------------------------------------------------
What the portfolio The portfolio's principal investment strategy is to
invests in invest primarily in domestic and foreign equity
securities (including common stock, preferred stock,
warrants, and securities convertible into common or
This portfolio preferred stock) selected for their growth potential.
invests in high The Portfolio may invest in companies of any size, from
yield or "junk" larger, well-established companies to smaller, emerging
bonds, which are growth companies. Securities are generally selected on
given a low credit a stock-by-stock basis without regard to any defined
rating by Moody's allocation among countries or geographic regions. The
(Ba and lower), or portfolio normally concentrates its investments in a
Standard & Poor's core group of 20-30 common stocks.
(BB and lower), or
have not been The portfolio manager applies a "bottom up" approach in
rated, but are of choosing investments. In other words, he looks for
comparable quality. companies with earnings growth potential that may not
High yield bonds be recognized by the market at large. If the portfolio
are considered to manager is unable to find such investments, a
be mostly significant portion of the portfolio's assets may be in
speculative in cash or similar investments.
nature.
Realization of income is not a significant
consideration when choosing investments for the
portfolio. Income realized on the portfolio's
investments will be incidental to its objective.
Foreign securities are generally selected on a stock-
by-stock basis without regard to any defined allocation
among countries or geographic regions. However, certain
factors such as expected levels of inflation,
government policies influencing business conditions,
the outlook for currency relationships, and prospects
for economic growth among countries, regions or
geographic areas may warrant greater consideration in
selecting foreign securities. There are no limitations
on the countries in which the portfolio may invest and
the portfolio may at times have significant foreign
exposure.
The portfolio may also purchase securities on a when-
issued, delayed delivery or forward commitment basis,
and purchase high-yield (often called "junk" bonds).
The portfolio manager may use options, futures and
other techniques to try to increase returns or to try
to hedge against changes in interest rates or market
declines. The manager may also use forward foreign
currency contracts or derivatives to hedge against
changes in currency exchange rates.
[LOGO] --------------------------------------------------
Risks you should be The Focused 30 Portfolio principally invests in equity
aware of securities, which may go up or down in value, sometimes
rapidly and unpredictably. While equities may offer the
potential for greater long-term growth than most fixed
income securities, they generally have higher
volatility. The portfolio may also be affected by the
following risks, among others:
. non-diversified - the portfolio is considered "non-
diversified" because it may invest in securities of a
fewer number of issuers than other portfolios. This
increases the risk that its value could go down
because of poor performance of a single investment or
small number of investments.
. price volatility - the value of the portfolio changes
as the prices of its investments go up or down. This
portfolio invests in companies that the portfolio
manager believes have the potential for rapid growth,
which may give the portfolio a higher risk of price
volatility than a portfolio that invests in equities
that are "undervalued," for example. This portfolio
may invest in small and medium-sized companies, which
may be more susceptible to greater price swings than
larger companies because they may have fewer
financial resources, limited product and market
diversification and many are dependent on a few key
managers.
. risks of foreign investing - foreign investments may
be riskier than U.S. investments for many reasons,
including changes in currency exchange rates,
unstable political and economic conditions, a lack of
adequate and timely company information, differences
in the way securities markets operate, relatively
lower market liquidity, less stringent financial
reporting and accounting standards and controls, less
secure foreign banks or securities depositories than
those in the U.S., and foreign controls on
investment.
22
<PAGE>
FOCUSED 30 PORTFOLIO
[LOGO] --------------------------------------------------
Risks you should be . credit risk - the portfolio could lose money if the
aware of issuer of a fixed income security is unable to meet
(continued) its financial obligations or goes bankrupt. This
portfolio may be subject to more credit risk than
The portfolio may certain other portfolios, because it invests in high-
invest without yield or "junk" bonds. This is especially true during
limit in foreign periods of economic uncertainty or economic
equity and debt downturns.
securities and may
invest up to 35% of . changes in interest rates - the value of the
its assets in high- portfolio's investments may fall when interest rates
yield or "junk" rise. This portfolio may be sensitive to changes in
bonds. interest rates because it may invest in fixed income
securities. The value of the portfolio may fall when
interest rates rise.
. inability to sell securities - high yield bonds may
be less liquid than higher quality investments. The
portfolio could lose money if it cannot sell a
security at the time and price that would be most
beneficial to the portfolio. A security whose credit
rating has been lowered may be particularly difficult
to sell.
. risks of using derivatives - this portfolio may use
options, futures contracts and other investment
techniques to help it achieve its investment goal.
There's always a risk that these techniques could
reduce returns or increase the portfolio's
volatility.
[LOGO] --------------------------------------------------
Who manages the Ron Sachs, CFA, joined Janus in 1996, and is the
portfolio portfolio manager and executive vice president of Janus
Orion Fund, and assistant portfolio manager of Janus
[LOGO OF JANUS Enterprise Fund and Janus Aspen Series Aggressive
APPEARS HERE] Growth Portfolio. He also manages private accounts with
a similar aggressive growth strategy. He graduated cum
The Focused 30 laude from Princeton with a bachelor's degree in
Portfolio is economics and obtained his law degree from the
managed by Janus University of Michigan.
Capital Corporation
(Janus). You'll
find more about
Janus in the fund
prospectus.
23
<PAGE>
ABOUT THE PORTFOLIOS INTERNATIONAL VALUE PORTFOLIO
[LOGO] --------------------------------------------------
The portfolio's This portfolio seeks long-term capital appreciation
investment goal primarily through investment in equity securities of
corporations domiciled in countries with developed
economies and markets other than the United States.
Current income from dividends and interest will not be
an important consideration.
[LOGO] --------------------------------------------------
What the portfolio The Portfolio invests primarily in equity securities,
invests in principally American Depository Receipts (ADRs) and
common stocks, of relatively large non-U.S. companies
with market capitalizations in the range of the Morgan
Stanley Capital International (MSCI) Europe,
Australasia and Far East Index that Lazard believes are
undervalued based on their earnings, cash flow or asset
values.
The Portfolio will generally invest at least 80% of its
total assets in equity securities of companies located
in at least three different foreign countries. The
allocation of the Portfolio's assets among geographic
sectors may shift from time to time based on Lazard's
judgment and its analysis of market conditions.
However, Lazard currently intends to invest the
Portfolio's assets primarily in companies based in
developed markets. The Portfolio may engage, to a
limited extent, in various investment techniques, such
as foreign currency transactions. The portfolio manager
typically sells a stock when it is no longer considered
a value company, appears less likely to benefit from
the current market and economic environment, shows
deteriorating fundamentals or falls short of Lazard's
expectations.
The portfolio may also lend some of its assets, as long
as the loans it makes are secured.
[LOGO] --------------------------------------------------
Risks you should be The International Value Portfolio principally invests
aware of in equity securities, which may go up or down in value,
sometimes rapidly and unpredictably. While equities may
This portfolio may offer the potential for greater long-term growth than
invest up to 15% of most fixed income securities, they generally have
its assets in higher volatility. The portfolio may be affected by the
emerging market following risks, among others:
countries.
. price volatility - the value of the portfolio changes
as the prices of the investments it holds go up or
down. Small-cap and mid-cap companies may be more
susceptible to larger price swings than larger
companies because they may have fewer financial
resources, limited product and market
diversification, and many are dependent on a few key
managers.
. risks of foreign investing - foreign investments may
be riskier than U.S. investments for many reasons,
including changes in currency exchange rates,
unstable political and economic conditions, a lack of
adequate or timely company information, differences
in the way securities markets operate, relatively
lower market liquidity, less stringent financial
reporting and accounting standards and controls, less
secure foreign banks or securities depositories than
those in the U.S., and foreign controls on
investment.
. emerging countries risk - investment in emerging
market countries (such as many in Latin America,
Asia, Middle East, Eastern Europe and Africa) may be
riskier than in developed markets, for many reasons
including smaller market capitalizations, greater
price volatility, less liquidity, higher degree of
political and economic instability, less governmental
regulation of the financial industry and markets, and
less stringent financial reporting and accounting
standards and controls.
Investment in securities of Eastern European
countries, including in particular, Russia, and other
emerging market countries, also involve risk of loss
resulting from problems in share registration and
custody.
24
<PAGE>
INTERNATIONAL VALUE PORTFOLIO
[LOGO] --------------------------------------------------
Risks you should be . risks of using derivatives - this portfolio may
aware of invest in foreign currency transactions, forward
(continued) foreign currency contracts or options, index options,
futures and other investment techniques to help it
achieve its investment goals. There's always a risk
that these techniques could reduce returns or
increase the portfolio's volatility. When it invests
in structured notes and other derivatives, this
portfolio is particularly sensitive to the risk that
the other party to the derivative cannot meet its
financial obligations to pay the portfolio.
[LOGO] --------------------------------------------------
How the portfolio Year by year total return (%)
has performed as of December 31 each year/1/
The bar chart shows
how the portfolio's
performance has
varied over the
past 10 years. [GRAPH OF INTERNATIONAL VALUE PORTFOLIO APPEARS HERE]
The table below the 90 91 92 93 94
bar chart compares ------- ----- ------ ----- ----
the portfolio's (13.48) 10.92 (9.78) 30.02 3.01
performance with
the Morgan Stanley 95 96 97 98 99
Capital ----- ----- ---- ---- -----
International 10.56 21.89 9.28 5.60 22.82
Europe,
Australasia, Far
East Index (MSCI Best and worst quarterly performance during this period:
EAFE Index), an 1st quarter 1998: 12.52%; 3rd quarter 1990: (20.35)%
index of stocks
from 21 countries Average annual total return
in Europe, as of December 31, 1999 1 year 5 years 10 years
Australia, ---------------------------------------------------------
New Zealand and International Value Portfolio/1/ 22.82% 13.81% 8.28%
Asia. MSCI EAFE Index 27.30% 13.15% 7.33%
Returns do not /1/ Lazard Asset Management began managing this
reflect fees and portfolio on January 2, 2001. Other firms managed
expenses associated the portfolio before that date.
with any variable
annuity contract or
variable life
insurance policy,
and would be lower
if they did.
Looking at how a
portfolio has
performed in the
past is important -
but it's no
guarantee of how it
will perform in the
future.
[LOGO] --------------------------------------------------
Who manages the Herbert W. Gullquist is vice chairman, managing
portfolio director and chief investment officer of Lazard Asset
Management. He joined Lazard in 1982. Before joining
[LOGO OF LAZARD Lazard he was a general partner of Oppenheimer &
APPEARS HERE] Company Inc. and a managing director and the chief
investment officer of Oppenheimer Capital Corp. Herbert
The International has 39 years of investment experience and a BA from
Value Portfolio is Northwestern University.
managed by Lazard
Asset Management John R. Reinsberg is a managing director of Lazard LLC.
(Lazard). You'll He joined Lazard in 1991. Before joining Lazard he was
find more about an executive vice president with General Electric
Lazard in the fund Investment Corporation. John has 19 years of investment
prospectus. experience, a BA from the University of Pennsylvania
and an MBA from Columbia University.
25
<PAGE>
ABOUT THE PORTFOLIOS CAPITAL OPPORTUNITIES PORTFOLIO
This portfolio is not available for:
. Pacific Corinthian variable annuity contracts
. Pacific Select variable life insurance policies.
[LOGO] --------------------------------------------------
The portfolio's This portfolio seeks long-term growth of capital.
investment goal
[LOGO] --------------------------------------------------
What the portfolio This portfolio's principal investment strategy is to
invests in invest at least 65% of its total assets in common
stocks and related securities, such as preferred stock,
convertible securities and depositary receipts. The
portfolio capital appreciation focuses on companies
which the portfolio manager believes have favorable
growth prospects and attractive valuations based on
current and expected earnings or cash flow.
The portfolio manager uses a bottom-up, as opposed to a
top-down, investment style in managing this portfolio.
This means that securities are selected based upon
fundamental analysis (such as analysis of earnings,
cash flows, competitive position and management
abilities) performed by the portfolio manager, with
input from its large team of equity research analysts.
The fund may invest in foreign securities (including
emerging market securities), and may have exposure to
foreign currencies through its investment in these
securities, its direct holdings of foreign currencies
or through its use of foreign currency exchange
contracts for the purchase or sale of a fixed quantity
of a foreign currency at a future date.
The portfolio may engage in active and frequent trading
to achieve its principal investment strategies.
[LOGO] --------------------------------------------------
Risks you should be The Capital Opportunities Portfolio principally invests
aware of in equity securities, which may go up or down in value
sometimes rapidly and unpredictably. While equities may
offer the potential for greater long-term growth than
most fixed income securities, they generally have
higher volatility.
The portfolio may also be affected by the following
risks, among others:
. price volatility - the value of the portfolio changes
as the prices of its investments go up or down. This
portfolio invests in companies that the team thinks
have the potential for above average growth, which
may give the portfolio a higher risk of price
volatility than a portfolio that invests principally
in equities that are "undervalued." Small emerging
growth companies may be more susceptible to larger
price swings than larger companies because they may
have fewer financial resources, limited product and
market diversification and many are dependent on a
few key managers. Emerging growth companies and
companies in cyclical industries may be particularly
susceptible to rapid price swings during periods of
economic uncertainty.
This portfolio may . risks of foreign investing - foreign investments may
invest up to 35% of be riskier than U.S. investments for many reasons,
its assets in including changes in currency exchange rates,
foreign securities, unstable political and economic conditions, a lack of
including those of adequate and timely company information, differences
emerging markets in the way securities markets operate, relatively
countries. lower market liquidity, less stringent financial
reporting and accounting standards and controls, less
secure foreign banks or securities depositories than
those in the U.S., and foreign controls on
investment.
. emerging countries risk - investment in emerging
market countries (such as Latin America, Asia, Middle
East, Eastern Europe and Africa) may be riskier than
in developed markets, for many reasons including
smaller market capitalizations, greater price
volatility, less liquidity, higher degree of
political and economic instability, less governmental
regulation of the financial industry and markets, and
less stringent reporting and accounting standards and
controls.
Investment in securities of Eastern European countries,
including in particular, Russia, and other emerging
market countries, also involve risk of loss resulting
from problems in share registration and custody.
26
<PAGE>
CAPITAL OPPORTUNITIES PORTFOLIO
[LOGO] -------------------------------------------------
Risks you should be . risks of using derivatives - this portfolio may use
aware of index options and other investment techniques to help
(continued) it achieve its investment goal. There's always a risk
that these techniques could reduce returns or
increase the portfolio's volatility.
------------------------------------------------------
Who manages the Maura A. Shaughnessy is a senior vice president of MFS
portfolio and has been employed in the investment management area
of MFS since 1991.
[LOGO OF MFS
APPEARS HERE]
The Capital
Opportunities
Portfolio is
managed by
Massachusetts
Financial Services
Company (MFS).
You'll find more
about MFS on page
32.
-------------------------------------------------------------------------------
PERFORMANCE OF COMPARABLE ACCOUNTS
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
This portfolio has This chart does not show you the performance of the
no historical Capital Opportunities Portfolio -- it shows the
performance because performance of similar accounts managed by MFS
it started on
January 2, 2001. Annual total returns since 1990 and average annual
total returns for the periods ending June 30, 2000.
The chart to the -------------------------------------------------------------
right shows the MFS Capital Opportunities
historical Composite, adjusted to
performance of the reflect estimated fees
MFS Capital MFS Capital and expenses of the MFS
Opportunities Opportunities Capital Opportunities S&P 500
Composite, Period Composite (%) Portfolio (%) Index (%)
calculated --------------------------------------------------------------
according to the 6/30/00/1/ 7.95 8.16 (0.42)
standards set by 1999 48.40 48.62 21.04
the Association for 1998 27.67 27.75 28.58
Investment 1997 27.17 27.25 33.36
Management and 1996 17.32 17.33 22.96
Research (AIMR). 1995 45.06 45.26 37.58
Each of the five 1994 (1.87) (1.99) 1.32
advisory accounts, 1993 26.13 26.20 10.08
including two 1992 18.90 18.92 7.62
mutual funds, has 1991 24.86 24.92 30.47
investment 1990 (11.24) (11.42) (3.11)
objectives, 1 year 35.02 35.77 7.25
policies and 5 years 29.29 30.05 23.81
strategies that are 10 years 20.98 21.75 17.79
substantially -------------------------------------------------------------
similar to those of /1/Total returns through June 30, 2000, not annualized.
the Capital
Opportunities
Portfolio.
</TABLE>
The composite The results shown above are a composite of actual
performance shows performance for five advisory accounts, including two
the historical mutual funds, calculated according to the standards set
track record of the by the Association for Investment Management and
portfolio manager Research (AIMR). Three of the accounts in the composite
and is not intended were not subject to the investment limitations,
to imply how the diversification requirements and other restrictions of
Capital the Investment Company Act of 1940 or Subchapter M of
Opportunities the Internal Revenue Code, which, if imposed, could
Portfolio has have adversely affected the performance.
performed or will
perform. Total The first column (after "Period") shows performance of
returns represent the MFS Capital Opportunities Composite after average
past performance of advisory fees and other expenses charged to the
the MFS Capital accounts in the composite have been deducted. The fees
Opportunities and expenses of the composite include investment
Composite and not advisory fees, but, for the accounts other than the
the Capital mutual funds, do not include custody fees or other
Opportunities expenses normally paid by mutual funds and which the
Portfolio. Capital Opportunities Portfolio will pay. If these were
included, returns would be lower.
Returns do not
reflect fees and The second column shows the gross performance of the
expenses associated composite, adjusted to reflect the estimated fees and
with any variable expenses of the Capital Opportunities Portfolio.
annuity contract or
variable life The third column shows performance of the S&P 500
insurance policy, Index, an index of the stocks of approximately 500
and would be lower large-capitalization U.S. companies, for the same
if they did. periods. Results include reinvested dividends.
27
<PAGE>
ABOUT THE PORTFOLIOS MID-CAP GROWTH PORTFOLIO
This portfolio is not available for:
. Pacific Corinthian variable annuity contracts
. Pacific Select variable life insurance policies.
[LOGO] -------------------------------------------------
The portfolio's This portfolio seeks long-term growth of capital.
investment goal
[LOGO] -------------------------------------------------
What the portfolio This portfolio's principal investment strategy is to
invests in invest at least 65% of its total assets in common
stocks and related securities, such as preferred
A company's stocks, convertible securities and depositary receipts
"capitalization" is for those securities, of companies with medium market
a measure of its capitalizations which the portfolio manager believes
size. have above-average growth potential.
Capitalization is
calculated by Medium market capitalization companies are companies
multiplying the with market capitalizations equaling or exceeding $250
current share price million but not exceeding the top of the Russell Midcap
by the number of Growth Index range at the time of the investment.
shares held by Companies whose market capitalizations fall below $250
investors. million or exceed the top of that index range after
purchase continue to be considered medium-
The Russell Midcap capitalization companies for purposes of the
Growth Index is a portfolio's 65% investment policy. The portfolio's
widely recognized, investments may include securities listed on a
unmanaged index of securities exchange or traded in the over-the-counter
mid-cap common markets.
stock prices. As of
June 30, 2000, the The portfolio's investments may include securities
top of this Russell listed on a securities exchange or traded in the over-
Index range was the-counter markets.
11.2 billion.
The portfolio manager uses a bottom-up, as opposed to a
top-down, investment style in managing this portfolio.
This means that securities are selected based upon
fundamental analysis (such as an analysis of earnings,
cash flows, competitive position and management's
abilities) performed by the portfolio manager, with
input from its team of equity research analysts.
The portfolio is considered "non-diversified" because
it may invest a relatively high percentage of its
assets in a small number of issuers. The portfolio may
invest in foreign securities (including emerging
markets securities) through which it may have exposure
to foreign currencies. The portfolio has engaged and
may engage in active and frequent trading to achieve
its principal investment policies.
[LOGO] -------------------------------------------------
Risks you should be The Mid-Cap Growth Portfolio principally invests in
aware of equity securities, which may go up or down in value
sometimes rapidly and unpredictably. While equities may
offer the potential for greater long-term growth than
most fixed income securities, they generally have
higher volatility. The portfolio may also be affected
by the following risks, among others:
. non-diversified - the portfolio is considered "non-
diversified" because it may invest in securities of a
fewer number of issuers than other portfolios. This
increases the risk that its value could go down
because of poor performance of a single investment or
small number of investments.
. price volatility - the value of the portfolio changes
as the prices of its investments go up or down. This
portfolio invests in companies that the team thinks
have the potential for above average growth, which
may give the portfolio a higher risk of price
volatility than a portfolio that invests principally
in equities that are "undervalued." Investment in
medium capitalization companies may be riskier and
more volatile than investment in companies with
larger market capitalizations.
Many OTC stocks trade less frequently and in smaller
volume than exchange-listed stocks. The values of these
stocks may be more volatile than exchange-listed
stocks, and the fund may experience difficulty in
establishing or closing out positions in these stocks
at prevailing market prices.
This portfolio may . risks of foreign investing - foreign investments may
invest up to 20% of be riskier than U.S. investments for many reasons,
its net assets in including changes in currency exchange rates,
foreign securities, unstable political and economic conditions, a lack of
including those of adequate and timely company information, differences
emerging markets in the way securities markets operate, relatively
countries. lower market liquidity, less stringent financial
reporting and accounting standards and controls, less
secure foreign banks or securities depositories than
those in the U.S., and foreign controls on
investment.
. emerging countries risk - investment in emerging
market countries (such as Latin America, Asia, Middle
East, Eastern Europe and Africa) may be riskier than
in developed markets, for many reasons including
smaller market capitalizations, greater price
volatility,
28
<PAGE>
MID-CAP GROWTH PORTFOLIO
[LOGO] --------------------------------------------------
Risks you should be less liquidity, higher degree of political and economic
aware of instability, less governmental regulation of the
(continued) financial industry and markets, and less stringent
reporting and accounting standards and controls.
Investment in securities of Eastern European countries,
including in particular, Russia, and other emerging
market countries, also involve risk of loss resulting
from problems in share registration and custody.
. risk of using derivatives - this portfolio may use
options, futures contracts and other investment
techniques to help it achieve its investment goal.
There's always a risk that these techniques could
reduce returns or increase the portfolio's
volatility.
[LOGO] --------------------------------------------------
Who manages the Mark Regan is a senior vice president of MFS and has
portfolio been employed in the investment management area of MFS
since 1989.
David E. Setti-Ducati is a vice president of MFS. Mr.
[LOGO OF MFS Setti-Ducati has been employed in the investment
APPEARS HERE] management area of MFS since 1995.
The Mid-Cap Growth
Portfolio is
managed by
Massachusetts
Financial Services
Company (MFS).
You'll find more
about MFS on page
32.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
PERFORMANCE OF COMPARABLE ACCOUNTS
-----------------------------------------------------------------------------------------------
<S> <C>
This portfolio has This chart does not show you the performance of the Mid-Cap Growth
no historical Portfolio -- it shows the performance of similar accounts managed by MFS
performance because
it started on January Annual total returns since 1994 and average annual total returns for
2, 2001. the periods ending June 30, 2000.
The chart to the ------------------------------------------------------------------------
right shows the MFS Mid-Cap Growth
historical Composite, adjusted to
performance of the MFS Mid-Cap reflect estimated fees and
MFS Mid-Cap Growth Growth expenses of the Mid-Cap Russell Midcap
Composite, Period Composite (%) Growth Portfolio (%) Growth (%)
calculated ------------------------------------------------------------------------
according to the 6/30/00/1/ 23.16 23.10 12.15
standards set by 1999 75.15 75.20 51.29
the Association for 1998 20.38 20.14 17.86
Investment 1997 24.96 24.74 22.54
Management and 1996 11.06 10.77 17.48
Research (AIMR). 1995 41.77 41.64 33.98
Each of the 21 1 year 79.95 80.19 48.60
advisory accounts, 3 years 42.04 42.06 30.40
including one 5 years 34.09 34.05 26.37
mutual fund, has since inception
investment 10/1/94 31.95 31.89 26.15
objectives, ------------------------------------------------------------------------
policies and /1/ Total returns through June 30, 2000, not annualized.
strategies that
are substantially The results shown above are a composite of actual
similar to those of performance for 21 advisory accounts, including one
the Mid-Cap Growth mutual fund account, calculated according to the
Portfolio. standards set by the Association for Investment
Management and Research (AIMR). Twenty of the accounts
in the composite were not subject to the investment
The composite limitations, diversification requirements and other
performance shows restrictions of the Investment Company Act of 1940 or
the historical Subchapter M of the Internal Revenue Code, which, if
track record of the imposed, could have adversely affected the performance.
portfolio manager
and is not intended The first column (after "Period") shows performance of
to imply how the the MFS Mid-Cap Growth Composite after average advisory
Mid-Cap Growth fees and other expenses charged to the accounts in the
Portfolio has composite have been deducted. The fees and expenses of
performed or will the composite include investment advisory fees, but,
perform. Total for the accounts other than the mutual fund, do not
returns represent include custody fees or other expenses normally paid by
past performance of mutual funds and which the Mid-Cap Growth Portfolio
the MFS MidCap will pay. If these were included, returns would be
Growth Composite lower.
and not the Mid-Cap
Growth Portfolio. The second column shows the gross performance of the
composite, adjusted to reflect the estimated fees and
Returns do not expenses of the Mid-Cap Growth Portfolio.
reflect fees and
expenses associated The third column shows performance of the Russell
with any variable Midcap Growth Index, an index consisting of 800 of the
annuity contract or smallest companies in the Russell 1000 Index, for the
variable life same periods. Results include reinvested dividends.
insurance policy,
and would be lower
if they did.
</TABLE>
29
<PAGE>
ABOUT THE PORTFOLIOS GLOBAL GROWTH PORTFOLIO
This portfolio is not available for:
. Pacific Corinthian variable annuity contracts
. Pacific Select variable life insurance policies.
[LOGO] -------------------------------------------------
The portfolio's This portfolio seeks capital appreciation.
investment goal
[LOGO] -------------------------------------------------
What the portfolio The Portfolio's principal investment strategy is to
invests in invest, under normal market conditions, at least 65% of
its total assets in common stocks and related equity
Foreign growth securities, such as preferred stock, convertible
companies are securities and depositary receipts, of companies in
companies located three distinct market sectors:
in more developed
securities markets . U.S. emerging growth companies, that the portfolio
(such as Australia, manager believes are either early in their life cycle
Canada, Japan, New but which have the potential to become major
Zealand and Western enterprises, or are major enterprises whose rates of
European earnings growth are expected to accelerate because of
countries). special factors, such as rejuvenated management, new
products, changes in consumer demand, or basic
Emerging market changes in the economic environment.
countries are
typically less . Foreign growth companies that the Portfolio Manager
developed believes have favorable growth prospects and
economically than attractive valuations based on current and expected
industrialized earnings and cash flow. The Portfolio Manager
countries and may generally seeks to purchase foreign growth securities
offer high growth of companies with relatively large capitalizations
potential as well relative to the market in which they are traded.
as considerable
investment risk. . Emerging market securities are securities of issuers
These countries are whose principal activities are located in emerging
generally located market countries.
in Latin America,
Asia, the Middle Under normal market conditions, the portfolio invests
East, Eastern in at least three different countries, one of which may
Europe and Africa. be the U.S.
[LOGO] -------------------------------------------------
Risks you should be The Global Growth Portfolio principally invests in
aware of equity securities, which may go up or down in value
sometimes rapidly and unpredictably. While equities may
offer the potential for greater long-term growth than
most fixed income securities, they generally have
higher volatility. The portfolio may also be affected
by the following risks, among others:
. non-diversified - the portfolio is considered "non-
diversified" because it may invest in securities of a
fewer number of issuers than other portfolios. This
increases the risk that its value could go down
because of poor performance of a single investment or
small number of investments.
. price volatility - the value of the portfolio changes
as the prices of its investments go up or down. This
portfolio invests in companies that the team thinks
have the potential for above average growth, which
may give the portfolio a higher risk of price
volatility than a portfolio that invests principally
in equities that are "undervalued." Small emerging
growth companies may be more susceptible to larger
price swings than larger companies because they may
have fewer financial resources, limited product and
market diversification and many are dependent on a
few key managers. Emerging growth companies and
companies in cyclical industries may be particularly
susceptible to rapid price swings during periods of
economic uncertainty.
. risks of foreign investing - foreign investments may
be riskier than U.S. investments for many reasons,
including changes in currency exchange rates,
unstable political and economic conditions, a lack of
adequate and timely company information, differences
in the way securities markets operate, relatively
lower market liquidity, less stringent financial
reporting and accounting standards and controls, less
secure foreign banks or securities depositories than
those in the U.S., and foreign controls on
investment.
. emerging countries risk - investment in emerging
market countries (such as Latin America, Asia, Middle
East, Eastern Europe and Africa) may be riskier than
in developed markets, for many reasons including
smaller market capitalizations, greater price
volatility, less liquidity, higher degree of
political and economic instability, less governmental
regulation of the financial industry and markets, and
less stringent reporting and accounting standards and
controls.
30
<PAGE>
GLOBAL GROWTH PORTFOLIO
[LOGO] ------------------------------------------------
Risks you should be Investment in securities of Eastern European
aware of countries, including in particular, Russia, and other
(continued) emerging market countries, also involve risk of loss
resulting from problems in share registration and
custody.
. risk of using derivatives - this portfolio may use
options, futures contracts and other investment
techniques to help it achieve its investment goal.
There's always a risk that these techniques could
reduce returns or increase the portfolio's
volatility.
------------------------------------------------------
Who manages the John Lathrop, CFA, is a Vice President at MFS. Mr.
portfolio Lathrop has been employed in the investment management
area of MFS since 1994.
[LOGO OF MFS
APPEARS HERE]
The Global Growth
Portfolio is
managed by a team
of analysts, led by
the portfolio
manager at
Massachusetts
Financial Services
Company (MFS).
You'll find more
about MFS on page
32.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
PERFORMANCE OF COMPARABLE ACCOUNTS
-------------------------------------------------------------------------------------------------
<S> <C>
This portfolio has This chart does not show you the performance of the
no historical Global Growth Portfolio-- it shows the performance of a
performance because similar account managed by MFS
it started on
January 2, 2001. Annual total returns since 1994 and average annual
total returns for the periods ending June 30, 2000.
-----------------------------------------------------------------------------
The chart to the MFS Global Growth
right shows the Fund, adjusted to reflect
historical estimated fees and
performance of the MFS Global Growth expenses of the Global MSCI All Country
MFS Global Growth Period Fund (%) Growth Portfolio (%) World Index (%)
Fund. This fund has -----------------------------------------------------------------------------
investment <S> <C> <C> <C>
objectives, 6/30/00/1/ (1.03) (0.93) (2.56)
policies and 1999 64.95 64.85 27.31
strategies that are 1998 11.87 11.42 21.72
substantially 1997 15.45 15.02 14.67
similar to those of 1996 14.25 13.81 13.09
the Global Growth 1995 17.13 16.71 18.242
Portfolio. 1994 3.60 3.09 5.36
1 year 44.96 45.78 12.55
3 years 22.23 22.76 14.22
5 years 21.12 21.67 16.52
since inception
11/18/93 18.24 18.76 15.49
-----------------------------------------------------------------------------
</TABLE>
This information /1/ Total returns through June 30, 2000, not annualized.
shows the
historical track The returns in the first column (after "Period") show
record of the performance of the MFS Global Growth Fund after
portfolio manager advisory fees and operating expenses of the MFS Global
and is not intended Growth Fund have been deducted, including custody fees
to imply how the and other expenses normally paid by mutual funds and
Global Growth which the Global Growth Portfolio will pay.
Portfolio has
performed or will The second column shows the gross performance of the
perform. Total MFS Global Growth Fund, adjusted to reflect the
returns represent estimated fees and expenses of the Global Growth
past performance of Portfolio.
the MFS Global
Growth Fund, and The third column shows performance of the MSCI All
not the Global Country World Index during the same periods. Results
Growth Portfolio. include reinvested dividends.
Returns do not
reflect fees and
expenses associated
with any variable
annuity contract or
variable life
insurance policy,
and would be lower
if they did.
31
<PAGE>
MANAGING THE PACIFIC SELECT FUND
--------------------------------------------------------
Managing the Managing the Pacific Select Fund is amended by adding
Pacific Select Fund the following information:
--------------------------------------------------------
[LOGO OF A I M A I M Capital Management, Inc. (A I M) was founded in
CAPITAL APPEARS 1986 and together with its affiliates manages over 120
HERE] investment portfolios with $176 billion as of June 30,
2000. A I M is an indirect subsidiary of AMVESCAP PLC,
A I M Capital an international investment management company that
Management, Inc.11 manages more than $389 billion in assets worldwide as
Greenway Plaza of June 30, 2000. AMVESCAP PLC is based in London, with
Houston, Texas money managers located in Europe, North and South
77046 America, and the Far East.
--------------------------------------------------------
[LOGO OF INVESCO INVESCO Funds Group, Inc. (INVESCO) was founded in 1932
FUNDS APPEARS HERE] and as of June 30, 2000, manages over $42 billion for
more than 46 INVESCO mutual funds. INVESCO is a
INVESCO FUNDS subsidiary of AMVESCAP PLC, an international investment
GROUP, INC. management company that manages more than $389 billion
7800 East Union in assets worldwide as of June 30, 2000. AMVESCAP is
Avenue based in London, with money managers located in Europe,
Denver, Colorado North and South America, and the Far East.
80237
--------------------------------------------------------
[LOGO OF MFS Massachusetts Financial Services Company (MFS) and its
APPEARS HERE] predecessor organizations have a history of money
management dating from 1924 and the founding of the
Massachusetts first mutual fund, Massachusetts Investors Trust. Net
Financial Services assets under the management of the MFS organization
Company were approximately $151 billion as of June 30, 2000.
500 Boylston Street
Boston,
Massachusetts 02116
32
<PAGE>
MANAGING THE PACIFIC SELECT FUND
--------------------------------------------------------
Information Effective January 2, 2001, Lazard Asset Management
concerning (Lazard) will become the portfolio manager of the
portfolio manager International Value Portfolio. Information about Lazard
change may be found on page 49 of the fund prospectus.
At a meeting held on October 12, 2000, the board,
including a majority of the independent trustees
approved Lazard Asset Management to serve as the new
portfolio manager of the International Value Portfolio
effective January 2, 2001 and approved a new portfolio
management agreement with Lazard. In reaching this
determination, the board considered, among other
things, (1) the experience of the personnel in Lazard
in managing other international value accounts with
similar investment objectives and policies as those of
the International Value Portfolio, (2) the
recommendations of the Adviser, (3) that the best
interests of the portfolio's shareholders would be
served and (4) that the Adviser's efforts to provide
high quality investment management services would be
enhanced if Lazard were engaged.
The board also considered the fact that the portfolio
management fee schedule to be paid to Lazard under the
new portfolio management agreement did not increase
from the fee schedule paid to the current manager. In
this regard, the board considered, among other factors,
the Adviser's expenses associated with the operation of
the fund and the portfolio, as well as the expenses
associated with the Adviser's variable contracts that
are funded by separate accounts, a portion of whose
proceeds are invested in the International Value
Portfolio, and the services provided by the Adviser in
connection with the variable contracts. There are no
material differences in the terms under the old and new
portfolio management agreements other than a decrease
in the portfolio management fee payable by the Adviser
to Lazard. Under the new portfolio management
agreement, there is a portfolio management fee
decrease, from .35% to .30% of the portfolio's average
daily net assets which exceeds $2 billion. Since assets
in the International Value Portfolio were less than $2
billion as of December 31, 1999, there would have been
no difference in the portfolio management fee paid in
1999 had the new portfolio management fee schedule been
in effect. There is no change to the advisory fee paid
by the portfolio to the Adviser (Pacific Life).
--------------------------------------------------------
How the fund is The following sentence is added at the end of the third
organized is paragraph:
amended
Each Portfolio also intends to comply with
diversification regulations under section 817(h) of the
Code that apply to mutual funds underlying variable
contracts. You'll find more information about taxation
in the fund's statement of additional information.
33
<PAGE>
--------------------------------------------------------
The table in Fees The table below shows the advisory fee and fund
and expenses paid expenses as an annual percentage of each portfolio's
by the fund is average daily net assets. For portfolios which began
replaced with the before January 2, 2001, expenses are based on projected
following net assets at the end of 2000. For portfolios which
information began on or after January 2, 2001, expenses are based
on projected net assets at the end of 2001. To help
The fund pays limit fund expenses, effective July 1, 2000 Pacific
Pacific Life an Life contractually agreed to waive all or part of its
advisory fee for investment advisory fees or otherwise reimburse each
the services it portfolio for operating expenses (including
provides as organizational expenses, but not including advisory
investment adviser. fees, additional costs associated with foreign
It also pays for investing and extraordinary expenses) that exceed an
all of the costs of annual rate of 0.10% of its average daily net assets.
its operations, as Such waiver or reimbursement is subject to repayment to
well as for other Pacific Life to the extent such expenses fall below the
services Pacific 0.10% expense cap. For each portfolio, Pacific Life's
Life provides right to repayment is limited to amounts waived and/or
through a support reimbursed that exceed the new 0.10% expense cap and,
services agreement. except for portfolios that started on or after October
2, 2000, that do not exceed the previously established
Pacific Life uses 0.25% expense cap. Any amounts repaid to Pacific Life
part of the will have the effect of increasing expenses of the
advisory fee to pay portfolio, but not above the 0.10% expense cap. There
for the services of is no guarantee that Pacific Life will continue to cap
the portfolio expenses after December 31, 2001. In 1999, Pacific Life
managers. reimbursed the Small-Cap Index Portfolio $96,949.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
Less
Advisory Other Total adviser's Total net
Portfolio fee expenses expenses+ reimbursement expenses
--------------------------------------------------------------------------
As an annual % of average daily net assets
<S> <C> <C> <C> <C> <C>
Blue Chip/2/ 0.95 0.06 1.01 -- 1.01
Aggressive
Growth/2/ 1.00 0.06 1.06 -- 1.06
Aggressive Equity 0.80 0.04 0.84 -- 0.84
Emerging
Markets/1/ 1.10 0.19 1.29 -- 1.29
Diversified
Research/2/ 0.90 0.10 1.00 -- 1.00
Small-Cap Equity 0.65 0.04 0.69 -- 0.69
International
Large-Cap/2/ 1.05 0.13 1.18 -- 1.18
Equity 0.65 0.04 0.69 -- 0.69
I-Net
Tollkeeper/2/ 1.50 0.13 1.63 (0.03) 1.60
Financial
Services/2/ 1.10 0.15 1.25 (0.05) 1.20
Health Sciences/2/
1.10 0.11 1.21 (0.01) 1.20
Technology/2/ 1.10 0.08 1.18 -- 1.18
Telecommunications/2/ 1.10 0.08 1.18 -- 1.18
Multi-Strategy 0.65 0.04 0.69 -- 0.69
Equity Income 0.65 0.04 0.69 -- 0.69
Strategic Value/2/
0.95 0.13 1.08 (0.03) 1.05
Growth LT 0.75 0.04 0.79 -- 0.79
Focused 30/2/ 0.95 0.11 1.06 (0.01) 1.05
Mid-Cap Value 0.85 0.04 0.89 -- 0.89
International
Value 0.85 0.11 0.96 -- 0.96
Capital
Opportunities/2/ 0.80 0.06 0.86 -- 0.86
Mid-Cap Growth/2/ 0.90 0.06 0.96 -- 0.96
Global Growth/2/ 1.10 0.19 1.29 -- 1.29
Equity Index/3/ 0.25 0.04 0.29 -- 0.29
Small-Cap Index 0.50 0.11 0.61 (0.01) 0.60
REIT 1.10 0.05 1.15 -- 1.15
Government
Securities 0.60 0.05 0.65 -- 0.65
Managed Bond/1/ 0.60 0.05 0.65 -- 0.65
Money Market/1/ 0.34 0.04 0.38 -- 0.38
High Yield Bond/1/
0.60 0.04 0.64 -- 0.64
Large-Cap Value 0.85 0.05 0.90 -- 0.90
--------------------------------------------------------------------------
</TABLE>
/1/ Total adjusted net expenses for these portfolios,
after deduction of an offset for custodian credits
were: 1.28% for Emerging Markets Portfolio, 0.64%
for Managed Bond Portfolio, 0.37% for Money Market
Portfolio, and 0.63% for High Yield Bond Portfolio.
/2/ Expenses are estimated. There were no actual
advisory fees or expenses for these portfolios in
1999 because the portfolios started after December
31, 1999.
/3/ Total adjusted net expenses for the Equity Index
Portfolio, after deduction of an offset for
custodian credits, were 0.28%. The advisory fee for
the portfolio has also been adjusted to reflect the
advisory fee increase effective January 1, 2000.
The actual advisory fee and total adjusted net
expenses for this portfolio in 1999, after
deduction of an offset for custodian credits, were
0.16% and 0.19%, respectively.
+ The fund has adopted a brokerage enhancement 12b-1
plan, under which brokerage transactions may be
placed with broker-dealers in return for credits,
cash, or other compensation that may be used to
help promote distribution of fund shares. There are
no fees or charges to any portfolio under this
plan, although the fund's distributor may defray
expenses of up to approximately $300,000 for the
year 2000, which it might otherwise incur for
distribution. If such defrayed amount were
considered a fund expense, it would represent
approximately .0023% or less of any portfolio's
average daily net assets.
34
<PAGE>
PERFORMANCE OF COMPARABLE ACCOUNTS
--------------------------------------------------------
Performance of Performance of comparable accounts is amended by
comparable accounts replacing the information regarding Alliance Capital
Management L.P. with the information below and adding
the information regarding Lazard Asset Management on
the next page.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
ALLIANCE CAPITAL MANAGEMENT L.P.
-----------------------------------------------------------------------------------------------
<S> <C>
The chart to the This chart shows you the performance of a composite
right shows the managed by Alliance Capital that are comparable
historical to the Emerging Markets Portfolio, the performance
performance of the of the Emerging Markets Portfolio and performance
Alliance Emerging of a benchmark index.
Markets Equity
Composite, Annual total returns since 1992 and average annual
calculated total returns for the periods ending June 30, 2000.
according to the
standards set by ------------------------------------------------------------------------
the Association for Alliance Emerging
Investment Markets Equity
Management and Composite, adjusted
Research (AIMR). Alliance to reflect estimated
The account in the Emerging fees and expenses MSCI Emerging
composite, a Markets Equity of the Emerging Markets Free
commingled trust Period Composite (%)/1/ Markets Portfolio (%)/2/ Index (%)
account which is ------------------------------------------------------------------------
exempt from mutual 6/30/00 (5.07) (5.27) (8.97)
fund registration, 1999 116.29 116.91 66.41
has investment 1998 (28.80) (29.52) (25.34)
objectives, 1997 (9.33) (9.88) (11.59)
policies and 1996 21.34 20.35 6.03
strategies that are 1995 (4.03) (4.52) (5.21)
substantially 1994 (13.10) (13.68) (7.32)
similar to those of 1993 63.33 63.44 74.84
the Emerging 1992 16.36 16.05 11.41
Markets Portfolio. 1 year 45.88 45.92 7.64
3 years 4.74 4.41 (7.00)
The composite 5 years 9.82 9.33 (1.12)
performance shows Since Inception
the historical (10/01/91) 11.99 11.58 8.80
track record of the ------------------------------------------------------------------------
portfolio manager /1/ Composite results are asset weighted and calculated
and is not intended on a monthly basis. Quarterly and annual composite
to imply how the performance figures are computed by linking monthly
Emerging Markets returns. Performance figures for each account are
Portfolio has calculated monthly. Monthly market values include
performed or will income accruals.
perform. Total
returns shown under /2/ In calculating returns, the Emerging Markets
the heading Portfolio's actual expense rates were used for 1996
Alliance Emerging to present; and the 1997/98 expense rate was used
Markets Equity for prior years.
Composite represent
past performance of The account in the composite was not subject to the
that composite and investment limitations, diversification requirements
not the Emerging and other restrictions of the Investment Company Act of
Markets Portfolio. 1940 or Subchapter M of the Internal Revenue Code,
which, if imposed, could have adversely affected the
Returns do not performance.
reflect fees and
expenses associated The first column (after "Period") shows performance of
with any variable Alliance Emerging Markets Equity Composite after the
annuity contract or deduction of investment management fees. The fees and
variable life expenses of the Composite do not include custody fees
insurance policy, or other expenses normally paid by mutual funds and
and would be lower which the Emerging Markets Portfolio pays. If these
if they did. fees were included, returns would be lower.
The second column shows gross performance of the
Alliance Composite adjusted to reflect the estimated
fees and expenses of the Emerging Markets Portfolio.
The third column shows the actual performance of the
Emerging Markets Portfolio.
The fourth column shows the performance of the MSCI
Emerging Markets Free Index. Results include reinvested
dividends.
</TABLE>
35
<PAGE>
PERFORMANCE OF COMPARABLE ACCOUNTS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
LAZARD ASSET MANAGEMENT
------------------------------------------------------------------------------------------------------------
<S> <C>
The chart to the This chart shows you the performance of a composite of accounts managed by Lazard
right shows the Asset Management that are comparable to the International Value Portfolio, the
historical performance of the International Value Portfolio and performance of a benchmark
performance of a index.
composite of 104
advisory accounts Annual total returns since 1994 and average annual total returns for the periods
managed by Lazard ending June 30, 2000.
Asset Management,
calculated -------------------------------------------------------------------------------------
according to the Lazard International
standards set by ADR Equity International
the Association for Lazard Composite, Adjusted Value
Investment International to Reflect Expenses Portfolio (%)/3/
Management and ADR Equity of the Emerging (under prior MSCI EAFE
Research (AIMR). Period Composite (%)/1/ Markets Portfolio (%)/2/ manager) Index (%)
The accounts have -------------------------------------------------------------------------------------
investment 6/30/00/4/ 3.13 2.92 (2.54) (3.95)
objectives, 1999 20.19 19.80 22.82 27.30
policies and 1998 23.74 23.96 5.60 20.33
strategies that are 1997 18.91 19.02 9.28 1.78
substantially 1996 12.09 12.14 21.89 6.04
similar to those of 1995 6.00 5.92 10.56 11.21
the International 1994 1.24 1.06 3.01 7.80
Value Portfolio. 1 year 20.66 20.31 14.75 17.44
3 years 16.36 16.24 6.58 10.48
5 years 16.79 16.78 11.72 11.33
Since Inception
(01/01/94) 12.85 12.82 -- 10.30
-------------------------------------------------------------------------------------
</TABLE>
This information /1/ Composite results are asset weighted and calculated
shows the on a monthly basis. Quarterly and annual composite
historical track performance figures are computed by linking monthly
record of the returns. Performance figures for each account are
portfolio manager calculated monthly. Monthly market values include
and is not intended income accruals.
to imply how the
International Value /2/ In calculating returns, the International Value
Portfolio has Portfolio's actual expense rates were used for 1994
performed or will to present.
perform. Total
returns represent /3/ The portfolio commenced operations on January 4,
past performance of 1998. The average annual return for the portfolio
the Lazard since inception through June 30, 1999 was 9.36%.
International ADR
Equity Composite /4/ Total returns through June 30, 2000, not
only and not the annualized.
International Value
Portfolio. The accounts in the composite were not subject to the
requirements of the Investment Company Act of 1940 or
The International Subchapter M of the Internal Revenue Code, which, if
ADR Equity imposed, could have adversely affected the performance.
Composite is a
byproduct of The first column (after "Period") shows performance of
Lazard's global Lazard International ADR Equity Composite after the
research platform deduction of investment management fees. The fees and
and represents our expenses of the Composite do not include custody fees
strongest or other expenses normally paid by mutual funds and
conviction which the International Value Portfolio pays. If these
securities in the fees were included, returns would be lower.
international
developed markets. The second column shows gross performance of the Lazard
The composite to Composite adjusted to reflect the fees and expenses of
the right was the International Value Portfolio.
created for clients
whose custodial The third column shows the actual performance of the
arrangements International Value Portfolio.
require securities
to be held in U.S. The fourth column shows the performance of the MSCI
dollar EAFE Index. Results include reinvested dividends.
denominations, and
therefore, ADR's.
Lazard believes and
represents that
investing in
ordinary shares
would have produced
substantially the
same performance.
The returns do not
reflect fees and
expenses associated
with any variable
annuity contract or
variable life
insurance policy,
and would be lower
if they did.
36
<PAGE>
Form No. 15-22970-00
FSUPP0101
<PAGE>
[LOGO OF PACIFIC SELECT FUND APPEARS HERE]
PACIFIC SELECT FUND
STATEMENT OF ADDITIONAL INFORMATION
Date: May 1, 2000 as Supplemented January 2, 2001
----------------
The Pacific Select Fund is an open-end investment management company
currently offering thirty-one investment portfolios. The following twenty-six
of those portfolios are classified as diversified: the Blue Chip Portfolio;
the Aggressive Growth Portfolio; the Aggressive Equity Portfolio; the Emerging
Markets Portfolio; the Diversified Research Portfolio; the Small-Cap Equity
Portfolio; the International Large-Cap Portfolio; the Equity Portfolio; the
I-Net Tollkeeper PortfolioSM; Financial Services Portfolio; the Health
Sciences Portfolio; the Technology Portfolio; the Telecommunications
Portfolio; the Multi-Strategy Portfolio; the Equity Income Portfolio; the
Growth LT Portfolio; the Mid-Cap Value Portfolio; the International Value
Portfolio; the Capital Opportunities Portfolio; the Equity Index Portfolio;
the Small-Cap Index Portfolio; the Government Securities Portfolio; the
Managed Bond Portfolio; the Money Market Portfolio; the High Yield Bond
Portfolio; and the Large-Cap Value Portfolio. The Strategic Value Portfolio,
Focused 30 Portfolio, the Mid-Cap Growth Portfolio, the Global Growth
Portfolio and REIT Portfolio are classified as non-diversified. The Fund's
Adviser is Pacific Life Insurance Company.
This Statement of Additional Information ("SAI") is intended to supplement
the information provided to investors in the Prospectus dated May 1, 2000, and
any supplement thereto, and has been filed with the Securities and Exchange
Commission ("SEC") as part of the Fund's Registration Statement. Investors
should note, however, that this SAI is not itself a prospectus and should be
read carefully in conjunction with the Fund's Prospectus and retained for
future reference. The contents of this SAI are incorporated by reference in
the Prospectus in their entirety. A copy of the Prospectus may be obtained
free of charge from the Fund at the address and telephone numbers listed
below.
----------------
Distributor:
Pacific Select Distributors, Inc.
700 Newport Center Drive
P.O. Box 9000
Newport Beach, CA 92660
(800) 800-7681
Adviser:
Pacific Life Insurance Company
700 Newport Center Drive
P.O. Box 9000
Newport Beach, CA 92660
Annuities (800) 722-2333
Life Insurance (800) 800-7681
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INTRODUCTION................................................................ 1
ADDITIONAL INVESTMENT POLICIES OF THE PORTFOLIOS............................ 1
Blue Chip Portfolio....................................................... 1
Aggressive Growth Portfolio............................................... 2
Aggressive Equity Portfolio............................................... 2
Emerging Markets Portfolio................................................ 3
Diversified Research Portfolio............................................ 3
Small-Cap Equity Portfolio................................................ 4
International Large-Cap Portfolio......................................... 4
Equity Portfolio.......................................................... 4
I-Net Tollkeeper Portfolio................................................ 5
Financial Services Portfolio.............................................. 6
Health Sciences Portfolio................................................. 7
Technology Portfolio...................................................... 7
Telecommunications Portfolio.............................................. 7
Multi-Strategy Portfolio.................................................. 8
Equity Income Portfolio................................................... 8
Strategic Value Portfolio................................................. 9
Growth LT Portfolio....................................................... 9
Focused 30 Portfolio...................................................... 10
Mid-Cap Value Portfolio................................................... 10
International Value Portfolio............................................. 11
Capital Opportunities Portfolio........................................... 12
Mid-Cap Growth Portfolio.................................................. 13
Global Growth Portfolio................................................... 13
Equity Index Portfolio.................................................... 14
Small-Cap Index Portfolio................................................. 14
REIT Portfolio............................................................ 15
Government Securities Portfolio........................................... 15
Managed Bond Portfolio.................................................... 16
Money Market Portfolio.................................................... 16
High Yield Bond Portfolio................................................. 17
Large-Cap Value Portfolio................................................. 18
Diversification Versus Non-Diversification................................ 18
SECURITIES AND INVESTMENT TECHNIQUES........................................ 19
U.S. Government Securities................................................ 19
Real Estate Investment Trusts............................................. 19
Mortgage-Related Securities............................................... 20
Mortgage Pass-Through Securities........................................ 20
GNMA Certificates....................................................... 20
FNMA and FHLMC Mortgage-Backed Obligations.............................. 21
Collateralized Mortgage Obligations (CMOs).............................. 21
FHLMC Collateralized Mortgage Obligations............................... 22
Other Mortgage-Related Securities....................................... 22
CMO Residuals........................................................... 23
Inverse Floaters and Planned Amortization Class Certificates............ 23
Stripped Mortgage-Backed Securities..................................... 23
Mortgage Dollar Rolls................................................... 24
</TABLE>
i
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<TABLE>
<S> <C>
Other Asset-Backed Securities............................................ 24
Zero Coupon, Deferred Interest, Step Coupon and Pay-In-Kind Bonds........ 24
High Yield Bonds......................................................... 25
Bank Obligations......................................................... 26
Municipal Securities..................................................... 27
Small Capitalization Stocks.............................................. 28
Corporate Debt Securities................................................ 28
Tender Option Bonds.................................................... 28
Variable and Floating Rate Securities.................................... 28
Commercial Paper......................................................... 29
Convertible Securities................................................... 29
Repurchase Agreements.................................................... 30
Borrowing................................................................ 31
Reverse Repurchase Agreements and Other Borrowings....................... 31
Firm Commitment Agreements and When-Issued or Delayed Delivery
Securities.............................................................. 32
Loans of Portfolio Securities............................................ 32
Short Sales.............................................................. 33
Short Sales Against the Box.............................................. 33
Illiquid and Restricted Securities (Private Placements).................. 33
Precious Metals-Related Securities....................................... 34
Foreign Securities....................................................... 34
Foreign Currency Transactions and Forward Foreign Currency Contracts..... 36
Options.................................................................. 38
Purchasing and Writing Options on Securities........................... 38
Purchasing and Writing Options on Stock Indexes........................ 39
Risks of Options Transactions.......................................... 39
Spread Transactions.................................................... 40
Options on Foreign Currencies............................................ 40
Investments in Other Investment Company Securities....................... 42
SPDRs.................................................................. 42
OPALS.................................................................. 42
I-Shares............................................................... 42
Futures Contracts and Options on Futures Contracts....................... 43
Futures on Securities.................................................. 43
Interest Rate Futures.................................................. 43
Stock Index Futures.................................................... 44
Futures Options........................................................ 44
Limitations............................................................ 45
Risks Associated with Futures and Futures Options...................... 46
Foreign Currency Futures and Options Thereon............................. 47
Swap Agreements and Options on Swap Agreements........................... 47
Risks of Swap Agreements............................................... 47
Structured Notes......................................................... 48
Warrants and Rights...................................................... 48
Duration................................................................. 48
INVESTMENT RESTRICTIONS.................................................... 50
Fundamental Investment Restrictions...................................... 50
Nonfundamental Investment Restrictions................................... 51
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
ORGANIZATION AND MANAGEMENT OF THE FUND..................................... 51
Trustees and Officers..................................................... 52
Investment Adviser........................................................ 53
Other Expenses of the Fund................................................ 56
Portfolio Management Agreements........................................... 56
Distribution of Fund Shares............................................... 67
Purchases and Redemptions................................................. 67
Exchanges Among the Portfolios............................................ 68
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................ 68
Investment Decisions...................................................... 68
Brokerage and Research Services........................................... 68
Portfolio Turnover........................................................ 70
NET ASSET VALUE............................................................. 70
PERFORMANCE INFORMATION..................................................... 72
TAXATION.................................................................... 75
Distributions............................................................. 76
Hedging Transactions...................................................... 76
OTHER INFORMATION........................................................... 77
Concentration Policy...................................................... 77
Brokerage Enhancement Plan................................................ 77
Capitalization............................................................ 77
Voting Rights............................................................. 78
Custodian and Transfer Agency and Dividend Disbursing Services............ 78
Financial Statements...................................................... 79
Independent Auditors...................................................... 79
Counsel................................................................... 79
Code of Ethics............................................................ 79
Registration Statement.................................................... 79
APPENDIX.................................................................... 80
Description of Bond Ratings............................................... 80
</TABLE>
iii
<PAGE>
INTRODUCTION
This SAI is designed to elaborate upon information contained in the
Prospectus, including the discussion of certain securities and investment
techniques. The more detailed information contained herein is intended solely
for investors who have read the Prospectus and are interested in a more
detailed explanation of certain aspects of the Fund's securities and
investment techniques.
ADDITIONAL INVESTMENT POLICIES OF THE PORTFOLIOS
The investment objective and investment policies of each Portfolio are
described in the Prospectus. The following descriptions and the information in
the section "Investment Restrictions" provide more detailed information on
investment policies that apply to each Portfolio, and are intended to
supplement the information provided in the Prospectus. Any percentage
limitations noted are based on market value at time of investment.
Unless otherwise noted, a Portfolio may invest up to 5% of its net assets
(taken at market value at the time of such investment) in any type of security
or investment that the Investment Adviser or Portfolio Manager reasonably
believes is compatible with the investment objectives and policies of the
Portfolio.
Unless otherwise noted, a Portfolio may lend up to 33 1/3% of its total
assets to brokers/dealers and other financial institutions to earn income, may
borrow money for administrative or emergency purposes, may invest in
restricted securities, and may invest up to 15% of its net assets in illiquid
securities (up to 10% for the Money Market Portfolio).
Blue Chip Portfolio
It is anticipated that the portfolio will generally invest in large and
medium sized companies (i.e., companies which fall in the largest 85% of
market capitalization of publicly traded companies listed in the United
States).
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may invest a portion of its assets in: preferred
stocks, convertible securities, corporate debt securities, bankers
acceptances, commercial paper, U.S. Government securities, its agencies or
instrumentalities, repurchase agreements, reverse repurchase agreements,
warrants, securities issued on a when-issued or delayed delivery basis, up to
25% of its assets in foreign securities (including American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"), up to 25% of its
assets in equity and/or debt Real Estate Investment Trusts ("REITs"), up to
10% of its assets in convertible securities, although the portfolio will not
invest in non-convertible corporate debt securities rated Ba or lower by
Moody's Investor's Service, Inc. ("Moody's") or BB or lower by Standard and
Poor's Rating Services ("S&P"), or if not rated by Moody's or S&P, of
equivalent quality as determined by the portfolio manager. For more
information on the risks of such securities, see "Description of Bond Ratings"
in the Appendix. The Portfolio may also engage in "short sales," in which the
Portfolio sells a security it does not own.
The Portfolio may also use forward contracts, futures contracts (including
interest rate, currency or stock index futures), purchase and write (covered)
options on securities, options on indices, options on currencies, and options
on futures contracts to attempt to hedge against the overall level of
investment and currency risk associated with its investments. The Portfolio
will not write options if, immediately after such sale, the aggregate value of
securities or obligations underlying the outstanding options exceed 20% of the
Portfolio's total assets. The Portfolio may also engage in foreign currency
transactions, forward currency contracts, and foreign currency futures and
purchase and write (covered) options on foreign currency futures contracts.
The Portfolio may borrow from banks and broker/dealers, however, the
Portfolio may not borrow for leveraging, but may borrow for temporary or
emergency cash purposes in anticipation of or in response to adverse market
conditions, or for cash management purposes. The Portfolio may not purchase
additional securities when any borrowings from banks exceed 5% of the
Portfolio's total assets.
1
<PAGE>
Aggressive Growth Portfolio
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may invest a portion of its assets in: preferred
stocks, convertible securities, corporate debt securities, bankers
acceptances, commercial paper, U.S. Government securities, its agencies or
instrumentalities, repurchase agreements, reverse repurchase agreements,
warrants, securities issued on a when-issued or delayed delivery basis, up to
25% of its assets in foreign securities (including ADRs and EDRs) and up to
25% of its assets in equity and/or debt REITs. The Portfolio may also engage
in "short sales," in which the Portfolio sells a security it does not own.
The Portfolio may also use forward contracts, futures contracts (including
interest rate, currency, or stock index futures), purchase and write (covered)
options on securities, options on indices, options on currencies, and options
on futures contracts to attempt to hedge against the overall level of
investment and currency risk associated with its investments. The Portfolio
will not write options if, immediately after such sale, the aggregate value of
securities or obligations underlying the outstanding options exceed 20% of the
Portfolio's total assets. The Portfolio may also engage in foreign currency
transactions, forward currency contracts, and foreign currency futures and
purchase and write (covered) options on foreign currency futures contracts.
The Portfolio may borrow from banks and broker/dealers, however, the
Portfolio may not borrow for leveraging, but may borrow for temporary or
emergency cash purposes, in anticipation of or in response to adverse market
conditions, or for cash management purposes. The Portfolio may not purchase
additional securities when any borrowings from banks exceed 5% of the
Portfolio's total assets.
Aggressive Equity Portfolio
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest a portion of its assets in: high-
quality money market instruments; mortgage-related and asset-backed
securities; convertible securities; repurchase agreements and reverse
repurchase agreements; small capitalization stocks; ADRs; U.S. Government
securities, its agencies or instrumentalities; U.S. dollar-denominated
obligations of foreign governments, foreign government agencies and
international agencies; variable and floating rate securities; firm commitment
agreements; when-issued securities may enter into short sales against the box;
and securities of foreign issuers traded in the U.S. securities markets and
outside the U.S. (including commercial paper), provided that the Portfolio may
not acquire a security of a foreign issuer principally traded outside the U.S.
if, at the time of such investment, more than 20% of the Portfolio's total
assets would be invested in such foreign securities.
The Portfolio may also invest up to 5% of its net assets in warrants and
rights (valued at the lower of cost or market) provided that no more than 2%
of its net assets are invested in warrants not listed on the New York or
American Stock Exchanges; and may invest in U.S. dollar-denominated corporate
debt securities of domestic issuers (including U.S. dollar-denominated debt
securities of foreign issuers) and debt securities of foreign issuers
denominated in foreign currencies, rated Baa by Moody's or BBB by S&P, or, if
not rated by Moody's or S&P, of equivalent quality as determined by the
Portfolio Manager. For more information on the risks of such securities, see
"Description of Bond Ratings" in the Appendix.
Bank obligations of foreign banks (including U.S. branches of foreign banks)
in which the Portfolio may invest must, at the time of investment (i) have
more than $10 billion, or the equivalent in other currencies, in total assets;
(ii) in terms of assets be among the 75 largest foreign banks in the world;
(iii) have branches or agencies (limited purpose offices which do not offer
all banking services) in the U.S.; and (iv) in the opinion of the portfolio
manager, be of an investment quality comparable to obligations of U.S. banks
in which the portfolio may invest.
For hedging purposes, the Portfolio may purchase put and call options on
securities and securities indexes and may write covered call and secured put
options. The Portfolio may also purchase and sell stock index futures
contracts and options thereon. To hedge against the risk of currency
fluctuation associated with investment in foreign securities, the Portfolio
may buy or sell foreign currencies on a spot (cash) basis and enter into
forward
2
<PAGE>
foreign currency contracts or purchase and write options on foreign currencies
or foreign currency futures contracts and purchase and write options thereon.
The Portfolio may trade futures contracts and options on futures contracts not
only on U.S. domestic markets, but also on exchanges located outside of the
U.S. The Portfolio may engage in "short sales against the box," in which the
Portfolio sells short a security it owns, as long as no more than 15% of the
Portfolio's net assets would be subject to such short sales at any time.
Emerging Markets Portfolio
The Portfolio is subject to guidelines for diversification of foreign
security investments that prescribe the minimum number of countries in which
the Portfolio's assets may be invested. These guidelines are discussed under
"Foreign Securities."
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest up to 10% of its assets in U.S.
government securities, high quality debt securities, money market obligations,
and in cash to meet cash flow needs or if the U.S. Government ever imposes
restrictions on foreign investing. Such money market obligations may include
short-term corporate or U.S. government obligations and bank certificates of
deposit. The Portfolio may also invest in: nonconvertible fixed income
securities denominated in foreign currencies; small capitalization stocks;
equity index swap agreements; ADRs; GDRs; EDRs, or other securities
convertible into equity securities of U.S. or foreign issuers; up to 5% of its
net assets in warrants and rights (valued at the lower of cost or market)
provided that no more than 2% of its net assets are invested in warrants not
listed on the New York or American Stock Exchanges; variable and floating rate
securities; warrants on securities that it is eligible to purchase; preferred
stock; repurchase agreements; reverse repurchase agreements; firm commitment
agreements; and when-issued securities. The Portfolio is also permitted to
invest in other investment company securities including Optimised Portfolios
as Listed Securities ("OPALS"). The debt securities (including commercial
paper, foreign government and international agencies) and money market
obligations in which the Portfolio invests may be issued by U.S. and foreign
issuers and may be denominated in U.S. dollars or foreign currencies. The
Portfolio may invest in corporate debt securities rated Baa or better by
Moody's or BBB or better by S&P, or, if not rated by Moody's or S&P, of
equivalent quality as determined by the Portfolio Manager. For more
information on the risks of such securities, see "Description of Bond Ratings"
in the Appendix.
The Portfolio may only invest in bank obligations of foreign banks
(including U.S. branches of foreign banks) which at the time of investment:
(i) had more than $10 billion, or the equivalent in other currencies, in total
assets; (ii) in terms of assets are among the 75 largest foreign banks in the
world; (iii) have branches or agencies (limited purpose offices which do not
offer all banking services) in the U.S.; and (iv) in the opinion of the
portfolio manager, are of an investment quality comparable to obligations of
U.S. banks in which the portfolio may invest.
The Portfolio may engage in the purchase and writing of put and call options
on foreign currencies, securities, and stock indexes. The Portfolio may also
engage in futures contracts on securities and stock indexes, including foreign
exchange futures contracts, and may purchase and sell put and call options
thereon. The Portfolio may enter into forward foreign currency contracts,
foreign currency exchange transactions on a spot (i.e., cash) basis, cross-
hedge between two non-U.S. currencies, and use derivatives and other
management techniques to hedge and manage changes in currency exchange rates.
The Portfolio may trade futures contracts and options on futures contracts not
only on U.S. domestic markets, but also on exchanges located outside of the
U.S.
Investors should understand that the expense ratio of the Portfolio can be
expected to be higher than investment companies investing in domestic
securities since the cost of maintaining the custody of foreign securities and
the rate of advisory fees paid by the Portfolio is higher.
Diversified Research Portfolio
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in: U.S. dollar-denominated
corporate debt securities of domestic and foreign issuers; convertible
securities; U.S.
3
<PAGE>
government securities; equity REITs; bank obligations; warrants; firm
commitment agreements; when-issued securities; commercial paper; repurchase
agreements; and reverse repurchase agreements. The Portfolio may also invest
in foreign issuers whose principal markets are in the U.S. (which include ADRs
and foreign securities registered in the U.S.); and up to 15% of its total
assets in companies domiciled outside the U.S. and not included in the
S&P 500. The Portfolio may engage in foreign currency transactions; forward
foreign currency contracts; and foreign currency futures contracts. The
Portfolio may also engage in the purchasing and writing of put and call
options on foreign currencies, foreign currency futures contracts, and
securities, and may purchase put and call options on stock indexes that are
exchange traded or traded on over-the-counter markets.
The Portfolio may not invest in variable and floating rate securities.
In addition to the risk factors described in the Prospectus, the Portfolio
may be affected by the following risk factors: The Portfolio's growth oriented
approach to stock selection may result in its securities being more sensitive
to changes in current or expected earnings than the prices of other stocks.
The price of growth stocks also is subject to the risk that the stock price of
one or more companies will fall or will fail to appreciate as anticipated by
the Portfolio Manager, regardless of performance of the securities markets.
Small-Cap Equity Portfolio
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may invest in various foreign securities if listed
on a U.S. exchange or otherwise included in the S&P 500; commercial paper;
repurchase agreements; corporate debt securities; U.S. Government securities,
its agencies or instrumentalities; ADRs; bank obligations; variable and
floating rate securities; firm commitment agreements; when-issued securities;
and may hold a portion of its assets in cash.
The Portfolio may also invest up to 5% of its assets in convertible bonds
and other fixed income securities (other than money market instruments), which
will primarily, at the time of investment, be rated Baa or better by Moody's
or BBB or better by S&P, or, if not rated by Moody's or S&P, will be of
comparable quality as determined by the Portfolio Manager.
The Portfolio may not engage in futures contracts and options on futures
contracts.
International Large-Cap Portfolio
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in: high quality debt securities
rated, at the time of purchase, within the top three quality categories by
Moody's or S&P (or unrated securities of equivalent quality); convertible
securities; U.S. government securities; warrants; equity REITs; bank
obligations; repurchase agreements; reverse repurchase agreements; and short-
term debt obligations (including commercial paper) denominated in U.S. dollars
(including U.S. dollar-denominated debt securities of foreign issuers) or
foreign currencies. The Portfolio may also engage in foreign currency
transactions and forward foreign currency contracts. The Portfolio may engage
in the purchase and writing of put and call options on foreign currencies,
foreign currency futures contracts, and securities, and may purchase put and
call options on stock indexes that are exchange traded or traded on over-the-
counter markets.
The Portfolio may not invest in variable and floating rate securities.
Investors should understand that the expense ratio of the Portfolio can be
expected to be higher than investment companies investing in domestic
securities since the cost of maintaining the custody of foreign securities and
the rate of advisory fees paid by the Portfolio is higher.
Equity Portfolio
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in: U.S. government securities;
small capitalization stocks; corporate bonds; convertible securities, money
4
<PAGE>
market instruments; precious metals-related securities; mortgage-related and
asset-backed securities. The Portfolio may invest in warrants; however, not
more than 5% of the market value of its assets (at the time of purchase) may
be invested in warrants other than warrants acquired in units or attached to
other securities; and rights; bank obligations; variable and floating rate
securities; firm commitment agreements; when-issued securities; and enter in
repurchase agreements, which the Portfolio may, together with other registered
investment companies managed by Goldman Sach Asset Management or its
affiliates, transfer uninvested cash balances into a single joint account, the
daily aggregate balance of which will be invested in one or more repurchase
agreements. In addition, the Portfolio may invest in commercial paper (1)
rated at the time of purchase Prime-1 by Moody's or A-1 by S&P or (2) if not
rated by either Moody's or S&P, issued by a corporation having an outstanding
debt issue rated Aa or better by Moody's or AA or better by S&P. The Portfolio
may engage in "short sales against the box," in which the Portfolio sells
short a security it owns, as long as no more than 15% of the Portfolio's net
assets would be subject to such short sales at any time.
The Portfolio may also purchase and write put and call options on securities
and stock indices and enter into stock index futures contracts and options
thereon. The Portfolio will only enter into futures contracts and futures
options which are standardized and traded on a U.S. exchange, board of trade,
or similar entity. The Portfolio may also purchase Standard & Poor's
Depository Receipts ("SPDRs"), which represent ownership interests in the SPDR
Trust, a long-term unit investment trust established to accumulate and hold a
portfolio of common stocks that is intended to track the price performance and
dividend yield of the Standard & Poor's 500 Composite Stock Price Index ("S&P
500").
I-Net Tollkeeper Portfolio
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may invest in preferred stocks; repurchase
agreements; U.S. government securities; bank obligations; interests in real
estate investment trusts (equity, mortgage, or hybrid); mortgage-related
securities, including real estate mortgage investment conduit ("REMIC")
certificates; asset-backed securities; commercial paper; short sales against
the box; firm commitment agreements; when-issued securities; high-yield bonds;
variable and floating rate securities; convertible securities; equity
interests in trusts; partnerships; joint ventures; limited liability companies
and similar enterprises; warrants and rights. The Portfolio may also invest up
to 10% of its assets in debt securities rated lower than Baa by Moody's or BBB
by S&P, or if not rated by Moody's or S&P, of equivalent quality as determined
by the Portfolio Manager. For more information on the risks of such
securities, see the "Description of Bond Ratings" in the Appendix and the
discussion under "High Yield Bonds". In addition, the Portfolio may invest in
obligations issued or guaranteed by U.S. or foreign banks. The Portfolio also
may invest in GDRs, EDRs or other similar instruments representing securities
of foreign issuers.
The Portfolio may purchase securities on margin. The Portfolio may enter
into forward currency contracts and foreign currency transactions and may
purchase and write put and call options on foreign currencies. The Portfolio
may also purchase and write covered put and call options on securities in
which it may invest and on any securities index consisting of securities in
which it may invest. The Portfolio may invest in futures contracts on
securities, stock indexes and interest rates, and options thereon. The
Portfolio may also trade futures contracts and options on futures contracts
not only on U.S. domestic markets, but also on exchanges located outside of
the United States. In addition, the Portfolio may invest in SPDRs and OPALS.
In addition to the risk factors described in the Prospectus, the Portfolio
may be affected by the following risk factors: First, investment in companies
that may be unseasoned, may have limited liquidity, which can result in their
being priced higher or lower than might otherwise be the case. Investments in
unseasoned companies are more speculative and entail greater risk than do
investments in companies with an established operating record.
Second, the legal obligations of online service providers is unclear under
both U.S. and foreign law with respect to freedom of expression, defamation,
libel, invasion of privacy, advertising, copyright or trademark infringement,
information security, or other areas based on the nature and content of the
materials disseminated through online service providers. Moreover, legislation
has been proposed that imposes liability for, or prohibits
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the transmission over, the Internet of certain types of information. It is
possible that now or in the future, related claims could be made against
online services companies. These liability issues, as well as possibly other
legal issues, could impact the growth of Internet use.
For example, it is possible that laws and regulations may be adopted with
respect to the Internet or other online service providers with respect to the
imposition of sales tax collection obligations on Internet companies and the
use of personal user information. The nature of this governmental action and
the manner in which it may be interpreted and enforced cannot be predicted.
Changes to existing laws or the passage or proposed passage of new laws
intended to address these and other issues, could create uncertainty in the
marketplace that could reduce demand for the services of an Internet company
or increase the costs of doing business as a result of actual or anticipated
litigation costs or increased service delivery costs, or could in some other
manner have a material adverse effect on an Internet company's business,
results of operations and financial condition.
The success of many Internet companies depends, in large part, upon the
development and maintenance of the infrastructure of the World Wide Web
("Web") for providing reliable Web access and services. There can be no
assurances that the infrastructure or complementary products or services
necessary to make the Web a viable commercial marketplace for the long term
will be developed, or, if they are developed, that the Web will become a
viable commercial marketplace for services such as those offered by Internet
companies.
The market for the purchase of products and services over the Internet is a
new and emerging market. If acceptance and growth of Internet use does not
occur, an Internet company's business and financial performance may suffer.
Although there has been substantial interest in the commercial possibilities
for the Internet, many businesses and consumers have been slow to purchase
Internet access services for a number of reasons, including inconsistent
quality of service, lack of availability of cost-effective, high-speed
service, a limited number of local access points for corporate users,
inability to integrate business applications on the Internet, the need to deal
with multiple and frequently incompatible vendors, inadequate protection of
the confidentiality of stored data and information moving across the Internet
and a lack of tools to simplify Internet access and use. It is possible that a
sufficiently broad base of consumers may not adopt, or continue to use, the
Internet as a medium of commerce.
Despite the implementation of security measures, an Internet company's
networks may be vulnerable to unauthorized access, computer viruses and other
disruptive problems. Internet companies have in the past experienced, and may
in the future experience, interruptions in service as a result of the
accidental or intentional actions of Internet users, current and former
employees or others. Unauthorized access could also potentially jeopardize the
security of confidential information stored in the computer systems of a
company and its subscribers. These events may result in liability of the
company to its subscribers and also may deter potential subscribers.
Financial Services Portfolio
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may invest in repurchase agreements; U.S. government
securities; mortgage-related securities; asset-backed securities; commercial
paper; REITs; ADRs; when-issued or delayed delivery securities; convertible
and preferred securities; warrants; and rights. The Portfolio may also invest
in U.S dollar denominated certificates of deposit, time deposits and banker's
acceptances issued by U.S and foreign banks. The Portfolio limits its
investments in bank obligations to U.S. domestic banks which have more than $5
billion in assets and that otherwise meets the Portfolio's credit rating
requirements, and in foreign banks which have more than $10 billion in assets
with branches or agencies in the U.S. The Portfolio may invest up to 25% of
its total assets in foreign securities including brady bonds. ADRs and
Canadian issuers are excluded for purposes of this limitation.
The Portfolio may also invest in debt securities rated lower than Baa by
Moody's or BBB by S&P (although it may not invest in securities rated lower
than Caa or CCC respectively), or if not rated by Moody's or S&P, of
equivalent quality as determined by the Portfolio Manager. For more
information on the risks of such securities, see "Description of Bond Ratings"
in the Appendix and the discussion under "High Yield Bonds".
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The Portfolio may enter into forward currency contracts and foreign currency
transactions and may purchase and write put and call options on foreign
currencies. The Portfolio may also purchase and write covered put and call
options on securities in which it may invest and on any securities index
consisting of securities in which it may invest. The Portfolio may invest in
futures contracts on securities, stock indexes and interest rates, and options
thereon.
Health Sciences Portfolio
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may invest in repurchase agreements; U.S. government
securities; mortgage-related securities; asset-backed securities; commercial
paper; REITs; ADRs; when-issued or delayed delivery securities; convertible
and preferred securities; warrants; and rights. The Portfolio may also invest
in U.S dollar denominated certificates of deposit, time deposits and banker's
acceptances issued by U.S and foreign banks. The Portfolio limits its
investments in bank obligations to U.S. domestic banks which have more than $5
billion in assets and that otherwise meets the Portfolio's credit rating
requirements, and in foreign banks which have more than $10 billion in assets
with branches or agencies in the U.S. The Portfolio may invest up to 25% of
its total assets in foreign securities including brady bonds. ADRs and
Canadian issuers are excluded for purposes of this limitation.
The Portfolio may also invest in debt securities rated lower than Baa by
Moody's or BBB by S&P (although it may not invest in securities rated lower
than Caa or CCC respectively), or if not rated by Moody's or S&P, of
equivalent quality as determined by the Portfolio Manager. For more
information on the risks of such securities, see "Description of Bond Ratings"
in the Appendix and the discussion under "High Yield Bonds".
The Portfolio may enter into forward currency contracts and foreign currency
transactions and may purchase and write put and call options on foreign
currencies. The Portfolio may also purchase and write covered put and call
options on securities in which it may invest and on any securities index
consisting of securities in which it may invest. The Portfolio may invest in
futures contracts on securities, stock indexes and interest rates, and options
thereon.
Technology Portfolio
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may invest in repurchase agreements; U.S. government
securities; mortgage-related securities; asset-backed securities; commercial
paper; REITs; ADRs; when-issued or delayed delivery securities; convertible
and preferred securities; warrants; and rights. The Portfolio may also invest
in U.S dollar denominated certificates of deposit, time deposits and banker's
acceptances issued by U.S and foreign banks. The Portfolio limits its
investments in bank obligations to U.S. domestic banks which have more than $5
billion in assets and that otherwise meets the Portfolio's credit rating
requirements, and in foreign banks which have more than $10 billion in assets
with branches or agencies in the U.S. The Portfolio may invest up to 25% of
its total assets in foreign securities including brady bonds. ADRs and
Canadian issuers are excluded for purposes of this limitation.
The Portfolio may also invest in debt securities rated lower than Baa by
Moody's or BBB by S&P (although it may not invest in securities rated lower
than Caa or CCC respectively), or if not rated by Moody's or S&P, of
equivalent quality as determined by the Portfolio Manager. For more
information on the risks of such securities, see "Description of Bond Ratings"
in the Appendix and the discussion under "High Yield Bonds".
The Portfolio may enter into forward currency contracts and foreign currency
transactions and may purchase and write put and call options on foreign
currencies. The Portfolio may also purchase and write covered put and call
options on securities in which it may invest and on any securities index
consisting of securities in which it may invest. The Portfolio may invest in
futures contracts on securities, stock indexes and interest rates, and options
thereon.
Telecommunications Portfolio
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may invest in repurchase agreements; U.S. government
securities; mortgage-related securities; asset-backed securities;
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commercial paper; REITs; ADRs; when-issued or delayed delivery securities;
convertible and preferred securities; warrants; and rights. The Portfolio may
also invest in U.S dollar denominated certificates of deposit, time deposits
and banker's acceptances issued by U.S and foreign banks. The Portfolio limits
its investments in bank obligations to U.S. domestic banks which have more
than $5 billion in assets and that otherwise meets the Portfolio's credit
rating requirements, and in foreign banks which have more than $10 billion in
assets with branches or agencies in the U.S. The Portfolio may invest without
limit in foreign securities including brady bonds.
In addition, the Portfolio may also invest up to 35% of its assets in debt
securities, of which no more than 15% may be rated Ba or lower by Moody's or
BB or lower by S & P (although the Portfolio may not invest in debt securities
rated lower than Caa or CCC respectively), or if not rated by Moody's or S&P,
of equivalent quality as determined by the Portfolio Manager. Investments in
unrated securities may not exceed 25% of the Portfolio's total assets. For
more information on the risks of such securities, see "Description of Bond
Ratings" in the Appendix and the discussion under "High Yield Bonds".
The Portfolio may enter into forward currency contracts and foreign currency
transactions and may purchase and write put and call options on foreign
currencies. The Portfolio may also purchase and write covered put and call
options on securities in which it may invest and on any securities index
consisting of securities in which it may invest. The Portfolio may invest in
futures contracts on securities, stock indexes and interest rates, and options
thereon.
Multi-Strategy Portfolio
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in: equity securities of small
companies and foreign issuers if U.S. exchange listed or if otherwise included
in the S&P 500; high yield bonds; repurchase agreements; U.S. government
securities; ADRs; bank obligations; variable and floating rate securities; and
firm commitment agreements; and when-issued securities. The Portfolio may
invest in warrants; however, not more than 10% of the market value of its
assets (at the time of purchase) may be invested in warrants other than
warrants acquired in units or attached to other securities. The Portfolio's
equity securities may or may not pay dividends and may or may not carry voting
rights. The Portfolio may invest in U.S. dollar-denominated corporate debt
securities of domestic issuers, U.S. dollar-denominated debt securities of
foreign issuers (including foreign government and international agencies); and
up to 10% of its assets in debt securities of foreign issuers which may be
denominated in foreign currencies rated Baa (Moody's) or BBB (S&P), or, if not
rated by Moody's or S&P, of equivalent quality. The Portfolio may also invest
in debt securities rated lower than Baa by Moody's or BBB by S&P, or if not
rated by Moody's or S&P, of equivalent quality. For more information on the
risks of such securities, see the "Description of Bond Ratings" in the
Appendix and the discussion under "High Yield Bonds". Fixed income securities
in which the portfolio may invest include debentures, asset-backed securities,
mortgage-related securities, convertible securities and money market
instruments.
The Portfolio may purchase and sell put and call options on securities and
stock indexes and may purchase or sell interest rate and stock index futures
contracts and options thereon. The Portfolio will only enter into futures
contracts and futures options which are standardized and traded on a U.S.
exchange, board of trade, or similar entity. The Portfolio may also engage in
forward currency contracts, foreign currency transactions, and foreign
currency futures and options thereon in anticipation of or to protect itself
against fluctuations in currency exchange rates with respect to investments in
securities of foreign issuers.
Equity Income Portfolio
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in ADRs and in foreign securities if
they are listed on a U.S. exchange or otherwise included in the S&P 500. To
invest temporary cash balances, to maintain liquidity to meet redemptions or
expenses, or for temporary defensive purposes, the Portfolio may invest in:
money market instruments, including U.S. government securities, short-term
bank obligations rated in the highest two rating categories by Moody's or S&P,
or, if not rated by Moody's or S&P, determined to be of equal quality by the
Portfolio Manager; certificates of deposit;
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time deposits; loans or credit agreements and banker's acceptances issued by
U.S. and foreign banks with assets of at least U.S. $500 million as of the end
of their most recent fiscal year; short-term debt obligations of savings and
loan institutions with assets of at least U.S. $500 million as of the end of
their most recent fiscal year; and commercial paper and corporate obligations,
including variable and floating rate securities that are issued by U.S. and
foreign issuers and that are rated in the highest two rating categories by
Moody's or S&P, or if not rated by Moody's or S&P, determined to be of equal
quality by the Portfolio Manager. The Portfolio may also invest in high yield
and convertible bonds; repurchase agreements; rights; firm commitment
agreements; and when-issued securities; and other fixed income securities
including, but not limited to high yield/high risk debt securities. The
Portfolio may invest in warrants; however, not more than 10% of the market
value of its assets (at the time of purchase) may be invested in warrants
other than warrants acquired in units or attached to other securities. The
Portfolio is also permitted to invest in U.S. dollar-denominated corporate
debt securities of domestic issuers and debt securities of foreign issuers
denominated in foreign currencies, rated Baa (Moody's) or BBB (S&P), or, if
not rated by Moody's or S&P, of equivalent quality. The Portfolio may also
invest in debt securities rated lower than Baa by Moody's or BBB by S&P, or if
not rated by Moody's or S&P, of equivalent quality. For more information on
the risks of such securities, see "Description of Bond Ratings" in the
Appendix and the discussion under "High Yield Bonds".
In addition to the derivatives described in the Prospectus, the Portfolio
may also purchase and write put and call options on securities and stock
indexes and may purchase or sell stock index futures contracts and options
thereon. The Portfolio will only enter into futures contracts and futures
options which are standardized and traded on a U.S. exchange, board of trade,
or similar entity.
Strategic Value Portfolio
The Portfolio is a "non-diversified" portfolio. The Portfolio reserves the
right to become a diversified portfolio by limiting the investments in which
more than 5% of its total assets are invested.
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in commercial paper; certificates of
deposit; repurchase agreements; or other short-term debt obligations; pass-
through securities, such as mortgage-backed securities, asset-backed
securities and participation interests; municipal obligations; short sales
against the box; variable and floating rate securities; standby commitments;
tender option bonds; inverse floaters; strip bonds; reverse repurchase
agreements; up to 10% of its assets in zero coupon, pay-in-kind and step
coupon securities; and securities of other investment companies. The Portfolio
may also invest in money market funds, including those managed by Janus
Capital Corporation ("Janus") as a means of receiving a return on cash,
pursuant to an exemptive order received by Janus from the SEC. The Portfolio
is also permitted to invest without limit in foreign securities, including
ADRs, EDRs, and GDRs, and up to 35% of its assets in bonds rated lower than
Baa by Moody's or BBB by S&P, or if not rated by Moody's or S&P, of equivalent
quality.
In addition to the derivatives described in the Prospectus, the Portfolio
may purchase and sell futures contracts on securities, interest rate, index,
and foreign currency, and options thereon, including Eurodollar instruments.
The Portfolio may also enter into interest rate swaps, caps and floors on
either an asset-based or a liability-based basis. The Portfolio may engage in
forward contracts, forward foreign currency contracts and foreign currency
transactions and purchase and write options on foreign currencies. The
Portfolio may also engage in the purchase and writing of put and call options
on securities that are traded on U.S. and foreign securities exchanges and
over-the-counter. The Portfolio may purchase and write options on the same
types of securities that the Portfolio may purchase directly.
Growth LT Portfolio
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in warrants; however, not more than
10% of the market value of its assets (at the time of purchase) may be
invested in warrants other than warrants acquired in units or attached to
other securities; preferred stocks;
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<PAGE>
certificates of deposit; mortgage-related and asset-backed securities;
commercial paper; U.S. government securities; rights; bank obligations
(including certain foreign bank obligations); U.S. dollar-denominated
obligations of foreign governments, foreign government agencies and
international agencies; convertible securities; variable and floating rate
securities; firm commitment agreements; when-issued securities; repurchase
agreements; and reverse repurchase agreements. The Portfolio may also invest
in small capitalization stocks; U.S. dollar-denominated corporate debt
securities of domestic issuers and debt securities of foreign issuers
denominated in foreign currencies, rated Baa (Moody's) or BBB (S&P), or, if
not rated by Moody's or S&P, of equivalent quality. The Portfolio may also
invest up to 10% of its assets in bonds rated lower than Baa by Moody's or BBB
by S&P, or if not rated by Moody's or S&P, of equivalent quality. For more
information on the risks of such securities, see the "Description of Bond
Ratings" in the Appendix and the discussion under "High Yield Bonds". The
Portfolio may also invest in money market funds, including those managed by
Janus as a means of receiving a return on cash, pursuant to an exemptive order
received by Janus from the SEC.
The Portfolio is also permitted to invest in equity securities of foreign
issuers if U.S. exchange listed or otherwise included in the S&P 500. The
Portfolio may invest up to 25% of its assets in foreign securities denominated
in a foreign currency and not publicly traded in the U.S. In addition, the
Portfolio may purchase ADRs, EDRs, and GDRs, and other types of receipts
evidencing ownership of the underlying foreign securities. The Portfolio may
purchase securities on margin and may engage in the purchase and writing of
put and call options on securities, stock indexes, and foreign currencies. In
addition, the Portfolio may purchase and sell interest rate, stock index, and
foreign currency futures contracts and options thereon. The Portfolio may
trade futures contracts and options on futures contracts not only on U.S.
domestic markets, but also on exchanges located outside of the U.S. The
Portfolio may also engage in forward foreign currency contracts and foreign
currency transactions.
Focused 30 Portfolio
The Portfolio is a "non-diversified" portfolio. The Portfolio reserves the
right to become a diversified portfolio by limiting the investments in which
more than 5% of its total assets are invested.
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in commercial paper; certificates of
deposit; repurchase agreements; or other short-term debt obligations; pass-
through securities, such as mortgage-backed securities, asset-backed
securities and participation interests; municipal obligations; short sales
against the box; variable and floating rate securities; standby commitments;
tender option bonds; inverse floaters; strip bonds; reverse repurchase
agreements; up to 10% of its assets in zero coupon, pay-in-kind and step
coupon securities; and securities of other investment companies. The Portfolio
may also invest in money market funds, including those managed by Janus as a
means of receiving a return on cash, pursuant to an exemptive order received
by Janus from the SEC. The Portfolio is also permitted to invest without limit
in foreign securities, including ADRs, EDRs, and GDRs, and up to 35% of its
assets in bonds rated lower than Baa by Moody's or BBB by S&P, or if not rated
by Moody's or S&P, of equivalent quality.
In addition to the derivatives described in the Prospectus, the Portfolio
may purchase and sell futures contracts on securities, interest rate, index,
and foreign currency, and options thereon, including Eurodollar instruments.
The Portfolio may also enter into interest rate swaps, caps and floors on
either an asset-based or a liability-based basis. The Portfolio may engage in
forward contracts, forward foreign currency contracts and foreign currency
transactions and purchase and write options on foreign currencies. The
Portfolio may also engage in the purchase and writing of put and call options
on securities that are traded on U.S. and foreign securities exchanges and
over-the-counter. The Portfolio may purchase and write options on the same
types of securities that the Portfolio may purchase directly.
Mid-Cap Value Portfolio
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in: preferred stocks; securities
convertible into or exchangeable for common stocks; forward foreign
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currency contracts; repurchase agreements; reverse repurchase agreements;
ADRs; GDRs; firm commitment agreements; and when-issued securities; and up to
5% of its total assets in rights. The Portfolio may invest in warrants;
however, not more than 10% of the market value of its assets (at the time of
purchase) may be invested in warrants other than warrants acquired in units or
attached to other securities. The Portfolio may purchase securities on margin
and may invest a portion of its assets in investment grade debt securities,
including: U.S. Government Securities; commercial paper; mortgage-related
securities; variable and floating rate securities; other short-term bank
obligations; and U.S. dollar-denominated corporate debt securities (including
U.S. dollar-denominated debt securities of foreign issuers, certain foreign
bank and government obligations, foreign government and international
agencies).
The Portfolio may borrow for investment purposes ("leveraging") to the
extent permitted under the 1940 Act, which permits an investment company to
engage in borrowing, provided that it maintains continuous asset coverage of
300% of the amount borrowed. If the required coverage should decline as a
result of market fluctuations or other reasons, the Portfolio may be required
to sell some of its portfolio securities within three days to reduce the
amount of its borrowings and to restore the 300% asset coverage, even though
it may be disadvantageous from an investment standpoint to sell securities at
that time. The Portfolio may also invest up to 15% of its total assets,
determined at the time of investment, in foreign equity or debt securities.
The Portfolio may engage in "short sales," in which the Portfolio sells a
security it does not own, and "short sales against the box," in which the
Portfolio sells short a security it owns, if, at the time of investment, the
total market value of all securities sold and held short would not exceed 25%
of the Portfolio's net assets.
The Portfolio may also purchase and write put and call options on
securities, stock indexes and foreign currencies and may purchase cash-settled
options on interest rate swaps and equity index swaps. The Portfolio may enter
into interest rate, interest rate index, and currency exchange rate swap
agreements and purchase and sell options thereon. In addition, the Portfolio
may purchase or sell futures contracts on securities, stock indexes, and
currency, and options thereon. The Portfolio may engage in foreign currency
transactions: (1) to fix in U.S. dollars the value of a security the Portfolio
has agreed to buy or sell between the trade and settlement dates; and (2) to
hedge the U.S. dollar value of securities the Portfolio already owns. The
Portfolio will enter into futures contracts and futures options which are
standardized and traded on a U.S. exchange, board of trade, or similar entity.
The Portfolio may also trade futures contracts and options on futures
contracts not only on U.S. domestic markets, but also on exchanges located
outside of the U.S. The Portfolio may also invest in equity real estate
investment trusts ("REITs"), although it currently intends to limit its
investments in REITs to no more than 5% of its assets.
International Value Portfolio
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may invest up to 5% of its assets, measured at the
time of investment, in debt securities that are rated below investment grade,
or if not rated, of equivalent quality. For more information on the risks of
such securities, see the "Description of Bond Ratings" in the Appendix and the
discussion under "High Yield Bonds". The Portfolio may also invest in: small
capitalization stocks; nonconvertible fixed income securities denominated in
foreign currencies; repurchase agreements; ADRs; EDRs; GDRs; or other
securities convertible into equity securities of foreign issuers; variable and
floating rate securities; U.S. government securities; bank obligations; firm
commitment agreements; when-issued securities; and commercial paper
denominated in foreign currencies. The Portfolio's investments in convertible
securities are not subject to the limitations described below or in the
section "Bank Obligations." The Portfolio may purchase securities on margin
and may engage in "short sales," in which the Portfolio sells a security it
does not own, and "short sales against the box," in which the Portfolio sells
short a security it owns.
The Portfolio may also hold cash (in U.S. dollars or foreign currencies) or
short-term securities denominated in such currencies to provide for
redemptions; it is generally not expected that such reserve for redemptions
will exceed 10% of the Portfolio's assets. Securities which may be held for
defensive purposes include nonconvertible
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preferred stock, debt securities, government securities issued by U.S. and
foreign countries and money market securities. The Portfolio is subject to
guidelines for diversification of foreign security investments that prescribe
the minimum number of countries in which the Portfolio's assets may be
invested. These guidelines are discussed under "Foreign Securities."
The Portfolio may also invest in obligations of foreign banks (including
U.S. branches of foreign banks) which at the time of investment (i) have more
than U.S. $1 billion, or the equivalent in other currencies, in total assets;
and (ii) in the opinion of the Portfolio Manager, are of an investment quality
comparable to fixed income obligations in which the Portfolio may invest. The
Portfolio may also purchase and sell financial futures contracts, stock index
futures contracts, and foreign currency futures contracts and options thereon.
The Portfolio may trade futures contracts and options on futures contracts not
only on U.S. domestic markets, but also on exchanges located outside of the
U.S. and may purchase and write put and call options on foreign currencies.
The Portfolio may purchase and write put and call options on stock indexes and
may invest in U.S. dollar-denominated corporate debt securities of domestic
issuers (including U.S. dollar-denominated debt securities of foreign issuers)
and debt securities of foreign issuers denominated in foreign currencies,
rated Baa (Moody's) or BBB (S&P), or, if not rated by Moody's or S&P, of
equivalent quality. For more information on the risks of such securities, see
"Description of Bond Ratings" in the Appendix. The Portfolio may also engage
in foreign currency transactions and forward foreign currency contracts in
anticipation of or to protect itself against fluctuations in currency exchange
rates.
Investors should understand that the expense ratio of the Portfolio can be
expected to be higher than investment companies investing in domestic
securities since the cost of maintaining the custody of foreign securities and
the rate of advisory fees paid by the Portfolio is higher.
Capital Opportunities Portfolio
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may invest in: short-term instruments; commercial
paper; closed-end funds; U.S. Government securities; variable and floating
rate securities; repurchase agreements and securities issued on a when-issued
basis. The Portfolio may also invest in corporate debt securities; zero coupon
bonds; deferred interest bonds; payable in kind ("PIK") bonds, although the
Portfolio will not invest more than 15% of its assets in debt securities
(including foreign and domestic securities) in lower rated bonds (bonds rated
Ba or lower by Moody's or BB or lower by S&P, or if not rated by Moody's or
S&P of equivalent quality as determined by the Portfolio Manager). For more
information on the risks of such securities, see "Description of Bond Ratings"
in the Appendix and the discussion under "High Yield Bonds". The Portfolio may
also invest up to 5% of its net assets, valued at the lower of cost or market,
in warrants. Included within such amount, but not to exceed 2% of the value of
the Portfolio's net assets, may be warrants which are not listed on the New
York or American Stock Exchange. Warrants acquired by the Portfolio in units
or attached to securities may be deemed to be without value. The Portfolio may
also invest up to 35% of its assets in foreign securities, including ADRs,
EDRs, GDRs and brady bonds. The Portfolio may engage in "short sales against
the box," in which the Portfolio sells short a security it owns.
The Portfolio may engage in the purchase and writing of put and call options
on foreign currencies, securities and stock indexes. The Portfolio may also
engage in futures contracts on foreign currencies, securities, stock indexes,
and may purchase and sell put and call options thereon. The Portfolio may also
enter into forward contracts.
In addition, the Portfolio will not invest more than 5% of its assets in
unsecured obligations of issuers which, including predecessors, controlling
persons, general partners and guarantors, have a record of less than three
years' continuous business operation or relevant business experience.
The Portfolio may not invest in corporate asset-backed securities, mortgage-
related securities (including collateralized mortgage obligations, mortgage-
backed securities, stripped mortgage-backed securities, pass-through
securities and mortgage "dollar roll" transactions), municipal bonds, indexed
securities, structured
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products, inverse floating rate obligations and dollar-denominated foreign
debt securities. In addition, the Portfolio may not engage in bank borrowings,
reverse repurchase agreements, short sales, reset options, yield curve
options, swaps and related derivative instruments.
Mid-Cap Growth Portfolio
The Portfolio is a "non-diversified" portfolio.
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may invest in: short-term instruments; commercial
paper; open-end and closed-end funds; U.S. Government securities; variable and
floating rate securities; repurchase agreements; securities issued on a when-
issued basis; corporate debt securities; zero coupon bonds; deferred interest
bonds; payable in kind ("PIK") bonds, although the Portfolio will not invest
more than 10% of its assets in debt securities (including foreign and domestic
securities) in lower rated bonds (bonds rated Ba or lower by Moody's or BB or
lower by S&P, or if not rated by Moody's or S&P of equivalent quality as
determined by the Portfolio Manager). The Portfolio may also invest up to 5%
of its net assets, valued at the lower of cost or market, in warrants.
Included within such amount, but not to exceed 2% of the value of the
Portfolio's net assets, may be warrants which are not listed on the New York
or American Stock Exchange. Warrants acquired by the Portfolio in units or
attached to securities may be deemed to be without value. The Portfolio may
also invest up to 20% of its assets in foreign securities, including ADRs,
EDRs, and GDRs. The Portfolio may engage in "short sales," in which the
Portfolio sells a security it does not own, and "short sales against the box,"
in which the Portfolio sells short a security it owns.
The Portfolio may engage in the purchase and writing of put and call options
on foreign currencies; securities and stock indexes. The Portfolio may also
engage in futures contracts on foreign currencies; securities; and stock
indexes, and may purchase and sell put and call options thereon. The Portfolio
may also enter into forward contracts.
In addition, the Portfolio will not invest more than 5% of its assets in
unsecured obligations of issuers which, including predecessors, controlling
persons, sponsoring entities, general partners and guarantors, have a record
of less than three years' continuous business operation or relevant business
experience.
The Portfolio may not invest in corporate asset-backed securities; mortgage-
related securities (including collateralized mortgage obligations, mortgage-
backed securities, stripped mortgage-backed securities, pass-through
securities and mortgage "dollar roll" transactions); municipal bonds; indexed
securities; structured products; inverse floating rate obligations and dollar-
denominated foreign debt securities. In addition, the Portfolio may not engage
in bank borrowings; reverse repurchase agreements; reset options; yield curve
options; swaps and related derivative instruments.
Global Growth Portfolio
The Portfolio is subject to guidelines for diversification of foreign
security investments that prescribe the minimum number of countries in which
the Portfolio's assets may be invested. These guidelines are discussed under
"Foreign Securities."
The Portfolio is a non-diversified portfolio. Additionally, foreign
securities exposure (including emerging markets) may be up to 100% of the
Portfolio's assets. Investing in the securities of foreign issuers involves
special risks and considerations not typically associated with investing in
U.S. companies (See "Foreign Securities" for more information concerning the
risks associated with investing in foreign securities).
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may invest in: short-term instruments; commercial
paper; open-end and closed-end funds; U.S. Government securities; variable and
floating rate securities; repurchase agreements; and securities issued on a
when-issued basis. The Portfolio may also invest in corporate debt securities
(including foreign and domestic securities) in lower rated bonds (bonds rated
Ba or lower by Moody's or BB or lower by S&P, or if not rated by Moody's or
S&P of equivalent quality as determined by the Portfolio Manager), zero coupon
bonds, deferred interest bonds, payable
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in kind ("PIK") bonds. The Portfolio may also invest up to 5% of its net
assets, valued at the lower of cost or market, in warrants. Included within
such amount, but not to exceed 2% of the value of the Portfolio's net assets,
may be warrants, which are not listed on the New York or American Stock
Exchange. Warrants acquired by the Portfolio in units or attached to
securities may be deemed to be without value. The Portfolio may also invest up
to 35% of its assets in foreign securities, including ADRs, EDRs, and GDRs.
The Portfolio may also engage in "short sales," in which the Portfolio sells a
security it does not own, and "short sales against the box," in which the
Portfolio sells short a security it owns.
The Portfolio may engage in the purchase and writing of put and call options
on foreign currencies, securities and stock indexes. The Portfolio may also
engage in futures contracts on foreign currencies, securities, stock indexes,
and may purchase and sell put and call options thereon. The Portfolio may also
enter into forward contracts.
The Portfolio may not invest in corporate asset-backed securities; mortgage-
related securities (including collateralized mortgage obligations, mortgage-
backed securities, stripped mortgage-backed securities, pass-through
securities and mortgage "dollar roll" transactions); municipal bonds; indexed
securities; structured products; inverse floating rate obligations and dollar-
denominated foreign debt securities. In addition, the Portfolio may not engage
in bank borrowings; reverse repurchase agreements; reset options; yield curve
options; swaps and related derivative instruments.
Equity Index Portfolio
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may purchase and sell stock index futures, purchase
options on stock indexes, and purchase and write options on stock index
futures that are based on stock indexes which the Portfolio attempts to track
or which tend to move together with stocks included in the index. The
Portfolio will enter into futures contracts and futures options which are
standardized and traded on a U.S. exchange, board of trade, or similar entity.
The Portfolio may also invest in foreign equity securities if U.S. exchange
listed or if otherwise included in the S&P 500; ADRs; convertible securities;
firm commitment agreements; when-issued securities; and reverse repurchase
agreements. The Portfolio may temporarily invest cash balances, maintained for
liquidity purposes or pending investment, in short-term high quality debt
instruments, including: commercial paper; variable and floating rate
securities; repurchase agreements; bank obligations; and U.S. Government
securities, its agencies and instrumentalities. Temporary investments are not
made for defensive purposes in the event of or in anticipation of a general
decline in the market price of stocks in which the Portfolio invests.
The Portfolio may not invest in restricted securities (including privately
placed securities).
The Fund reserves the right to change the index whose performance the
Portfolio will attempt to replicate or for the Portfolio to seek its
investment objective by means other than attempting to replicate an index,
such as by operating the Portfolio as a managed fund, and reserves the right
to do so without seeking shareholder approval, but only if operating the
Portfolio as described in the Prospectus and above is not permitted under
applicable law for an investment company that serves as an investment medium
for variable insurance contracts, or otherwise involves substantial legal
risk.
Small-Cap Index Portfolio
Under normal conditions, the Portfolio invests at least 80% of the value of
its total assets in the common stock of companies included in the Russell 2000
Small Stock Index ("Russell 2000"). The Portfolio will be managed in an
attempt to minimize the degree to which the investment results of the
Portfolio (before taking into account the Portfolio's expenses) differ from
the results of the Russell 2000.
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may purchase and sell stock index futures and
options thereon and options on stock indexes that are based on the Russell
2000 or other indexes of small capitalization companies. The Portfolio will
enter into futures contracts and futures
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options which are standardized and traded on a U.S. exchange, board of trade,
or similar entity. The Portfolio may invest in foreign equity securities if
U.S. exchange listed and if they are included in the Russell 2000 and may
invest in warrants; however, not more than 10% of the market value of its
assets (at the time of purchase) may be invested in warrants other than
warrants acquired in units or attached to other securities. The Portfolio is
also permitted to invest in ADRs; repurchase agreements; rights; equity REITs;
U.S. Government securities, its agencies or instrumentalities; bank
obligations; commercial paper; variable and floating rate securities; firm
commitment agreements; when-issued securities; and securities that are
convertible into common stock. The Portfolio may maintain a portion of its
assets in short-term debt securities and money market instruments to meet
redemption requests or pending investment in the securities of the Russell
2000. These investments will not be made in anticipation of a general decline
in the market prices of stocks in which the Portfolio invests.
The Fund reserves the right to change the index whose performance the
Portfolio will attempt to replicate or for the Portfolio to seek its
investment objective by means other than attempting to replicate an index,
such as by operating the Portfolio as a managed fund, and reserves the right
to do so without seeking shareholder approval, but only if operating the
Portfolio as described in the Prospectus and above is not permitted under
applicable law for an investment company that serves as an investment medium
for variable insurance contracts, or otherwise involves substantial legal
risk.
REIT Portfolio
The Portfolio is a "non-diversified" portfolio. For purposes of the
Portfolio's investment policies, a company is principally engaged in the real
estate industry if: (1) it derives at least 50% of its revenues or profits
from the ownership, construction, management, financing or sale of
residential, commercial or industrial real estate; or (2) it has at least 50%
of the fair market value of its assets invested in residential, commercial, or
industrial real estate.
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may invest in warrants; however, not more than 10%
of the market value of its assets (at the time of purchase) may be invested in
warrants other than warrants acquired in units or attached to other
securities; and up to 10% of its assets in foreign securities (which may
include EDRs and GDRs) including: U.S. dollar-denominated corporate debt
securities, certain foreign bank obligations, and foreign government and
international agencies. The Portfolio may buy and sell put and call options on
securities and may purchase and sell futures contracts on interest rates and
options thereon. The Portfolio may also invest in the following: ADRs; bank
obligations; U.S. Government securities; convertible securities; commercial
paper; variable and floating rate securities; firm commitment agreements;
when-issued securities; preferred stock; repurchase agreements; currency
exchange rate swap agreements; interest rate derivative products, such as
swaps (including interest rate index swaps), caps, collars and floors; and
structured notes.
Government Securities Portfolio
In addition to its investments in U.S. government securities and related
investments, as described in the Prospectus, the Portfolio may invest up to
35% of its assets in the following: corporate debt securities of domestic
issuers (including U.S. dollar-denominated debt securities of foreign issuers)
rated Aa or better by Moody's or AA or better by S&P, or, if not rated by
Moody's or S&P, of comparable quality as determined by the Portfolio Manager;
mortgage-related securities, including collateralized mortgage obligations and
mortgage-backed bonds; asset-backed securities; repurchase agreements and
reverse repurchase agreements; commercial paper; bank obligations; convertible
securities; variable and floating rate securities; firm commitment agreements;
when-issued securities; ADRs; and in cash or high quality money market
instruments.
The Portfolio may also: purchase and write put and call options on
securities; purchase and sell spread transactions with securities dealers;
enter into interest rate, interest rate index, and currency exchange rate swap
agreements, and purchase and sell options thereon; engage in forward currency
contracts, foreign currency transactions, options on foreign currencies, and
foreign currency futures and options thereon; and purchase and sell interest
rate futures contracts and options thereon. The Portfolio may trade futures
contracts and options on
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futures contracts not only on U.S. domestic markets, but also on exchanges
located outside of the U.S. In addition, the Portfolio may invest up to 20% of
its total assets in debt securities of foreign issuers, which may be
denominated in foreign currencies.
Managed Bond Portfolio
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in: obligations issued or guaranteed
by the U.S. Government, its agencies, or instrumentalities; mortgage-related
securities; asset-backed securities; variable and floating rate debt
securities; bank obligations; commercial paper; convertible securities; firm
commitment agreements; when-issued securities; ADRs; U.S. dollar-denominated
obligations of international agencies (such as the International Bank for
Reconstruction and Development) and government agencies; and repurchase and
reverse repurchase agreements. The Portfolio may invest in U.S. dollar-
denominated debt securities of foreign issuers and up to 20% of its assets in
debt securities of foreign issuers denominated in foreign currencies.
The Portfolio may also invest up to 10% of its assets in debt securities
rated lower than Baa by Moody's or BBB by S&P (although it may not invest in
securities rated lower than B), or if not rated by Moody's or S&P, of
equivalent quality. The Portfolio, except as provided above, may invest only
in securities rated Baa or better by Moody's or BBB or better by S&P or, if
not rated by Moody's or S&P, determined by the Portfolio Manager to be of
comparable quality. The dollar-weighted average quality of all fixed income
securities held by the Portfolio will be A or higher as rated by Moody's and
S&P. In the event that a security owned by the Portfolio is downgraded to
below a B rating, the Portfolio may nonetheless retain the security. For more
information on the risks of such securities, see the "Description of Bond
Ratings" in the Appendix and the discussion under "High Yield Bonds". For the
year ended December 31, 1999, the amount of the Portfolio's average total
assets, measured on the basis of month-end values, invested in debt securities
rated less than investment grade was approximately 6.09%. The asset
composition after this time may or may not be the same as shown in 1999.
In pursuing its investment objective, the Portfolio may purchase and write
put and call options on securities; purchase and sell spread transactions with
securities dealers; purchase and sell interest rate futures contracts and
options thereon; and enter into interest rate, interest rate index, and
currency exchange rate swap agreements, and purchase and sell options thereon.
The Portfolio may trade futures contracts and options on futures contracts not
only on U.S. domestic markets, but also on exchanges located outside of the
U.S.
Furthermore, the Portfolio may engage in foreign currency transactions and
forward currency contracts; options on foreign currencies; and foreign
currency futures and options thereon, in anticipation of or to protect itself
against fluctuations in currency exchange rates with respect to investments in
securities of foreign issuers.
Money Market Portfolio
The Portfolio invests at least 95% of its total assets, measured at the time
of investment, in a diversified portfolio of money market securities that are
in the highest rating category for short-term instruments. The Portfolio may
invest only in U.S. dollar denominated securities that present minimal credit
risk. The Adviser shall determine whether a security presents minimal credit
risk under procedures adopted by the Fund's Board of Trustees that conform to
SEC rules for money market funds. In addition, the Portfolio is subject to
diversification standards applicable to money market funds under SEC rules.
A money market instrument will be considered to be highest quality (1) if
the instrument (or other comparable short-term instrument of the same issuer)
is rated in the highest rating category, (i.e., Aaa or Prime-1 by Moody's, AAA
or A-1 by S&P) by (i) any two nationally recognized statistical rating
organizations ("NRSROs") or, (ii) if rated by only one NRSRO, by that NRSRO;
(2) an unrated security that is of comparable quality to a security in the
highest rating category as determined by the Adviser; or (3) a U.S. Government
security. The Portfolio may not invest more than 5% of its total assets,
measured at the time of investment, in securities of any one issuer that are
of the highest quality, except that this limitation shall not apply to U.S.
Government securities and repurchase agreements thereon.
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<PAGE>
With respect to 5% of its total assets, measured at the time of investment,
the Portfolio may also invest in money market instruments that are in the
second-highest rating category for short-term debt obligations (i.e., rated Aa
or Prime-2 by Moody's or AA or A-2 by S&P). A money market instrument will be
considered to be in the second-highest rating category under the criteria
described above with respect to instruments considered highest quality, as
applied to instruments in the second-highest rating category. The Portfolio
may not invest more than the greater of 1% of its total assets or $1,000,000,
measured at the time of investment, in securities of any one issuer that are
in the second-highest rating category.
The quality of securities subject to guarantees may be determined based
solely on the quality of the guarantee. Additional eligibility restrictions
apply with respect to guarantees and demand features. In addition, securities
subject to guarantees not issued by a person in a control relationship with
the issuer of such securities are not subject to the preceding diversification
requirements. However, the Portfolio must generally, with respect to 75% of
its total assets, invest no more than 10% of its total assets in securities
issued by or subject to guarantees or demand features from the same entity.
In the event that an instrument acquired by the Portfolio is downgraded or
otherwise ceases to be of the quality that is eligible for the Portfolio, the
Adviser, under procedures approved by the Board of Trustees shall promptly
reassess whether such security presents minimal credit risk and determine
whether or not to retain the instrument. The Portfolio's investments are
limited to securities that mature within 13 months or less from the date of
purchase (except that securities held subject to repurchase agreements having
terms of 13 months or less from the date of delivery may mature in excess of
13 months from such date).
In addition to the securities and investment techniques described in the
Prospectus, the Portfolio may also invest in firm commitment agreements; when-
issued securities; short-term corporate debt securities (including U.S. dollar
denominated debt securities of foreign issuers and obligations of government
and international agencies); mortgage-related securities; asset-backed
securities; commercial paper; bank obligations; variable and floating rate
securities; savings and loan obligations; and repurchase agreements involving
these securities. The Portfolio may also invest in restricted securities and
up to 10% of its net assets in illiquid securities.
The Portfolio may not engage in futures contracts and options on futures
contracts.
High Yield Bond Portfolio
The Portfolio invests primarily in fixed-income securities (including
corporate debt securities) rated Baa or lower by Moody's, or BBB or lower by
S&P, or, if not rated by Moody's or S&P, of equivalent investment quality as
determined by the Adviser. For more information on the risks of such
securities, see the "Description of Bond Ratings" in the Appendix and the
discussion under "High Yield Bonds". In addition to the investment policies
and techniques described in the Prospectus, the Portfolio may also invest in:
U.S. Government securities (including securities of U.S. agencies and
instrumentalities); bank obligations; commercial paper; mortgage-related
securities; asset-backed securities; variable and floating rate debt
securities; firm commitment agreements; when-issued securities; convertible
securities; ADRs; rights; repurchase agreements; reverse repurchase
agreements; U.S. dollar-denominated debt securities of foreign issuers,
foreign government and international agencies and foreign branches of U.S.
banks; dividend-paying common stocks (including up to 10% of the market value
of the Portfolio's total assets in warrants to purchase common stocks) that
are considered by Pacific Life to be consistent with the investment objective
of current income; and higher quality corporate bonds. The Portfolio may also
invest in warrants; however, not more than 10% of the market value of its
assets (at the time of purchase) may be invested in warrants other than
warrants acquired in units or attached to other securities.
In seeking higher income or a reduction in principal volatility, the
Portfolio may purchase and sell put and call options on securities; purchase
or sell interest rate futures contracts and options thereon, and invest up to
5% of its total assets in spread transactions, which give the Portfolio the
right to sell or receive a security or a cash payment with respect to an index
at a fixed dollar spread or yield spread in relationship to another security
or index which is used as a benchmark. The Portfolio will only enter into
futures contracts and futures options which are standardized and traded on a
U.S. exchange, board of trade, or similar entity.
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In an effort to reduce credit risk, the Portfolio diversifies its holdings
among many issuers. As of December 31, 1999, the Portfolio held securities of
160 corporate issuers, excluding short-term obligations. As of December 31,
1999, the amount of the Portfolio's average total assets, measured on the
basis of month-end values, invested in bonds rated lower than Baa by Moody's
or BBB by S&P or, if not rated by Moody's or S&P, determined to be of
equivalent quality by Pacific Life, was approximately 94.64%. The asset
composition after this time may or may not be the same as shown in 1999.
Large-Cap Value Portfolio
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may invest a portion of its assets in: short-term
fixed income securities, such as repurchase agreements, commercial paper,
U.S. Government securities, its agencies or instrumentalities, bank
obligations, and cash or cash equivalents, to meet operating expenses, to
serve as collateral in connection with certain investment techniques, or to
meet anticipated redemption requests. The Portfolio is also permitted to
invest in: mortgage-related securities; small-capitalization stocks; equity
REITS; ADRs; variable and floating rate securities; firm commitment
agreements; when-issued securities; and up to 20% of its net assets, measured
at the time of investment, in foreign companies (including U.S. dollar-
denominated corporate debt securities of foreign issuers, certain foreign bank
obligations, government obligations, foreign government and international
agencies). The Portfolio may invest without limit in high yield convertible
securities, and may, from time to time, invest up to 5% of its net assets in
high yield non-convertible debt securities. The Portfolio may also invest up
to 5% of its assets (no limit on below investment grade convertible
securities) in debt securities rated lower than Baa by Moody's or BBB by S&P,
or if not rated by Moody's or S&P, of equivalent quality as determined by the
Portfolio Manager. For more information on the risks of such securities, see
the "Description of Bond Ratings" in the Appendix and the discussion under
"High Yield Bonds".
The Portfolio may purchase put and call options on securities and securities
indexes and enter into the following: stock, index and currency futures
contracts (including foreign currency) and options thereon; and forward
currency contracts; foreign currency transactions; currency swaps; and options
on currencies. The Portfolio will enter into futures contracts and futures
options which are standardized and traded on a U.S. exchange, board of trade,
or similar entity. The Portfolio may also trade futures contracts and options
on futures contracts not only on U.S. domestic markets, but also on exchanges
located outside of the U.S.
Diversification Versus Non-Diversification
Each of the Portfolios, other than the Strategic Value Portfolio, Focused 30
Portfolio, Mid-Cap Growth Portfolio, Global Growth Portfolio, and REIT
Portfolio, are diversified, so that with respect to 75% of each such
Portfolio's assets (100% for the Money Market Portfolio), it may not invest
more than 5% of its assets (taken at market value at the time of investment)
in securities of any one issuer, except that this restriction does not apply
to U.S. Government securities. The Strategic Value Portfolio and Focused 30
Portfolio reserve the right to become diversified Portfolios by limiting the
investments in which more than 5% of each Portfolio's total assets are
invested.
The Strategic Value Portfolio, Focused 30 Portfolio, Mid-Cap Growth
Portfolio, Global Growth Portfolio, and REIT Portfolio are "non-diversified,"
which means that the proportion of the Portfolio's assets that may be invested
in the securities of a single issuer is not limited by the Investment Company
Act of 1940, as amended ("1940 Act"). However, to meet Federal tax
requirements, the Portfolios may not have more than 25% of its total assets
invested in any one issuer and, with respect to 50% of its total assets, no
more than 5% of its total assets invested in any one issuer, except that this
restriction does not apply to U.S. Government securities. Nonetheless, because
the Portfolios may invest in a smaller number of companies than a diversified
fund, an investment in this Portfolio may, under certain circumstances,
present greater risk to an investor than an investment in a diversified fund.
This risk includes greater exposure to potential poor earnings or default of
fewer issuers than would be the case for a more diversified fund.
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SECURITIES AND INVESTMENT TECHNIQUES
Unless otherwise stated in the prospectus, many investment techniques,
including various hedging techniques and techniques which may be used to help
add incremental income, are discretionary. That means Portfolio Managers may
elect to engage or not to engage in the various techniques at their sole
discretion. Hedging may not be cost-effective or Portfolio Managers may simply
elect not to engage in hedging and have the Portfolio assume full risk of the
investments. Investors should not assume that any Portfolio will be hedged at
all times or that it will be hedged at all; nor should investors assume that
any particular discretionary investment technique or strategy will be employed
at all times, or ever employed.
U.S. Government Securities
All Portfolios may invest in U.S. Government securities. U.S. Government
securities are obligations of, or guaranteed by, the U.S. Government, its
agencies, or instrumentalities. Treasury bills, notes, and bonds are direct
obligations of the U.S. Treasury and they differ with respect to certain items
such as coupons, maturities, and dates of issue. Treasury bills have a
maturity of one year or less. Treasury notes have maturities of one to
ten years and Treasury bonds generally have a maturity of greater than ten
years. Securities guaranteed by the U.S. Government include federal agency
obligations guaranteed as to principal and interest by the U.S. Treasury (such
as GNMA certificates (described below) and Federal Housing Administration
debentures). In guaranteed securities, the payment of principal and interest
is unconditionally guaranteed by the U.S. Government, and thus they are of the
highest credit quality. Such direct obligations or guaranteed securities are
subject to variations in market value due to fluctuations in interest rates,
but, if held to maturity, the U.S. Government is obligated to or guarantees to
pay them in full.
Securities issued by U.S. Government instrumentalities and certain federal
agencies are neither direct obligations of, nor guaranteed by, the U.S.
Treasury. However, they involve federal sponsorship in one way or another:
some are backed by specific types of collateral; some are supported by the
issuer's right to borrow from the U.S. Treasury; some are supported by the
discretionary authority of the U.S. Treasury to purchase certain obligations
of the issuer; others are supported only by the credit of the issuing
government agency or instrumentality. These agencies and instrumentalities
include, but are not limited to Federal National Mortgage Association, Federal
Home Loan Bank, Federal Land Banks, Farmers Home Administration, Central Bank
for Cooperatives, Federal Intermediate Credit Banks, Federal Financing Bank,
Farm Credit Banks, and the Tennessee Valley Authority.
Real Estate Investment Trusts
Real estate investment trusts ("REITs") pool investors' funds for investment
primarily in income-producing real estate or in loans or interests related to
real estate. A REIT is not taxed on income distributed to its shareholders or
unitholders if it complies with a regulatory requirement that it distributes
to its shareholders or unitholders at least 95% of its taxable income for each
taxable year. Generally, REITs can be classified as equity REITs, mortgage
REITs or hybrid REITs. Equity REITs invest a majority of their assets directly
in real property and derive their income primarily from rents and capital
gains from appreciation realized through property sales. Equity REITs are
further categorized according to the types of real estate securities they own,
e.g., apartment properties, retail shopping centers, office and industrial
properties, hotels, health-care facilities, manufactured housing and mixed-
property types. Mortgage REITs invest a majority of their assets in real
estate mortgages and derive their income primarily from income payments.
Hybrid REITs combine the characteristics of both equity and mortgage REITs.
REITs depend generally on their ability to generate cash flow to make
distributions to shareholders or unitholders, and may be subject to changes in
the value of their underlying properties, defaults by borrowers, and to self-
liquidations. Some REITs may have limited diversification and may be subject
to risks inherent in investments in a limited number of properties, in a
narrow geographic area, or in a single property type. Equity REITs may be
affected by changes in underlying property values. Mortgage REITs may be
affected by the quality of the credit extended. REITs are dependent upon
specialized management skills and incur management
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expenses. In addition, the performance of a REIT may be affected by its
failure to qualify for tax-free pass-through of income under the Internal
Revenue Code of 1986, as amended, or its failure to maintain an exemption from
registration under the 1940 Act. REITs also involve risks such as refinancing,
changes in property values, general or specific economic risk on the real
estate industry, dependency on management skills, and other risks similar to
small company investing.
Mortgage-Related Securities
Mortgage-related securities are interests in pools of mortgage loans made to
residential home buyers, including mortgage loans made by savings and loan
institutions, mortgage banks, commercial banks, and others. Pools of mortgage
loans are assembled as securities for sale to investors by various
governmental, government-related, and private organizations. Subject to its
investment policies, a portfolio may invest in mortgage-related securities as
well as debt securities which are secured with collateral consisting of
mortgage-related securities, and in other types of mortgage-related
securities. For information concerning the characterization of mortgage-
related securities (including collateralized mortgage obligations) for various
purposes including the Fund's policies concerning diversification and
concentration, see "Concentration Policy".
Mortgage Pass-Through Securities. These are securities representing
interests in "pools" of mortgages in which payments of both interest and
principal on the securities are made periodically, in effect "passing through"
periodic payments made by the individual borrowers on the residential mortgage
loans which underlie the securities (net of fees paid to the issuer or
guarantor of the securities). Early repayment of principal on mortgage pass-
through securities (arising from prepayments of principal due to sale of the
underlying property, refinancing, or foreclosure, net of fees and costs which
may be incurred) may expose a Portfolio to a lower rate of return upon
reinvestment of principal. Payment of principal and interest on some mortgage
pass-through securities may be guaranteed by the full faith and credit of the
U.S. Government (such as securities guaranteed by the Government National
Mortgage Association, or "GNMAs"); other securities may be guaranteed by
agencies or instrumentalities of the U.S. Government such as the Federal
National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC") and are not backed by the full faith and credit of the
U.S. Government. Mortgage pass-through securities created by nongovernmental
issuers (such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers, and other secondary market
issuers) may be supported by various forms of insurance or guarantees,
including individual loan, title, pool and hazard insurance and letters of
credit, which may be issued by governmental entities, private insurers, or the
mortgage poolers.
GNMA Certificates. GNMA certificates are mortgage-backed securities
representing part ownership of a pool of mortgage loans on which timely
payment of interest and principal is guaranteed by the full faith and credit
of the U.S. Government. GNMA is a wholly-owned U.S. Government corporation
within the Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the U.S. Government, the timely
payment 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 mortgages insured by the Federal
Housing Administration ("FHA"), or guaranteed by the Department of Veterans
Affairs ("VA"). GNMA certificates differ from typical bonds because principal
is repaid monthly over the term of the loan rather than returned in a lump sum
at maturity. Because both interest and principal payments (including
prepayments) on the underlying mortgage loans are passed through to the holder
of the certificate, GNMA certificates are called "pass-through" securities.
Interests in pools of mortgage-related securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a periodic payment which consists of both
interest and principal payments. In effect, these payments are a "pass-
through" of the periodic payments made by the individual borrowers on the
residential mortgage loans, 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. Mortgage-related
securities issued by
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GNMA are described as "modified pass-through" securities. These securities
entitle the holder to receive all interest and principal payments owed on the
mortgage pool, net of certain fees, at the scheduled payment dates regardless
of whether or not the mortgagor actually makes the payment. Although GNMA
guarantees timely payment even if homeowners delay or default, tracking the
"pass-through" payments may, at times, be difficult. Expected payments may be
delayed due to the delays in registering the newly traded paper securities.
The custodian's policies for crediting missed payments while errant receipts
are tracked down may vary. Other mortgage-backed securities such as those of
FHLMC and FNMA trade in book-entry form and are not subject to the risk of
delays in timely payment of income.
Although the mortgage loans in the pool will have maturities of up to 30
years, the actual average life of the GNMA certificates typically will be
substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Early repayments of
principal on the underlying mortgages may expose a Portfolio to a lower rate
of return upon reinvestment of principal. Prepayment rates vary widely and may
be affected by changes in market interest rates. In periods of falling
interest rates, the rate of prepayment tends to increase, thereby shortening
the actual average life of the GNMA certificates. Conversely, when interest
rates are rising, the rate of prepayment tends to decrease, thereby
lengthening the actual average life of the GNMA certificates. Accordingly, it
is not possible to accurately predict the average life of a particular pool.
Reinvestment of prepayments may occur at higher or lower rates than the
original yield on the certificates. Due to the prepayment feature and the need
to reinvest prepayments of principal at current rates, GNMA certificates can
be less effective than typical bonds of similar maturities at "locking in"
yields during periods of declining interest rates, although they may have
comparable risks of decline in value during periods of rising interest rates.
FNMA and FHLMC Mortgage-Backed Obligations. Government-related guarantors
(i.e., not backed by the full faith and credit of the U.S. Government) include
FNMA and FHLMC. FNMA, a federally chartered and privately-owned corporation,
issues pass-through securities representing interests in a pool of
conventional mortgage loans. FNMA guarantees the timely payment of principal
and interest but this guarantee is not backed by the full faith and credit of
the U.S. Government. FNMA is a government sponsored corporation owned entirely
by private stockholders. It is subject to general regulation by the Secretary
of Housing and Urban Development and the U.S. Treasury. FNMA purchases
conventional (i.e., not insured or guaranteed by any government agency)
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. FHLMC, a
federally chartered and privately-owned corporation, was created by Congress
in 1970 for the purpose of increasing the availability of mortgage credit for
residential housing. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal and maintains reserves to protect holders against losses due to
default, but PCs are not backed by the full faith and credit of the U.S.
Government. As is the case with GNMA certificates, the actual maturity of and
realized yield on particular FNMA and FHLMC pass-through securities will vary
based on the prepayment experience of the underlying pool of mortgages.
Collateralized Mortgage Obligations (CMOs). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semiannually. CMOs may
be collateralized by whole mortgage loans but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC, or FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments,
generally is first returned to investors holding the shortest maturity class.
Investors holding the longer maturity classes receive principal only after the
first class has been retired. An investor is partially guarded against a
sooner than desired return of principal because of the sequential payments.
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In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond
offering are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The series A, B, and C
Bonds all bear current interest. Interest on the series Z Bond is accrued and
added to principal and a like amount is paid as principal on the series A, B,
or C Bond currently being paid off. When the series A, B, and C Bonds are paid
in full, interest and principal on the series Z Bond begins to be paid
currently. With some CMOs, the issuer serves as a conduit to allow loan
originators (primarily builders or savings and loan associations) to borrow
against their loan portfolios.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations
of FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are
made semiannually, as opposed to monthly. The amount of principal payable on
each semiannual payment date is determined in accordance with FHLMC's
mandatory sinking fund schedule, which, in turn, is equal to approximately
100% of FHA prepayment experience applied to the mortgage collateral pool. All
sinking fund payments in the CMOs are allocated to the retirement of the
individual classes of bonds in the order of their stated maturities. Payment
of principal on the mortgage loans in the collateral pool in excess of the
amount of FHLMC's minimum sinking fund obligation for any payment date are
paid to the holders of the CMOs as additional sinking fund payments. Because
of the "pass-through" nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum sinking fund requirement, the
rate at which principal of the CMOs is actually repaid is likely to be such
that each class of bonds will be retired in advance of its scheduled maturity
date.
If collection of principal (including prepayments) on the mortgage loans
during any semiannual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are identical
to those of FHLMC PCs. FHLMC has the right to substitute collateral in the
event of delinquencies and/or defaults.
Other Mortgage-Related 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
and/or servicers of the underlying mortgage loans as well as the guarantors of
the mortgage-related securities. Pools created by such non-governmental
issuers generally offer a higher rate of interest than government and
government-related pools because there are no direct or indirect government or
agency 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, and letters of credit. The insurance and guarantees are issued by
governmental entities, private insurers, and the mortgage poolers. Such
insurance and guarantees and the creditworthiness of the issuers thereof will
be considered in determining whether a mortgage-related security meets a
Portfolio's investment quality standards. There can be no assurance that the
private insurers or guarantors can meet their obligations under the insurance
policies or guarantee arrangements. A Portfolio may buy mortgage-related
securities without insurance or guarantees, if, in an examination of the loan
experience and practices of the originator/servicers and poolers, the Adviser
or Portfolio Manager determines that the securities meet a Portfolio's quality
standards. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be readily
marketable. It is expected that governmental, government-related, or private
entities may create mortgage loan pools and other mortgage-related securities
offering mortgage pass-through and mortgage collateralized investments in
addition to those described above. As new types of mortgage-related securities
are developed and offered to investors, the Adviser or Portfolio Manager will,
consistent with a Portfolio's investment objectives, policies, and quality
standards, consider making investments in such new types of mortgage-related
securities.
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CMO Residuals. CMO residuals are derivative mortgage securities issued by
agencies or instrumentalities of the U.S. Government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs
is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess
cash flow remaining after making the foregoing payments. Each payment of such
excess cash flow to a holder of the related CMO residual represents income
and/or a return of capital. The amount of residual cash flow resulting from a
CMO will depend on, among other things, the characteristics of the mortgage
assets, the coupon rate of each class of CMO, prevailing interest rates, the
amount of administrative expenses and the prepayment experience on the
mortgage assets. In particular, the yield to maturity on CMO residuals is
extremely sensitive to prepayments on the related underlying mortgage assets,
in the same manner as an interest-only ("IO") class of stripped mortgage-
backed securities. See "Other Mortgage-Related Securities--Stripped Mortgage-
Backed Securities." In addition, if a series of a CMO includes a class that
bears interest at an adjustable rate, the yield to maturity on the related CMO
residual will also be extremely sensitive to changes in the level of the index
upon which interest rate adjustments are based. As described below with
respect to stripped mortgage-backed securities, in certain circumstances a
Portfolio may fail to recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only very recently developed and CMO residuals currently
may not have the liquidity of other more established securities trading in
other markets. Transactions in CMO residuals are generally completed only
after careful review of the characteristics of the securities in question. CMO
residuals may or, pursuant to an exemption therefrom, may not have been
registered under the Securities Act of 1933, as amended. CMO residuals,
whether or not registered under such Act, may be subject to certain
restrictions on transferability, and may be deemed "illiquid" and subject to a
Portfolio's limitations on investment in illiquid securities.
Inverse floaters and planned amortization class certificates
("PAC"). Planned amortization class certificates are parallel-pay real estate
mortgage investment conduit ("REMIC") certificates that generally require that
specified amounts of principal be applied on each payment date to one or more
classes of REMIC certificates, even though all other principal payments and
prepayments of the mortgage assets are then required to be applied to one or
more other classes of the certificates. The scheduled principal payments for
the PAC certificates generally have the highest priority on each payment date
after interest due has been paid to all classes entitled to receive interest
currently. Shortfalls, if any, are added to the amount payable on the next
payment date. The PAC certificate payment schedule is taken into account in
calculating the final distribution date of each class of the PAC certificate.
In order to create PAC Tranches, generally one or more tranches must be
created that absorb most of the volatility in the underlying mortgage assets.
These tranches tend to have market prices and yields that are much more
volatile than other PAC classes.
A PAC IO is a PAC bond that pays an extremely high coupon rate, such as
200%, on its outstanding principal balance, and pays down according to a
designated PAC schedule. Due to their high-coupon interest, PAC IO's are
priced at very high premiums to par. Due to the nature of PAC prepayment bands
and PAC collars, the PAC IO has a greater call (contraction) potential and
thus would be impacted negatively by a sustained increase in prepayment
speeds.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities
("SMBS") are derivative multi-class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the
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interest and most of the principal from the mortgage assets, while the other
class will receive most of the interest and the remainder of the principal. In
the most extreme case, one class will receive all of the interest (the IO
class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is
extremely sensitive to the rate of principal payments (including prepayments)
on the related underlying mortgage assets, and a rapid rate of principal
payments may have a material adverse effect on the Portfolio's yield to
maturity from these securities. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, a Portfolio may fail to
fully recoup its initial investment in these securities even if the security
is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these
securities were only recently developed. As a result, established trading
markets have not yet developed and, accordingly, these securities may be
deemed "illiquid" and subject to a Portfolio's limitations on investment in
illiquid securities.
Mortgage Dollar Rolls. Mortgage "dollar rolls" are contracts in which a
Portfolio sells securities for delivery in the current month and
simultaneously contracts with the same counterparty to repurchase
substantially similar (same type, coupon and maturity) but not identical
securities on a specified future date. During the roll period, a Portfolio
loses the right to receive principal and interest paid on the securities sold.
However, a Portfolio 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 or fee income plus the interest earned on the cash proceeds of
the securities sold until the settlement date for the forward purchase. Unless
such benefits exceed the income, capital appreciation and gain or loss due to
mortgage prepayments that would have been realized on the securities sold as
part of the mortgage dollar roll, the use of this technique will diminish the
investment performance of a Portfolio. A Portfolio will hold and maintain in a
segregated account until the settlement date cash or liquid assets in an
amount equal to the forward purchase price. For financial reporting and tax
purposes, a Portfolio treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale. Portfolios do not currently intend to enter into
mortgage dollar rolls that are accounted for as a financing.
Other Asset-Backed Securities
Other asset-backed securities are securities that directly or indirectly
represent a participation interest in, or are secured by and payable from a
stream of payments generated by particular assets such as automobile loans or
installment sales contracts, home equity loans, computer and other leases,
credit card receivables, or other assets. Generally, the payments from the
collateral are passed through to the security holder. Due to the possibility
that prepayments (on automobile loans and other collateral) will alter cash
flow on asset-backed securities, generally it is not possible to determine in
advance the actual final maturity date or average life of many asset-backed
securities. Faster prepayment will shorten the average life and slower
prepayment will lengthen it. However, it may be possible to determine what the
range of that movement could be and to calculate the effect that it will have
on the price of the security. Other risks relate to limited interests in
applicable collateral. For example, credit card debt receivables are generally
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such debtors the right to
set off certain amounts on credit card debt thereby reducing the balance due.
Additionally, holders of asset-backed securities may also experience delays in
payments or losses if the full amounts due on underlying sales contracts are
not realized. The securities market for asset-backed securities may not, at
times, offer the same degree of liquidity as markets for other types of
securities with greater trading volume.
Zero Coupon, Deferred Interest, Step Coupon and Pay-In-Kind Bonds
Zero coupon and deferred interest bonds are issued and traded at a discount
from their face value. The discount approximates the total amount of interest
the bonds will accrue and compound over the period until maturity or the first
interest payment date at a rate of interest reflecting the market rate of the
security at the time of issuance. While zero coupon bonds do not require
periodic payment of interest, deferred interest bonds provide
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for a period of delay before the regular payment of interest begins. Step
coupon bonds trade at a discount from their face value and pay coupon
interest. The coupon rate is low for an initial period and then increases to a
higher coupon rate thereafter. The discount from the face amount or par value
depends on the time remaining until cash payments begin, prevailing interest
rates, liquidity of the security and the perceived credit quality of the
issuer. Pay-in-kind bonds normally give the issuer an option to pay cash at a
coupon payment date or give the holder of the security a similar bond with the
same coupon rate and a face value equal to the amount of the coupon payment
that would have been made.
A Portfolio must distribute its investment company taxable income, including
the original issue discount accrued on zero coupon or step coupon bonds.
Because a Portfolio will not receive cash payments on a current basis in
respect of accrued original-issue discount on zero coupon bonds or step coupon
bonds during the period before interest payments begin, in some years a
Portfolio may have to distribute cash obtained from other sources in order to
satisfy the distribution requirements under the Internal Revenue Code of 1986
and the regulations thereunder. A Portfolio may obtain such cash from selling
other portfolio holdings which may cause a Portfolio to incur capital gains or
losses on the sale.
High Yield Bonds
High Yield Bonds are high risk debt securities rated lower than Baa or BBB,
or, if not rated by Moody's or S&P, of equivalent quality ("high yield bonds,"
which are commonly referred to as "junk bonds").
In general, high yield bonds are not considered to be investment grade, and
investors should consider the risks associated with high yield bonds before
investing in the pertinent Portfolio. Investment in such securities generally
provides greater income and increased opportunity for capital appreciation
than investments in higher quality securities, but they also typically entail
greater price volatility and principal and income risk.
Investment in high yield bonds involves special risks in addition to the
risks associated with investments in higher rated debt securities. High yield
bonds are regarded as predominately speculative with respect to the issuer's
continuing ability to meet principal and interest payments. A severe economic
downturn or increase in interest rates might increase defaults in high yield
securities issued by highly leveraged companies. An increase in the number of
defaults could adversely affect the value of all outstanding high yield
securities, thus disrupting the market for such securities. Analysis of the
creditworthiness of issuers of debt securities that are high yield bonds may
be more complex than for issuers of higher quality debt securities, and the
ability of a Portfolio to achieve its investment objective may, to the extent
of investment in high yield bonds, be more dependent upon such
creditworthiness analysis than would be the case if the Portfolio were
investing in higher quality bonds.
Included among the emerging market debt obligations in which a Portfolio may
invest are "Brady Bonds," which are created through the exchange of existing
commercial bank loans to sovereign entities for new obligations in connection
with debt restructuring under a plan introduced by former U.S. Secretary of
the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Bonds are not
considered U.S. Government securities and are considered speculative. Brady
Bonds have been issued relatively recently, and accordingly, do not have a
long payment history. They may be collateralized or uncollateralized, or have
collateralized or uncollateralized elements, and issued in various currencies
(although most are U.S. dollar- denominated), and they are traded in the over-
the-counter secondary market.
Brady Bonds involve various risk factors including residual risk and the
history of defaults with respect to commercial bank loans by public and
private entities of countries issuing Brady Bonds. There can be no assurance
that Brady Bonds in which a Portfolio may invest will not be subject to
restructuring arrangements or to requests for new credit, which may cause a
Portfolio to suffer a loss of interest or principal on any of its holdings.
High yield bonds may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade bonds. The
prices of high yield bonds have been found to be less sensitive to interest-
rate changes than higher-rated investments, but more sensitive to adverse
economic downturns or
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individual corporate developments. A projection of an economic downturn or of
a period of rising interest rates, for example, could cause a decline in high
yield bond prices because the advent of a recession could lessen the ability
of a highly leveraged company to make principal and interest payments on its
debt securities. If an issuer of high yield bonds defaults, in addition to
risking payment of all or a portion of interest and principal, a Portfolio may
incur additional expenses to seek recovery.
A portfolio may purchase defaulted securities only when the portfolio
manager believes, based upon analysis of the financial condition, results of
operations and economic outlook of an issuer, that there is potential for
resumption of income payments and the securities offer an unusual opportunity
for capital appreciation. Notwithstanding the portfolio manager's belief about
the resumption of income, however, the purchase of any security on which
payment of interest or dividends is suspended involves a high degree of risk.
In the case of high yield bonds structured as zero-coupon or pay-in-kind
securities, their market prices are affected to a greater extent by interest
rate changes, and therefore tend to be more volatile than securities which pay
interest periodically and in cash.
The secondary market on which high yield bonds are traded may be less liquid
than the market for higher grade bonds. Less liquidity in the secondary
trading market could adversely affect the price at which a Portfolio could
sell a high yield bond, and could adversely affect and cause large
fluctuations in the daily net asset value of the Portfolio's shares. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield bonds,
especially in a thinly-traded market. When secondary markets for high yield
bonds are less liquid than the market for higher grade bonds, it may be more
difficult to value the securities because such valuation may require more
research, and elements of judgment may play a greater role in the valuation
because there is less reliable, objective data available.
There are also certain risks involved in using credit ratings for evaluating
high yield bonds. For example, credit ratings evaluate the safety of principal
and interest payments, not the market value risk of high yield bonds. Also,
credit rating agencies may fail to timely reflect subsequent events.
Bank Obligations
Bank obligations include certificates of deposit, bankers' acceptances,
fixed time deposits, and loans or credit agreements. Each Portfolio may also
hold funds on deposit with its sub-custodian bank in an interest-bearing
account for temporary purposes.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on
demand by the investor, but may be subject to early withdrawal penalties which
vary depending upon market conditions and the remaining maturity of the
obligation. There are no contractual restrictions on the right to transfer a
beneficial interest in a fixed time deposit to a third party, although there
is no market for such deposits. A Portfolio will not invest in fixed time
deposits which (i) are not subject to prepayment, or (ii) incur withdrawal
penalties upon prepayment (other than overnight deposits) if, in the
aggregate, more than 15% of its net assets (10% for the Money Market
Portfolio) would be invested in such deposits, repurchase agreements maturing
in more than seven days, and other illiquid assets.
The Portfolio may purchase loans or participation interests in loans made by
U.S. banks and other financial institutions to large corporate customers.
Loans are made by a contract called a credit agreement. Loans are typically
secured by assets pledged by the borrower, but there is no guarantee that the
value of the collateral will be sufficient to cover the loan, particularly in
the case of a decline in value of the collateral. Loans may be floating rate
or amortizing. See "Variable and Floating Rate Securities" below for more
information. Some loans may be traded in the secondary market among banks,
loan funds, and other institutional investors.
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Unless otherwise noted, a Portfolio will not invest in any security or bank
loan/credit agreement issued by a commercial bank unless: (i) the bank has
total assets of at least U.S. $1 billion, or the equivalent in other
currencies, or, in the case of domestic banks which do not have total assets
of at least U.S. $1 billion, the aggregate investment made in any one such
bank is limited to an amount, currently U.S. $100,000, insured in full by the
Federal Deposit Insurance Corporation ("FDIC"); (ii) in the case of U.S.
banks, it is a member of the FDIC; and (iii) in the case of foreign banks, the
security is, in the opinion of the Adviser or the Portfolio Manager, of an
investment quality comparable with other debt securities of similar maturities
which may be purchased by the Portfolio. These limitations do not prohibit
investments in securities issued by foreign branches of U.S. banks, provided
such U.S. banks meet the foregoing requirements.
Obligations of foreign banks involve somewhat different investment risks
than those affecting obligations of U.S. banks, including: (i) the
possibilities that their liquidity could be impaired because of future
political and economic developments; (ii) their obligations may be less
marketable than comparable obligations of U.S. banks; (iii) a foreign
jurisdiction might impose withholding taxes on interest income payable on
those obligations; (iv) foreign deposits may be seized or nationalized; (v)
foreign governmental restrictions, such as exchange controls, may be adopted
which might adversely affect the payment of principal and interest on those
obligations; and (vi) the selection of those obligations may be more difficult
because there may be less publicly available information concerning foreign
banks or the accounting, auditing, and financial reporting standards,
practices and requirements applicable to foreign banks may differ from those
applicable to U.S. banks. Foreign banks are not generally subject to
examination by any U.S. Government agency or instrumentality.
Unless otherwise noted, a Portfolio may invest in short-term debt
obligations of savings and loan associations provided that the savings and
loan association issuing the security (i) has total assets of at least
$1 billion, or, in the case of savings and loan associations which do not have
total assets of at least $1 billion, the aggregate investment made in any one
savings and loan association is insured in full, currently up to $100,000, by
the Savings Association Insurance Fund ("SAIF"); (ii) the savings and loan
association issuing the security is a member of the Federal Home Loan Bank
System; and (iii) the institution is insured by the SAIF.
A Portfolio will not purchase any security of a small bank or savings and
loan association which is not readily marketable if, as a result, more than
15% of the value of its net assets (10% for the Money Market Portfolio) would
be invested in such securities, other illiquid securities, or securities
without readily available market quotations, such as restricted securities and
repurchase agreements maturing in more than seven days.
Municipal Securities
Municipal securities consist of bonds, notes and other instruments issued by
or on behalf of states, territories and possessions of the United States
(including the District of Columbia) and their political subdivisions,
agencies or instrumentalities, the interest on which is exempt from regular
federal income tax. Municipal securities are often issued to obtain funds for
various public purposes. Municipal securities also include "private activity
bonds" or industrial development bonds, which are issued by or on behalf of
public authorities to obtain funds for privately operated facilities, such as
airports and waste disposal facilities, and, in some cases, commercial and
industrial facilities.
The yields and market values of municipal securities are determined
primarily by the general level of interest rates, the creditworthiness of the
issuers of municipal securities and economic and political conditions
affecting such issuers. Due to their tax exempt status, the yields and market
prices of municipal securities may be adversely affected by changes in tax
rates and policies, which may have less effect on the market for taxable fixed
income securities. Moreover, certain types of municipal securities, such as
housing revenue bonds, involve prepayment risks which could affect the yield
on such securities.
Investments in municipal securities are subject to the risk that the issuer
could default on its obligations. Such a default could result from the
inadequacy of the sources or revenues from which interest and principal
payments are to be made or the assets collateralizing such obligations.
Revenue bonds, including private activity bonds, are backed only by specific
assets or revenue sources and not by the full faith and credit of the
governmental issuer.
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Small Capitalization Stocks
Investments in larger companies present certain advantages in that such
companies generally have greater financial resources, more extensive research
and development, manufacturing, marketing and service capabilities, more
stability and greater depth of management and technical personnel. Investments
in smaller, less seasoned companies may present greater opportunities for
growth but also involve greater risks than customarily are associated with
more established companies. The securities of smaller companies may be subject
to more abrupt or erratic market movements than larger, more established
companies. These companies may have limited product lines, markets or
financial resources, or they may be dependent upon a limited management group.
Their securities may be traded only in the over-the-counter market or on a
regional securities exchange and may not be traded every day or in the volume
typical of trading on a major securities exchange. As a result, the
disposition by a Portfolio of securities to meet redemptions, or otherwise,
may require the Portfolio to sell these securities at a discount from market
prices or to sell during a period when such disposition is not desirable or to
make many small sales over a lengthy period of time.
Corporate Debt Securities
The debt securities in which any Portfolio, other than the Money Market
Portfolio, may invest are limited to corporate debt securities (corporate
bonds, debentures, notes, and other similar corporate debt instruments) which
meet the minimum ratings criteria set forth for that particular Portfolio, or,
if not so rated, are, in the Portfolio Manager's opinion, comparable in
quality to corporate debt securities in which a Portfolio may invest. The debt
securities in which the Money Market Portfolio may invest are described in the
Prospectus and in the discussion of the investment objective and policies of
that Portfolio above.
The investment return on corporate debt securities reflects interest
earnings and changes in the market value of the security. The market value of
corporate debt obligations may be expected to rise and fall inversely with
interest rates generally. There also exists the risk that the issuers of the
securities may not be able to meet their obligations on interest or principal
payments at the time called for by an instrument.
Tender Option Bonds. Tender option bonds are generally long-term securities
that are coupled with the option to tender the securities to a bank, broker-
dealer or other financial institution at periodic intervals and receive the
face value of the bond. This type of security is commonly used as a means of
enhancing the security's liquidity.
Variable and Floating Rate Securities
Variable and floating rate securities provide for a periodic adjustment in
the interest rate paid on obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an
appropriate interest rate adjustment index as provided in the respective
obligations. The adjustment intervals may be regular, and range from daily to
annually, or may be event based, such as based on a change in the prime rate.
The interest rate on a floating rate debt instrument ("floater") is a
variable rate which is tied to another interest rate, such as a money market
index or Treasury bill rate. The interest rate on a floater resets
periodically, typically every six months. While, because of the interest rate
reset feature, floaters provide Portfolios with a certain degree of protection
against rises in interest rates, Portfolios investing in floaters will
participate in any declines in interest rates as well.
The interest rate on a leveraged inverse floating rate debt instrument
("inverse floater") resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values. Accordingly,
duration of an inverse floater may exceed its stated final maturity. Certain
inverse floaters may be deemed to be illiquid securities for purposes of a
Portfolio's limitations on investments in such securities.
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A super floating rate collateralized mortgage obligation ("super floater")
is a leveraged floating-rate tranche in a CMO issue. At each monthly reset
date, a super floater's coupon rate is determined by a slated formula.
Typically, the rate is a multiple of some index minus a fixed-coupon amount.
When interest rates rise, a super floater is expected to outperform regular
floating rate CMOs because of its leveraging factor and higher lifetime caps.
Conversely, when interest rates fall, a super floater is expected to
underperform floating rate CMOs because its coupon rate drops by the
leveraging factor. In addition, a super floater may reach its cap as interest
rates increase and may no longer provide the benefits associated with
increasing coupon rates.
Commercial Paper
Each Portfolio, other than the Money Market Portfolio, may invest in
commercial paper denominated in U.S. dollars, issued by U.S. corporations or
foreign corporations and (1) rated at the date of investment Prime-1 or Prime-
2 by Moody's or A-1 or A-2 by S&P or (2) if not rated by either Moody's or
S&P, issued by a corporation having an outstanding debt issue rated Aa or
better by Moody's or AA or better by S&P or (3) if not rated, are determined
to be of an investment quality comparable to rated commercial paper in which a
Portfolio may invest. If issued by a foreign corporation, such commercial
paper is U.S. dollar-denominated and not subject at the time of purchase to
foreign tax withholding. The Money Market Portfolio may invest in commercial
paper that meets the standards for money market securities that Portfolio may
acquire as described in the Prospectus and in the discussion of the investment
objective and policies of that Portfolio above.
Commercial paper obligations may include variable amount master demand
notes. These are obligations that permit the investment of fluctuating amounts
at varying rates of interest pursuant to direct arrangements between a
Portfolio, as lender, and the borrower. These notes permit daily changes in
the amounts borrowed. The lender has the right to increase the amount under
the note at any time up to the full amount provided by the note agreement, or
to decrease the amount, and the borrower may prepay up to the full amount of
the note without penalty. Because variable amount master demand notes are
direct lending arrangements between the lender and borrower, it is not
generally contemplated that such instruments will be traded and there is no
secondary market for these notes. However, they are redeemable (and thus
immediately repayable by the borrower) at face value, plus accrued interest,
at any time. In connection with master demand note arrangements, the Adviser
or Portfolio Manager will monitor, on an ongoing basis, the earning power,
cash flow, and other liquidity ratios of the borrower and its ability to pay
principal and interest on demand. The Adviser or Portfolio Manager also will
consider the extent to which the variable amount master demand notes are
backed by bank letters of credit. These notes generally are not rated by
Moody's or S&P; a Portfolio, other than the Money Market Portfolio, may invest
in them only if the Adviser or Portfolio Manager believes that at the time of
investment the notes are of comparable quality to the other commercial paper
in which the Portfolio may invest. With respect to the Money Market Portfolio,
determination of eligibility for the Portfolio will be in accordance with the
standards described in the discussion of the Portfolio in the Prospectus and
in "Additional Investment Policies of the Portfolios" above. Master demand
notes are considered by the Portfolio to have a maturity of one day unless the
Adviser or Portfolio Manager has reason to believe that the borrower could not
make immediate repayment upon demand. See the Appendix for a description of
Moody's and S&P ratings applicable to commercial paper.
Convertible Securities
Convertible securities are fixed-income securities which may be converted or
exchanged at a stated exchange ratio into underlying shares of common stock.
The exchange ratio for any particular convertible security may be adjusted
from time to time due to stock splits, dividends, spin-offs, other corporate
distributions, or scheduled changes in the exchange ratio. Convertible bonds
and convertible preferred stocks, until converted, have general
characteristics similar to both fixed-income and equity securities. Although
to a lesser extent than with fixed-income securities generally, the market
value of convertible securities tends to decline as interest rates increase
and, conversely, tends to increase as interest rates decline. In addition,
because of the conversion or exchange feature, the market value of convertible
securities tends to vary with fluctuations in the market value of the
underlying common stocks, and, therefore, also will react to variations in the
general market for equity
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securities. A unique feature of convertible securities is that as the market
price of the underlying common stock declines, convertible securities tend to
trade increasingly on a yield basis, and so may not experience market value
declines to the same extent as the underlying common stock. When the market
price of the underlying common stock increases, the prices of the convertible
securities tend to rise as a reflection of the value of the underlying common
stock. While no securities investments are without risk, investments in
convertible securities generally entail less risk than investments in common
stock of the same issuer.
As fixed-income securities, convertible securities are investments which
provide for a stable stream of income with generally higher yields than common
stocks. Of course, like all fixed-income securities, there can be no assurance
of current income because the issuers of the convertible securities may
default in their obligations. Convertible securities, however, generally offer
lower interest or dividend yields than non-convertible securities of similar
quality because of the potential for capital appreciation.
A convertible security, in addition to providing fixed-income, offers the
potential for capital appreciation through the conversion feature which
enables the holder to benefit from increases in the market price of the
underlying common stock. In selecting the securities for a Portfolio, the
Adviser or Portfolio Manager gives substantial consideration to the potential
for capital appreciation of the common stock underlying the convertible
securities. However, there can be no assurance of capital appreciation because
securities prices fluctuate.
Convertible securities generally are subordinated to other similar but
nonconvertible securities of the same issuer although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar non-
convertible securities.
A "synthetic convertible" is created by combining distinct securities which
possess the two principal characteristics of a true convertible, i.e., fixed-
income ("fixed-income component") and the right to acquire equity securities
("convertibility component"). This combination is achieved by investing in
nonconvertible fixed-income securities (nonconvertible bonds and preferred
stocks) and in warrants, granting the holder the right to purchase a specified
quantity of securities within a specified period of time at a specified price.
However, the synthetic convertible differs from the true convertible
security in several respects. Unlike a true convertible, which is a single
security having a unitary market value, a synthetic convertible is comprised
of two distinct securities, each with its own market value. Therefore, the
"market value" of a synthetic convertible is the sum of the values of its
fixed-income component and its convertibility component. For this reason, the
value of a synthetic convertible and a true convertible security will respond
differently to market fluctuations.
More flexibility is possible in the assembly of a synthetic convertible than
in the purchase of a convertible security in that its two components may be
purchased separately. For example, a Portfolio Manager may purchase a warrant
for inclusion in a synthetic convertible but temporarily hold short-term
investments while postponing purchase of a corresponding bond pending
development of more favorable market conditions.
A holder of a synthetic convertible faces the risk that the price of the
stock underlying the convertibility component will decline, causing a decline
in the value of the warrant; should the price of the stock fall below the
exercise price and remain there throughout the exercise period, the entire
amount paid for the warrant would be lost. Since a synthetic convertible
includes the fixed-income component as well, the holder of a synthetic
convertible also faces the risk that interest rates will rise, causing a
decline in the value of the fixed-income instrument.
Repurchase Agreements
Repurchase agreements entail the purchase of a portfolio eligible security
from a bank or broker-dealer that agrees to repurchase the security at the
Portfolio's cost plus interest within a specified time (normally one day).
Repurchase agreements permit an investor to maintain liquidity and earn income
over periods of time as short as
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overnight. If a Portfolio acquires securities from a bank or broker-dealer it
may simultaneously enter into a repurchase agreement with the seller wherein
the seller agrees at the time of sale to repurchase the security at a mutually
agreed upon time and price. The term of such an agreement is generally quite
short, possibly overnight or for a few days, although it may extend over a
number of months (up to one year) from the date of delivery. The resale price
is in excess of the purchase price by an amount which reflects an agreed upon
market rate of return, effective for the period of time the Portfolio is
invested in the security. This results in a fixed rate of return protected
from market fluctuations during the period of the agreement. This rate is not
tied to the coupon rate on the security subject to the repurchase agreement.
If the party agreeing to repurchase should default and if the value of the
securities held by a Portfolio should fall below the repurchase price, a loss
could be incurred. Repurchase agreements will be entered into only where the
underlying security is within the three highest credit categories assigned by
established rating agencies (Aaa, Aa, or A by Moody's or AAA, AA, or A by S&P)
or, if not rated by Moody's or S&P, are of equivalent investment quality as
determined by the Adviser or Portfolio Manager, except that the Money Market
Portfolio will enter into repurchase agreements only where the underlying
securities are of the quality that is eligible for the Portfolio as described
in the Prospectus and in the discussion of that Portfolio's investment
objective and policies above.
Under the 1940 Act, repurchase agreements are considered to be loans by the
purchaser collateralized by the underlying securities. The Adviser or
Portfolio Manager to a Portfolio monitors the value of the underlying
securities at the time the repurchase agreement is entered into and at all
times during the term of the agreement to ensure that its value always equals
or exceeds the agreed upon repurchase price to be paid to the Portfolio. The
Adviser or Portfolio Manager, in accordance with procedures established by the
Board of Trustees, also evaluates the creditworthiness and financial
responsibility of the banks and brokers or dealers with which the Portfolio
enters into repurchase agreements.
A Portfolio may not enter into a repurchase agreement having more than seven
days remaining to maturity if, as a result, such agreements, together with any
other securities which are not readily marketable, would exceed 15% of the net
assets of the Portfolio (10% for the Money Market Portfolio). If the seller
should become bankrupt or default on its obligations to repurchase the
securities, a Portfolio may experience delay or difficulties in exercising its
rights to the securities held as collateral and might incur a loss if the
value of the securities should decline. A Portfolio also might incur
disposition costs in connection with liquidating the securities.
Borrowing
Each Portfolio may borrow up to certain limits. A Portfolio may not borrow
if, as a result of such borrowing, the total amount of all money borrowed by
the Portfolio exceeds 33 1/3% of the value of its total assets (at the time of
such borrowing), including reverse repurchase agreements. This borrowing may
be unsecured. Borrowing may exaggerate the effect on net asset value of any
increase or decrease in the market value of a Portfolio. Money borrowed will
be subject to interest costs which may or may not be recovered by appreciation
of the securities purchased. A Portfolio also may be required to maintain
minimum average balances in connection with such borrowing or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest
rate. Reverse repurchase agreements will be included as borrowing subject to
the borrowing limitations described above.
Reverse Repurchase Agreements and Other Borrowings
Reverse repurchase agreements, among the forms of borrowing, involve the
sale of a debt security held by the Portfolio, with an agreement by that
Portfolio to repurchase the security at a stated price, date and interest
payment.
A Portfolio will use the proceeds of a reverse repurchase agreement to
purchase other money market instruments which either mature at a date
simultaneous with or prior to the expiration of the reverse repurchase
agreement or which are held under an agreement to resell maturing as of that
time. The use of reverse repurchase
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agreements by a Portfolio creates leverage which increases a Portfolio's
investment risk. If the income and gains on securities purchased with the
proceeds of reverse repurchase agreements exceed the cost of the agreements,
the Portfolio's earnings or net asset value will increase faster than
otherwise would be the case; conversely, if the income and gains fail to
exceed the costs, earnings or net asset value would decline faster than
otherwise would be the case. A Portfolio will enter into a reverse repurchase
agreement only when the interest income to be earned from the investment of
the proceeds of the transaction is greater than the interest expense of the
transaction. However, reverse repurchase agreements involve the risk that the
market value of securities retained by the Portfolio may decline below the
repurchase price of the securities sold by the Portfolio which it is obligated
to repurchase.
A Portfolio may enter into reverse repurchase agreements with banks or
broker-dealers. Entry into such agreements with broker-dealers requires the
creation and maintenance of segregated assets consisting of U.S. Government
securities, cash or liquid securities marked-to-market daily at least equal in
value to its obligations in respect of reverse repurchase agreements.
Firm Commitment Agreements and When-Issued or Delayed Delivery Securities
Firm commitment agreements are agreements for the purchase of securities at
an agreed upon price on a specified future date. A Portfolio may purchase new
issues of securities on a "when-issued" or "delayed delivery" basis, whereby
the payment obligation and interest rate on the instruments are fixed at the
time of the transaction. Such transactions might be entered into, for example,
when the Adviser or Portfolio Manager to a Portfolio anticipates a decline in
the yield of securities of a given issuer and is able to obtain a more
advantageous yield by committing currently to purchase securities to be issued
or delivered later.
Except for the Mid-Cap Value Portfolio, a Portfolio will not enter into such
a transaction for the purpose of investment leverage. Liability for the
purchase price--and all the rights and risks of ownership of the securities--
accrue to the Portfolio at the time it becomes obligated to purchase such
securities, although delivery and payment occur at a later date. Accordingly,
if the market price of the security should decline, the effect of the
agreement would be to obligate the Portfolio to purchase the security at a
price above the current market price on the date of delivery and payment.
During the time the Portfolio is obligated to purchase such securities it will
segregate assets consisting of U.S. Government securities, cash or liquid
securities marked-to-market daily of an aggregate current value sufficient to
make payment for the securities.
Loans of Portfolio Securities
For the purpose of realizing additional income, each Portfolio may make
secured loans of its portfolio securities to broker-dealers or U.S. banks
provided: (i) such loans are secured continuously by collateral consisting of
cash, cash equivalents, or U.S. Government securities maintained on a daily
marked-to-market basis in an amount or at a market value at least equal to the
current market value of the securities loaned; (ii) the Portfolio may at any
time call such loans (subject to notice provisions in the loan agreement) and
obtain the securities loaned; (iii) the Portfolio will receive an amount in
cash at least equal to the interest or dividends paid on the loaned
securities; and (iv) the aggregate market value of securities loaned will not
at any time exceed 33 1/3% of the total assets of the Portfolio. In addition,
it is anticipated that the Portfolio may share with the borrower some of the
income received on the collateral for the loan or that it will be paid a
premium for the loan. If the borrower fails to deliver the loaned securities
on a timely basis (as defined in the loan agreement), the Portfolio could use
the collateral to replace the securities while holding the borrower liable for
any excess of replacement cost over collateral. It should be noted that in
connection with the lending of its portfolio securities, the Portfolio is
exposed to the risk of delay in recovery of the securities loaned or possible
loss of rights in the collateral should the borrower become insolvent. The
Fund has authorized State Street Bank & Trust Company and The Chase Manhattan
Bank ("Chase") (collectively, the "Lending Agents") to engage in securities
lending. In determining whether to lend securities, the Lending Agents
consider all relevant facts and circumstances, including the creditworthiness
of the borrower. Voting rights attached to the loaned securities may pass to
the borrower with the lending of portfolio securities. The Portfolio may
recall securities if the Portfolio Manager wishes to vote on matters put
before shareholders.
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Short Sales
A short sale is a transaction in which a Portfolio sells a security it does
not own in anticipation of a decline in the market price. Even during normal
or favorable market conditions, the Portfolio may make short sales in an
attempt to maintain portfolio flexibility and facilitate the rapid
implementation of investment strategies if the Portfolio Manager believes that
the price of a particular security or group of securities is likely to
decline.
When the Portfolio makes a short sale, the Portfolio must arrange through a
broker to borrow the security to deliver to the buyer; and, in so doing, the
Portfolio becomes obligated to replace the security borrowed at its market
price at the time of replacement, whatever that price may be. The Portfolio
may have to pay a premium to borrow the security. The Portfolio must also pay
any dividends or interest payable on the security until the Portfolio replaces
the security.
The Portfolio's obligation to replace the security borrowed in connection
with the short sale will be secured by collateral deposited with the broker,
consisting of cash, U.S. Government securities or other securities acceptable
to the broker. In addition, with respect to any short sale, other than short
sales against the box, the Portfolio will be required to maintain cash or
liquid securities, marked-to-market daily, in segregation in an amount such
that the value of the sum of both collateral deposits is at all times equal to
at least 100% of the current market value of the securities sold short.
Short Sales Against the Box
A short sale is "against the box" when a Portfolio enters into a transaction
to sell a security short as described above, while at all times during which a
short position is open, maintaining an equal amount of such securities, or
owning securities giving it the right, without payment of future
consideration, to obtain an equal amount of securities sold short. The
Portfolio's obligation to replace the securities sold short is then completed
by purchasing the securities at their market price at time of replacement.
Illiquid and Restricted Securities (Private Placements)
Generally, a security is considered illiquid if it cannot be disposed of
within seven days. Its illiquidity might prevent the sale of such security at
a time when a Portfolio Manager might wish to sell, and these securities could
have the effect of decreasing the overall level of a Portfolio's liquidity.
Further, the lack of an established secondary market may make it more
difficult to value illiquid securities, requiring the Fund to rely on
judgments that may be somewhat subjective in determining value, which could
vary from the amount that a Portfolio could realize upon disposition.
A Portfolio will not acquire restricted securities (including privately
placed securities) if they are illiquid and other securities that are
illiquid, such as repurchase agreements maturing in more than seven days, if
as a result they would comprise more than 15% of the value of the Portfolio's
net assets, and in the case of the Money Market Portfolio, 10% of the value of
its Portfolio assets. The privately placed securities in which these
Portfolios may invest are called restricted securities because there are
restrictions or conditions attached to their resale.
Restricted securities may be sold only in a public offering with respect to
which a registration statement is in effect under the Securities Act of 1933
or in a transaction exempt from such registration such as certain privately
negotiated transactions. Where registration is required, the Portfolio may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the
Portfolio may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to
develop, the Portfolio might obtain a less favorable price than prevailed when
it decided to sell. Restricted securities will be priced at fair value as
determined in good faith under the direction of the Board of Trustees. If
through the appreciation of restricted securities or the depreciation of
unrestricted securities, the Portfolio should be in a position where more than
15% of the value of its net assets are invested in restricted securities that
are illiquid and other securities that are illiquid, the Portfolio Manager
will consider whether steps should be taken to assure liquidity.
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Certain restricted securities may be purchased by certain "qualified
institutional buyers" without the necessity for registration of the
securities. A Portfolio may acquire such a security without the security being
treated as illiquid for purposes of the above-described limitation on
acquisition of illiquid assets if the Portfolio Manager determines that the
security is liquid under guidelines adopted by the Fund's Board of Trustees.
Investing in such restricted securities could have the effect of increasing
the level of the Portfolio's illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities.
Precious Metals-Related Securities
Precious metals-related securities are considered equity securities of U.S.
and foreign companies involved in the exploration, mining, development,
production, or distribution of gold or other natural resources, including
minerals and metals such as copper, aluminum, silver, platinum, uranium,
strategic metals, diamonds, coal, oil, and phosphates.
The value of these securities may be affected by worldwide financial and
political factors, and prices may fluctuate sharply over short time periods.
For example, precious metals securities may be affected by changes in
inflation expectations in various countries, metal sales by central banks of
governments or international agencies, governmental restrictions on the
private ownership of certain precious metals or minerals and other factors.
Foreign Securities
American Depositary Receipts ("ADRs") are dollar-denominated receipts issued
generally by domestic banks and representing the deposit with the bank of a
security of a foreign issuer. ADRs are publicly-traded on exchanges or over-
the-counter in the United States. European Depositary Receipts ("EDRs") and
global Depositary Receipts ("GDRs") are receipts evidencing an arrangement
with a non-U.S. bank similar to that for ADRs and are designed for use in the
non-U.S. securities markets. EDRs and GDRs are not necessarily quoted in the
same currency as the underlying security.
Investing in the securities of foreign issuers involves special risks and
considerations not typically associated with investing in U.S. companies.
These risks are intensified with respect to investments in emerging market
countries. These include differences in accounting, auditing and financial
reporting standards, generally higher commission rates on foreign portfolio
transactions, the possibility of expropriation, nationalization, or
confiscatory taxation, adverse changes in investment or exchange control
regulations, trade restrictions, political instability (which can affect U.S.
investments in foreign countries), and potential restrictions on the flow of
international capital. It may be more difficult to obtain and enforce
judgments against foreign entities. Additionally, income (including dividends
and interest) from foreign securities may be subject to foreign taxes,
including foreign withholding taxes, and other foreign taxes may apply with
respect to securities transactions. Transactions on foreign exchanges or over-
the-counter markets may involve greater time from the trade date until
settlement than for domestic securities transactions and, if the securities
are held abroad, may involve the risk of possible losses through the holding
of securities in custodians and depositories in foreign countries. Foreign
securities often trade with less frequency and volume than domestic securities
and therefore may exhibit greater price volatility. Changes in foreign
exchange rates will affect the value of those securities which are denominated
or quoted in currencies other than the U.S. dollar. Investing in ADRs, EDRs
and GDRs may involve many of the same special risks associated with investing
in securities of foreign issuers other than liquidity risks.
There is generally less publicly available information about foreign
companies comparable to reports and ratings that are published about companies
in the United States. Foreign companies are also generally not subject to
uniform accounting and auditing and financial reporting standards, practices,
and requirements comparable to those applicable to U.S. companies.
It is contemplated that most foreign securities will be purchased in over-
the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient
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as those in the United States. While growing in volume, they usually have
substantially less volume than the New York Stock Exchange, and securities of
some foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. Similarly, volume and liquidity in most foreign
bond markets is less than in the United States and at times, volatility of
price can be greater than in the United States. Fixed commissions on foreign
stock exchanges are generally higher than negotiated commissions on U.S.
exchanges, although the Portfolio will endeavor to achieve the most favorable
net results on its portfolio transactions. There is generally less government
supervision and regulation of stock exchanges, brokers, and listed companies
than in the United States.
With respect to certain foreign countries, there is the possibility of
adverse changes in investment or exchange control regulations,
nationalization, expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the Portfolio, political or social
instability, or diplomatic developments which could affect United States
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the United States' economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
The dividends and interest payable on certain of the Portfolios' foreign
portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution.
Each of the emerging countries, including Asia and Eastern Europe, may be
subject to a substantially greater degree of economic, political and social
instability and disruption than is the case in the United States, Japan and
most Western European countries. This instability may result from, among other
things, the following: (i) authoritarian governments or military involvement
in political and economic decision making, including changes or attempted
changes in governments through extra-constitutional means; (ii) popular unrest
associated with demands for improved political, economic or social conditions;
(iii) internal insurgencies; (iv) hostile relations with neighboring
countries; (v) ethnic, religious and racial disaffection or conflict; and (vi)
the absence of developed legal structures governing foreign private
investments and private property. Such economic, political and social
instability could disrupt the principal financial markets in which the
Portfolios may invest and adversely affect the value of the Portfolios'
assets. A Portfolio's investments could in the future be adversely affected by
any increase in taxes or by political, economic or diplomatic developments.
Investment opportunities within former "east bloc" countries in Eastern Europe
may be considered "not readily marketable" for purposes of the limitation on
illiquid securities set forth above.
Investment in foreign securities also involves the risk of possible losses
through the holding of securities in custodian banks and securities
depositories in foreign countries. (See "Custodian and Transfer Agency and
Dividend Disbursing Services" for more information concerning the Fund's
custodian and foreign sub-custodian.)
No assurance can be given that expropriation, nationalization, freezes, or
confiscation of assets, which would impact assets of the Portfolio, will not
occur, and shareholders bear the risk of losses arising from these or other
events.
Foreign investments of any Portfolio whose principal investment strategy is
to invest in companies located outside of the U.S. will be allocated to at
least three countries at all times. In addition, each Portfolio may not invest
more than 50% of its assets in any one second tier country or more than 25% of
its assets in any one third tier country. First tier countries are: Germany,
the United Kingdom, Japan, the United States, France, Canada, and Australia.
Second tier countries are all countries not in the first or third tier. Third
tier countries are countries identified as "emerging" or "developing" by the
International Bank for Reconstruction and Development ("World Bank") or
International Finance Corporation. The Portfolios are not subject to any limit
upon investment in issuers domiciled or primarily traded in the United States.
Less diversification among countries may create an opportunity for higher
returns, but may also result in higher risk of loss because of greater
exposure to a market decline in a single country.
Furthermore, there are greater risks involved in investing in emerging
market countries and/or their securities markets, such as less diverse and
less mature economic structures, less stable political systems, more
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restrictive foreign investment policies, smaller-sized securities markets and
low trading volumes. Such risks can make investments illiquid and more
volatile than investments in developed countries and such securities may be
subject to abrupt and severe price declines.
Foreign Currency Transactions and Forward Foreign Currency Contracts
Generally, foreign exchange transactions will be conducted on a spot, i.e.,
cash, basis at the spot rate for purchasing or selling currency prevailing in
the foreign exchange market. This rate, under normal market conditions,
differs from the prevailing exchange rate in an amount generally less than
0.15 of 1% due to the costs of converting from one currency to another.
However, the Portfolios have authority to deal in forward foreign exchange
transactions to hedge and manage currency exposure against possible
fluctuations in foreign exchange rates. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date and price set at the time of the contract. When entering into such
contracts, a Portfolio assumes the credit risk of the counterparty.
Dealings in forward foreign exchange transactions may include hedging
involving either specific transactions or portfolio positions. A Portfolio may
purchase and sell forward foreign currency contracts in combination with other
transactions in order to gain exposure to an investment in lieu of actually
purchasing such investment. Transaction hedging is the purchase or sale of
forward foreign currency contracts with respect to specific receivables or
payables of a Portfolio arising from the purchase and sale of portfolio
securities, the sale and redemption of shares of a Portfolio, or the payment
of dividends and distributions by a Portfolio. Position hedging is the sale of
forward foreign currency contracts with respect to portfolio security
positions denominated in or exposed to a foreign currency. In connection with
either of these types of hedging, a Portfolio may also engage in proxy
hedging. Proxy hedging entails entering into a forward contract to buy or sell
a currency whose changes in value are generally considered to be moving in
correlation with a currency or currencies in which portfolio securities are or
are expected to be denominated. Proxy hedging is often used when a currency in
which portfolio securities are denominated is difficult to hedge. The precise
matching of a currency with a proxy currency will not generally be possible
and there may be some additional currency risk in connection with such hedging
transactions. In addition to the above, a portfolio may also cross-hedge
between two non-U.S. currencies, which involves moving a security from one
currency into a second currency that is not the currency that account
performance is based upon. The Portfolios will not speculate in forward
foreign exchange.
A Portfolio may enter into forward foreign currency contracts only under the
following circumstances: First, when a Portfolio enters into a contract for
the purchase or sale of a security denominated in or exposed to a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security. By
entering into a forward contract for the purchase or sale of the amount of
foreign currency involved in the underlying security transactions (or a proxy
currency considered to move in correlation with that currency) for a fixed
amount of dollars, a Portfolio may be able to protect itself against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the subject foreign currency during the period between the
date the security is purchased or sold and the date on which payment is made
or received. Second, when the Portfolio Manager of a Portfolio believes that
the currency of a particular foreign country may suffer a substantial movement
against another currency, it may enter into a forward contract to sell or buy
the amount of the former foreign currency (or a proxy currency considered to
move in correlation with that currency), approximating the value of some or
all of the Portfolio's portfolio securities denominated in or exposed to such
foreign currency. The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible since the
future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. The
projection of short-term currency market movements is extremely difficult and
the successful execution of a short-term hedging strategy is highly uncertain.
In no event will a Portfolio enter into forward contracts or maintain a net
exposure to such contracts, where the consummation of the contracts would
obligate the Portfolio to deliver an amount of foreign currency in excess of
the value of that Portfolio's holdings denominated in or exposed to that
foreign currency (or a proxy currency considered to move in correlation with
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that currency), or exposed to a particular securities market, or futures
contracts, options or other derivatives on such holdings. In addition, in no
event will a Portfolio enter into forward contracts under this second
circumstance, if, as a result, the Portfolio will have more than 25% of the
value of its total assets committed to the consummation of such contracts. The
Portfolios will cover outstanding forward currency contracts by maintaining
liquid portfolio securities or other assets denominated in or exposed to the
currency underlying the forward contract or the currency being hedged. To the
extent that a Portfolio is not able to cover its forward currency positions
with underlying portfolio securities, cash or liquid equity or debt securities
will be segregated in an amount equal to the value of the Portfolio's total
assets committed to the consummation of forward foreign currency exchange
contracts. If the value of the securities used to cover a position or the
value of segregated assets declines, a Portfolio will find alternative cover
or additional cash or securities will be segregated on a daily basis so that
the value of the segregated assets will equal the amount of the Portfolio's
commitments with respect to such contracts.
When a Portfolio Manager of a Portfolio believes that the currency of a
particular foreign country may suffer a decline against the U.S. dollar, that
Portfolio may enter into a forward contract to sell the amount of foreign
currency approximating the value of some or all of the Portfolio's holdings
denominated in or exposed to such foreign currency. At the maturity of the
forward contract to sell, the Portfolio may either sell the portfolio security
and make delivery of the foreign currency or it may retain the security and
terminate its contractual obligation to deliver the foreign currency by
purchasing an "offsetting" contract with the same currency trader obligating
the Portfolio to purchase, on the same maturity date, the same amount of the
foreign currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of the contract. Accordingly, it may be
necessary for a Portfolio to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency. Conversely, it may be necessary to sell on
the spot market some of the foreign currency received upon the sale of the
portfolio security if its market value exceeds the amount of foreign currency
the Portfolio is obligated to deliver.
If a Portfolio retains the portfolio security and engages in an offsetting
transaction, the Portfolio will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. If the
Portfolio engages in an offsetting transaction, it may subsequently enter into
a new forward contract to sell the foreign currency. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Portfolio will suffer a loss to the extent the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
A Portfolio is not required to enter into such transactions with regard to
their foreign currency denominated securities and will not do so unless deemed
appropriate by its Portfolio Manager. It also should be realized that this
method of protecting the value of a Portfolio's holdings in securities against
a decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a rate of exchange
which one can achieve at some future point in time. Additionally, although
such contracts tend to minimize the risk of loss due to a decline in the value
of the hedged currency, at the same time they tend to limit any potential gain
which might result from the value of such currency increase.
Although a Portfolio values its shares in terms of U.S. dollars, it does not
intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. It 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 Portfolio
at one rate, while offering a lesser rate of exchange should the Portfolio
desire to resell that currency to the dealer.
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Options
Purchasing and Writing Options on Securities. A Portfolio may purchase and
sell (write) (i) both put and call options on debt or other securities in
standardized contracts traded on national securities exchanges, boards of
trade, similar entities, or for which an established over-the-counter market
exists; and (ii) agreements, sometimes called cash puts, which may accompany
the purchase of a new issue of bonds from a dealer.
An option on a security is a contract that gives the holder of the option,
in return for a premium, the right to buy from (in the case of a call) or sell
to (in the case of a put) the writer of the option the security underlying the
option at a specified exercise price at any time during the term of the
option. The writer of an option on a security has the obligation upon exercise
of the option to deliver the underlying security upon payment of the exercise
price or to pay the exercise price upon delivery of the underlying security. A
Portfolio may purchase put options on securities to protect holdings in an
underlying or related security against a substantial decline in market value.
Securities are considered related if their price movements generally correlate
to one another. For example, the purchase of put options on debt securities
held in a Portfolio will enable a Portfolio to protect, at least partially, an
unrealized gain in an appreciated security without actually selling the
security. In addition, the Portfolio will continue to receive interest income
on such security.
A Portfolio may purchase call options on securities to protect against
substantial increases in prices of securities the Portfolio intends to
purchase pending its ability to invest in such securities in an orderly
manner. A Portfolio may sell put or call options it has previously purchased,
which could result in a net gain or loss depending on whether the amount
realized on the sale is more or less than the premium and other transaction
costs paid on the put or call option which is sold. A Portfolio may also allow
options to expire unexercised.
In order to earn additional income on its portfolio securities or to protect
partially against declines in the value of such securities, a Portfolio may
write covered call options. The exercise price of a call option may be below,
equal to, or above the current market value of the underlying security at the
time the option is written. During the option period, a covered call option
writer may be assigned an exercise notice by the broker-dealer through whom
such call option was sold requiring the writer to deliver the underlying
security against payment of the exercise price. This obligation is terminated
upon the expiration of the option period or at such earlier time in which the
writer effects a closing purchase transaction. Closing purchase transactions
will ordinarily be effected to realize a profit on an outstanding call option,
to prevent an underlying security from being called, to permit the sale of the
underlying security, or to enable the Portfolio to write another call option
on the underlying security with either a different exercise price or
expiration date or both.
In order to earn additional income or to facilitate its ability to purchase
a security at a price lower than the current market price of such security, a
Portfolio may write secured put options. During the option period, the writer
of a put option may be assigned an exercise notice by the broker-dealer
through whom the option was sold requiring the writer to purchase the
underlying security at the exercise price.
A Portfolio may write call options and put options only if they are
"covered" or "secured." In the case of a call option on a security, the option
is "covered" if the Portfolio owns the security underlying the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount are segregated) upon conversion or exchange of
other securities held by the Portfolio, or, if the Portfolio has a call on the
same security if the exercise price of the call held (i) is equal to or less
than the exercise price of the call written or (ii) is greater than the
exercise price of the call written, if the difference is maintained by the
Portfolio in segregated cash, U.S. Government securities or liquid securities
marked-to-market daily. A put is secured if the Portfolio maintains cash, U.S.
Government securities or liquid securities marked-to-market daily with a value
equal to the exercise price on a segregated basis, sells short the security
underlying the put option at an equal or greater exercise price, or holds a
put on the same underlying security at an equal or greater exercise price.
Prior to the earlier of exercise or expiration, an option may be closed out
by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security, exercise price, and expiration). There can be
no assurance, however, that a closing purchase or sale transaction can be
effected when the Portfolio desires.
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A Portfolio will realize a capital gain from a closing purchase transaction
if the cost of the closing option is less than the premium received from
writing the option, or, if it is more, the Portfolio will realize a capital
loss. If the premium received from a closing sale transaction is more than the
premium paid to purchase the option, the Portfolio will realize a capital gain
or, if it is less, the Portfolio will realize a capital loss. The principal
factors affecting the market value of a put or a call option include supply
and demand, interest rates, the current market price of the underlying
security in relation to the exercise price of the option, the volatility of
the underlying security, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by a Portfolio is an
asset of the Portfolio. The premium received for an option written by a
Portfolio is recorded as a deferred credit. The value of an option purchased
or written is marked-to-market daily and is valued at the closing price on the
exchange on which it is traded or, if not traded on an exchange or no closing
price is available, at the mean between the last bid and asked prices.
Purchasing and Writing Options on Stock Indexes. A stock index is a method
of reflecting in a single number the market values of many different stocks
or, in the case of value weighted indices that take into account prices of
component stocks and the number of shares outstanding, the market values of
many different companies. Stock indexes are compiled and published by various
sources, including securities exchanges. An index may be designed to be
representative of the stock market as a whole, of a broad market sector (e.g.,
industrials), or of a particular industry (e.g., electronics). An index may be
based on the prices of all, or only a sample, of the stocks whose value it is
intended to represent.
A stock index is ordinarily expressed in relation to a "base" established
when the index was originated. The base may be adjusted from time to time to
reflect, for example, capitalization changes affecting component stocks. In
addition, stocks may from time to time be dropped from or added to an index
group. These changes are within the discretion of the publisher of the index.
Different stock indexes are calculated in different ways. Often the market
prices of the stocks in the index group are "value weighted;" that is, in
calculating the index level, the market price of each component stock is
multiplied by the number of shares outstanding. Because of this method of
calculation, changes in the stock prices of larger corporations will generally
have a greater influence on the level of a value weighted (or sometimes
referred to as a capitalization weighted) index than price changes affecting
smaller corporations.
In general, index options are very similar to stock options, and are
basically traded in the same manner. However, when an index option is
exercised, the exercise is settled by the payment of cash--not by the delivery
of stock. The assigned writer of a stock option is obligated to pay the
exercising holder cash in an amount equal to the difference (expressed in
dollars) between the closing level of the underlying index on the exercise
date and the exercise price of the option, multiplied by a specified index
"multiplier." A multiplier of 100, for example, means that a one-point
difference will yield $100. Like other options listed on United States
securities exchanges, index options are issued by the Options Clearing
Corporation ("OCC").
Gains or losses on the Portfolios' transactions in securities index options
depend primarily on price movements in the stock market generally (or, for
narrow market indexes, in a particular industry or segment of the market)
rather than the price movements of individual securities held by a Portfolio
of the Fund. A Portfolio may sell securities index options prior to expiration
in order to close out its positions in stock index options which it has
purchased. A Portfolio may also allow options to expire unexercised.
Risks of Options Transactions. There are several risks associated with
transactions in options. For example, there are significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objectives. A decision as to whether, when, and how to use options
involves the exercise of skill and judgment, and even a well-conceived
transaction may be unsuccessful to some degree because of market behavior or
unexpected events.
There can be no assurance that a liquid market will exist when a Portfolio
seeks to close out an option position. If a Portfolio were unable to close out
an option it had purchased on a security, it would have to exercise
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the option to realize any profit or the option may expire worthless. If a
Portfolio were unable to close out a covered call option it had written on a
security, it would not be able to sell the underlying security unless the
option expired without exercise. As the writer of a covered call option, a
Portfolio forgoes, during the option's life, the opportunity to profit from
increases in the market value of the security covering the call option above
the sum of the premium and the exercise price of the call.
If trading were suspended in an option purchased by a Portfolio, the
Portfolio would not be able to close out the option. If restrictions on
exercise were imposed, the Portfolio might be unable to exercise an option it
has purchased.
With respect to index options, current index levels will ordinarily continue
to be reported even when trading is interrupted in some or all of the stocks
in an index group. In that event, the reported index levels will be based on
the current market prices of those stocks that are still being traded (if any)
and the last reported prices for those stocks that are not currently trading.
As a result, reported index levels may at times be based on non-current price
information with respect to some or even all of the stocks in an index group.
Exchange rules permit (and in some instances require) the trading of index
options to be halted when the current value of the underlying index is
unavailable or when trading is halted in stocks that account for more than a
specified percentage of the value of the underlying index. In addition, as
with other types of options, an exchange may halt the trading of index options
whenever it considers such action to be appropriate in the interests of
maintaining a fair and orderly market and protecting investors. If a trading
halt occurs, whether for these or for other reasons, holders of index options
may be unable to close out their positions and the options may expire
worthless.
Spread Transactions. Spread transactions are not generally exchange listed
or traded. Spread transactions may occur in the form of options, futures,
forwards or swap transactions. The purchase of a spread transaction gives a
Portfolio the right to sell or receive a security or a cash payment with
respect to an index at a fixed dollar spread or fixed yield spread in
relationship to another security or index which is used as a benchmark. The
risk to a Portfolio in purchasing spread transactions is the cost of the
premium paid for the spread transaction and any transaction costs. The sale of
a spread transaction obligates a Portfolio to purchase or deliver a security
or a cash payment with respect to an index at a fixed dollar spread or fixed
yield spread in relationship to another security or index which is used as a
benchmark. In addition, there is no assurance that closing transactions will
be available. The purchase and sale of spread transactions will be used in
furtherance of a Portfolio's objectives and to protect a Portfolio against
adverse changes in prevailing credit quality spreads, i.e., the yield spread
between high quality and lower quality securities. Such protection is only
provided during the life of the spread transaction. The Fund does not consider
a security covered by a spread transaction to be "pledged" as that term is
used in the Fund's policy limiting the pledging or mortgaging of its assets.
The sale of spread transactions will be "covered" or "secured" as described in
the "Options", "Options on Foreign Currencies", "Futures Contracts and Options
on Futures Contracts", and "Swap Agreements and Options on Swap Agreements"
sections.
Options on Foreign Currencies
Portfolios may purchase and sell options on foreign currencies for hedging
purposes in a manner similar to that in which futures or forward contracts on
foreign currencies will be utilized. For example, a decline in the U.S. dollar
value of a foreign currency in which portfolio securities are denominated will
reduce the U.S. dollar value of such securities, even if their value in the
foreign currency remains constant. In order to protect against such
diminutions in the value of portfolio securities, a Portfolio may buy put
options on the foreign currency. If the value of the currency declines, the
Portfolio will have the right to sell such currency for a fixed amount in U.S.
dollars and will offset, in whole or in part, the adverse effect on its
portfolio.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a Portfolio may buy call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Portfolio from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, if currency exchange rates do not move in the direction or
to the extent desired, the Portfolio could sustain losses
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on transactions in foreign currency options that would require the Portfolio
to forgo a portion or all of the benefits of advantageous changes in those
rates.
A Portfolio may write options on foreign currencies for hedging purposes.
For example, to hedge against a potential decline in the U.S. dollar value of
foreign currency denominated securities due to adverse fluctuations in
exchange rates, the Portfolio could, instead of purchasing a put option, write
a call option on the relevant currency. If the expected decline occurs, the
option will most likely not be executed and the diminution in value of
portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against a potential
increase in the U.S. dollar cost of securities to be acquired, the Portfolio
could write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the Portfolio to hedge the
increased cost up to the amount of the premium. As in the case of other types
of options, however, the writing of a foreign currency option will constitute
only a partial hedge up to the amount of the premium. If exchange rates do not
move in the expected direction, the option may be exercised and the Portfolio
would be required to buy or sell the underlying currency at a loss which may
not be offset by the amount of the premium. Through the writing of options on
foreign currencies, the Portfolio also may lose all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
exchange rates.
A Portfolio may write covered call and put options on foreign currencies. A
call option written on a foreign currency by the Portfolio is "covered" if the
Portfolio (i) owns the underlying foreign currency covered by the call; (ii)
has an absolute and immediate right to acquire that foreign currency without
additional cash consideration (or for additional cash consideration held in
segregation) upon conversion or exchange of other foreign currency held in its
portfolio; (iii) has a call on the same foreign currency and in the same
principal amount as the call written if the exercise price of the call held
(a) is equal to or less than the exercise price of the call written, or (b) is
greater than the exercise price of the call written, if the difference is
maintained by the Portfolio in segregated government securities, cash or
liquid securities marked-to-market daily, and/or cash, U.S. Government
securities, or liquid securities marked-to-market daily; or (iv) segregates
and marks-to-market cash or liquid assets equal to the value of the underlying
foreign currency. A put option written on a foreign currency by a Portfolio is
"covered" if the option is secured by (i) segregated government securities,
cash or liquid securities marked-to-market daily of that foreign currency,
and/or segregated U.S. Government securities, cash or liquid securities
marked-to-market daily at least equal to the exercise price, (ii) sells short
the security underlying the put option at an equal or greater exercise price,
or (iii) a put on the same underlying currency at an equal or greater exercise
price.
A Portfolio also may write call options on foreign currencies for cross-
hedging purposes that would not be deemed to be covered. A written call option
on a foreign currency is for cross-hedging purposes if it is not covered but
is designed to provide a hedge against a decline due to an adverse change in
the exchange rate in the U.S. dollar value of a security which the Portfolio
owns or has the right to acquire and which is denominated in the currency
underlying the option. In such circumstances, the Portfolio collateralizes the
option by segregating cash, U.S. Government Securities, and/or liquid
securities marked-to-market daily in an amount not less than the value of the
underlying foreign currency in U.S. dollars marked-to-market daily.
Foreign currency options are subject to the risks of the availability of a
liquid secondary market described above, as well as the risks regarding
adverse market movements, margining of options written, the nature of the
foreign currency market, possible intervention by governmental authorities and
the effects of other political and economic events. In addition, exchange-
traded options on foreign currencies involve certain risks not presented by
the over-the-counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its clearing member,
impose special procedures on exercise and settlement, such as technical
changes in the mechanics of delivery of currency, the fixing of dollar
settlement prices or prohibitions on exercise.
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In addition, options on foreign currencies may be traded on foreign
exchanges and over-the-counter in foreign countries. Such transactions are
subject to the risk of governmental actions affecting trading in or the prices
of foreign currencies or securities. The value of such positions also could be
adversely affected by (i) other complex foreign political and economic
factors, (ii) lesser availability than in the United States of data on which
to make trading decisions, (iii) delays in a Portfolio's ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States, (iv) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States, and (v) low
trading volume.
Investments in Other Investment Company Securities
Under the 1940 Act, a Portfolio may not own more than 3% of the outstanding
voting stock of an investment company, invest more than 5% of its total assets
in any one investment company, or invest more than 10% of its total assets in
the securities of investment companies. In some instances, a Portfolio may
invest in an investment company, including an unregistered investment company,
in excess of these limits. This may occur, for instance, when a Portfolio
invests collateral it receives from loaning its portfolio securities. As the
shareholder of another investment company, a Portfolio would bear, along with
other shareholders, its pro rata portion of the other investment company's
expenses, including advisory fees. Such expenses are in addition to the
expenses a Portfolio pays in connection with its own operations.
Among the types of investment companies in which a Portfolio may invest are
Portfolio Depositary Receipts ("PDRs") and Index Fund Shares (PDRs and Index
Fund Shares are collectively referred to as "Exchange Traded Funds" or
"ETFs"). PDRs represent interests in an unit investment trust holding a
portfolio of securities("UIT") that may be obtained from the UIT or purchased
in the secondary market. Each PDR is intended to track the underlying
securities portfolio, trade like a share of common stock, and pay to PDR
holders periodic dividends proportionate to those paid with respect to the
underlying portfolio of securities, less certain expenses. Index Fund Shares
are shares issued by an open-end management investment company that seeks to
provide investment results that correspond generally to the price and yield
performance of specified foreign or domestic equity index ("Index Fund"). ETFs
include, among others, Standard & Poor's Depository Receipts ("SPDRs"),
Optimized Portfolios as Listed Securities ("OPALS"), Dow Jones Industrial
Average Instruments ("Diamond"), Nasdaq 100 tracking shares ("QQQ") and I-
Shares.
SPDRs. SPDRs track the performance of a basket of stocks intended to track
the price performance and dividend yields of the S&P 500 until a specified
maturity date. SPDRs are listed on the American Stock Exchange. Holders of
SPDRs are entitled to receive quarterly distributions corresponding to
dividends received on shares contained in the underlying basket of stocks net
of expenses. On the maturity date of the SPDRs' UIT, the holders will receive
the value of the underlying basket of stocks.
OPALS. OPALS track the performance of adjustable baskets of stocks until a
specified maturity date. Holders of OPALS are entitled to receive semi-annual
distributions corresponding to dividends received on shares contained in the
underlying basket of stocks, net of expenses. On the maturity date of the
OPALS' UIT, the holders will receive the physical securities comprising the
underlying baskets.
I-Shares. I-Shares track the performance of specified equity market indexes,
including the S&P 500. I-Shares are listed on the American Stock Exchange and
the Chicago Board Option Exchange. Holders of I-Shares are entitled to receive
distributions not less frequently than annually corresponding to dividends and
other distributions received on shares contained in the underlying basket of
stocks net of expenses. I-Shares are Index Fund Shares.
Individual investments in PDRs generally are not redeemable, except upon
termination of the UIT. Similarly, individual investments in Index Fund Shares
generally are not redeemable. However, large quantities of PDRs known as
"Creation Units" are redeemable from the sponsor of the UIT. Similarly, block
sizes of Index Fund Shares, also known as "Creation Units", are redeemable
from the issuing Index Fund. The liquidity of small holdings of ETFs,
therefore, will depend upon the existence of a secondary market.
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The price of ETFs is derived from and based upon the securities held by the
UIT or Index Fund. Accordingly, the level of risk involved in the purchase or
sale of an ETF is similar to the risk involved in the purchase or sale of
traditional common stock, with the exception that the pricing mechanism for an
ETF is based on a basket of stocks. Disruptions in the markets for the
securities underlying ETFs purchased or sold by a Portfolio could result in
losses on ETFs. ETFs represent an unsecured obligation and therefore carry
with them the risk that the counterparty will default and the Portfolio may
not be able to recover the current value of its investment.
Investments in ETFs will be limited to the percentage restrictions set forth
above for investments in investment company securities.
Futures Contracts and Options on Futures Contracts
There are several risks associated with the use of futures and futures
options. While a Portfolio hedging transactions may protect the Portfolio
against adverse movements in the general level of interest rates or stock or
currency prices, such transactions could also preclude the opportunity to
benefit from favorable movements in the level of interest rates or stock or
currency prices. A hedging transaction may not correlate perfectly with price
movements in the assets being hedged. An incorrect correlation could result in
a loss on both the hedged assets in a Portfolio and/or the hedging vehicle, so
that the Portfolio's return might have been better had hedging not been
attempted.
There can be no assurance that a liquid market will exist at a time when a
Portfolio seeks to close out a futures contract or a futures option position.
Most futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single day; once the daily limit
has been reached on a particular contract, no trades may be made that day at a
price beyond that limit. In addition, certain of these instruments are
relatively new and lack a deep secondary market. Lack of a liquid market for
any reason may prevent a Portfolio from liquidating an unfavorable position
and the Portfolio would remain obligated to meet margin requirements until the
position is closed.
Futures on securities. A futures contract on a security is an agreement
between two parties (buyer and seller) to take or make delivery of a specified
quantity of a security at a specified price at a future date.
If a fund buys a futures contract to gain exposure to securities, the fund
is exposed to the risk of change in the value of the futures contract, which
may be caused by a change in the value of the underlying securities.
Interest Rate Futures. An interest rate futures contract is an agreement
between two parties (buyer and seller) to take or make delivery of a specified
quantity of financial instruments (such as GNMA certificates or Treasury
bonds) at a specified price at a future date. In the case of futures contracts
traded on U.S. exchanges, the exchange itself or an affiliated clearing
corporation assumes the opposite side of each transaction (i.e., as buyer or
seller). A futures contract may be satisfied or closed out by delivery or
purchase, as the case may be, of the financial instrument or by payment of the
change in the cash value of the index. Frequently, using futures to effect a
particular strategy instead of using the underlying or related security will
result in lower transaction costs being incurred. A public market exists in
futures contracts covering various financial instruments including U.S.
Treasury bonds, U.S. Treasury notes, GNMA certificates, three month
U.S. Treasury bills, 90 day commercial paper, bank certificates of deposit,
and Eurodollar certificates of deposit.
As a hedging strategy a Portfolio might employ, a Portfolio would purchase
an interest rate futures contract when it is not fully invested in long-term
debt securities but wishes to defer their purchase for some time until it can
orderly invest in such securities or because short-term yields are higher than
long-term yields. Such purchase would enable the Portfolio to earn the income
on a short-term security while at the same time minimizing the effect of all
or part of an increase in the market price of the long-term debt security
which the Portfolio intended to purchase in the future. A rise in the price of
the long-term debt security prior to its purchase either would be offset by an
increase in the value of the futures contract purchased by the Portfolio or
avoided by taking delivery of the debt securities under the futures contract.
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A Portfolio would sell an interest rate futures contract in order to
continue to receive the income from a long-term debt security, while
endeavoring to avoid part or all of the decline in market value of that
security which would accompany an increase in interest rates. If interest
rates did rise, a decline in the value of the debt security held by the
Portfolio would be substantially offset by the ability of the Portfolio to
repurchase at a lower price the interest rate futures contract previously
sold. While the Portfolio could sell the long-term debt security and invest in
a short-term security, ordinarily the Portfolio would give up income on its
investment, since long-term rates normally exceed short-term rates.
Stock Index Futures. A stock index is a method of reflecting in a single
number the market values of many different stocks or, in the case of
capitalization weighted indices that take into account both stock prices and
the number of shares outstanding, many different companies. An index
fluctuates generally with changes in the market values of the common stocks so
included. A stock index futures contract is a bilateral agreement pursuant to
which two parties agree to take or make delivery of an amount of cash equal to
a specified dollar amount multiplied by the difference between the stock index
value at the close of the last trading day of the contract and the price at
which the futures contract is originally purchased or sold. No physical
delivery of the underlying stocks in the index is made.
A Portfolio may purchase and sell stock index futures contracts to hedge its
securities portfolio. A Portfolio may engage in transactions in futures
contracts only in an effort to protect it against a decline in the value of
the Portfolio's portfolio securities or an increase in the price of securities
that the Portfolio intends to acquire. For example, a Portfolio may sell stock
index futures to protect against a market decline in an attempt to offset
partially or wholly a decrease in the market value of securities that the
Portfolio intends to sell. Similarly, to protect against a market advance when
the Portfolio is not fully invested in the securities market, the Portfolio
may purchase stock index futures that may partly or entirely offset increases
in the cost of securities that the Portfolio intends to purchase.
Futures Options. Futures options possess many of the same characteristics as
options on securities. A futures option gives the holder the right, in return
for the premium paid, to assume a long position (call) or short position (put)
in a futures contract at a specified exercise price at any time during the
period of the option. Upon exercise of a call option, the holder acquires a
long position in the futures contract and the writer is assigned the opposite
short position. In the case of a put option, the opposite is true.
Options on stock index futures contracts give the purchaser the right, in
return for the premium paid, to assume a position in a stock index futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period
of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
stock index futures contract, at exercise, exceeds (in the case of a call) or
is less than (in the case of a put) the exercise price of the option on the
stock index futures contract. If an option is exercised on the last trading
day prior to the expiration date of the option, the settlement will be made
entirely in cash equal to the difference between the exercise price of the
option and the closing level of the index on which the futures contract is
based on the expiration date. Purchasers of options who fail to exercise their
options prior to the exercise date suffer a loss of the premium paid. During
the option period, the covered call writer (seller) has given up the
opportunity to profit from a price increase in the underlying securities above
the exercise price. The writer of an option has no control over the time when
it may be required to fulfill its obligation as a writer of the option.
If a purchase or sale of a futures contract is made by a Portfolio, the
Portfolio is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or U.S. Government securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Portfolio upon
termination of the contract, assuming all contractual obligations have been
satisfied. Each investing Portfolio expects to earn interest income
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on its initial margin deposits. A futures contract held by a Portfolio is
valued daily at the official settlement price of the exchange on which it is
traded. Each day the Portfolio pays or receives cash, called "variation
margin," equal to the daily change in value of the futures contract. This
process is known as "marking-to-market." Variation margin does not represent a
borrowing or loan by a Portfolio but is instead settlement between the
Portfolio and the broker of the amount one would owe the other if the futures
contract expired. In computing daily net asset value, each Portfolio will
mark-to-market its open futures positions.
A Portfolio is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Portfolio.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security, and delivery month). If an offsetting purchase
price is less than the original sale price, the Portfolio realizes a capital
gain, or if it is more, the Portfolio realizes a capital loss. Conversely, if
an offsetting sale price is more than the original purchase price, the
Portfolio realizes a capital gain, or if it is less, the Portfolio realizes a
capital loss. The transaction costs must also be included in these
calculations.
Limitations. The Fund will comply with certain regulations of the Commodity
Futures Trading Commission ("CFTC") under which an investment company may
engage in futures transactions and qualify for an exclusion from being a
"commodity pool." Under these regulations, a Portfolio may only enter into a
futures contract or purchase an option thereon (1) for bona fide hedging
purposes and (2) for other purposes if, immediately thereafter, the initial
margin deposits for futures contracts held by that Portfolio plus premiums
paid by it for open futures option positions, less the amount by which any
such positions are "in-the-money," would not exceed 5% of the Portfolio's
total assets. A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise price. A put
option is "in-the-money" if the exercise price exceeds the value of the
futures contract that is the subject of the option.
When purchasing a futures contract, a Portfolio must segregate cash, U.S.
Government securities and/or other liquid securities marked-to-market daily
(including any margin) equal to the price of such contract or will "cover" its
position by holding a put option permitting the Portfolio to sell the same
futures contract with a strike price equal to or higher than the price of the
futures contract held. When writing a call option on a futures contract, the
Portfolio similarly will segregate government securities, cash and/or liquid
securities marked-to-market daily of that foreign currency, and/or, U.S.
Government securities, cash, or other liquid securities marked-to-market daily
(including any margin) equal to the value of the futures contract or will
"cover" its position by (1) owning the same futures contract at a price equal
to or lower than the strike price of the call option, or (2) owning the
commodity (financial or otherwise) underlying the futures contract, or (3)
holding a call option permitting the Portfolio to purchase the same futures
contract at a price equal to or lower than the strike price of the call option
sold by the Portfolio. When selling a futures contract or selling a put option
on a futures contract, the Portfolio is required to segregate government
securities, cash and/or liquid securities marked-to-market daily of that
foreign currency, and/or U.S. Government securities, cash, or other liquid
securities marked-to-market daily (including any margin) equal to the market
value of such contract or exercise price of such option or to "cover" its
position, when selling a futures contract, by (1) owning the commodity
(financial or otherwise) underlying the futures contract or (2) holding a call
option permitting the Portfolio to purchase the same futures contract at a
price equal to or lower than the price at which the short position was
established, and, when selling a put option on the futures contract, by (1)
selling the futures contract underlying the put option at the same or higher
price than the strike price of the put option or (2) purchasing a put option,
if the strike price of the purchased option is the same or higher than the
strike price of the put option sold by the Portfolio.
A Portfolio may not maintain open short positions in futures contracts or
call options written on futures contracts if, in the aggregate, the market
value of all such open positions exceeds the current value of its portfolio
securities, plus or minus unrealized gains and losses on the open positions,
adjusted for the historical relative
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volatility of the relationship between the Portfolio and the positions. For
this purpose, to the extent the Portfolio has written call options on specific
securities it owns, the value of those securities will be deducted from the
current market value of the securities portfolio.
The Fund reserves the right to engage in other types of futures transactions
in the future and to use futures and related options for other than hedging
purposes to the extent permitted by regulatory authorities. If other types of
options, futures contracts, or futures options are traded in the future, a
Portfolio may also use such investment techniques, provided that the Board of
Trustees determines that their use is consistent with the Portfolio's
investment objective.
Risks Associated with Futures and Futures Options. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. There can be
significant differences between the securities and futures markets that could
result in an imperfect correlation between the markets, causing a given hedge
not to achieve its objectives. The degree of imperfection of correlation
depends on circumstances such as variations in speculative market demand for
futures and futures options on securities, including technical influences in
futures trading and futures options, and differences between the portfolio
securities being hedged and the instruments underlying the hedging vehicle in
such respects as interest rate levels, maturities, conditions affecting
particular industries, and creditworthiness of issuers. A decision as to
whether, when, and how to hedge involves the exercise of skill and judgment
and even a well-conceived hedge may be unsuccessful to some degree because of
market behavior or unexpected interest rate trends.
The price of futures contracts may not correlate perfectly with movement in
the underlying security or stock index, due to certain market distortions.
This might result from decisions by a significant number of market
participants holding stock index futures positions to close out their futures
contracts through offsetting transactions rather than to make additional
margin deposits. Also, increased participation by speculators in the futures
market may cause temporary price distortions. These factors may increase the
difficulty of effecting a fully successful hedging transaction, particularly
over a short time frame. With respect to a stock index futures contract, the
price of stock index futures might increase, reflecting a general advance in
the market price of the index's component securities, while some or all of the
portfolio securities might decline. If a Portfolio had hedged its portfolio
against a possible decline in the market with a position in futures contracts
on an index, it might experience a loss on its futures position until it could
be closed out, while not experiencing an increase in the value of its
portfolio securities. If a hedging transaction is not successful, the
Portfolio might experience losses which it would not have incurred if it had
not established futures positions. Similar risk considerations apply to the
use of interest rate and other futures contracts.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a
price beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because
the limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
Foreign markets may offer advantages such as trading in indices that are not
currently traded in the United States. Foreign markets, however, may have
greater risk potential than domestic markets. Unlike trading on domestic
commodity exchanges, trading on foreign commodity exchanges is not regulated
by the CFTC and may be subject to greater risk than trading on domestic
exchanges. For example, some foreign exchanges are principal markets so that
no common clearing facility exists and a trader may look only to the broker
for performance of the contract. Trading in foreign futures or foreign options
contracts may not be afforded certain of the protective measures provided by
the Commodity Exchange Act, the CFTC's regulations, and the rules of the
National
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Futures Association and any domestic exchange, including the right to use
reparations proceedings before the CFTC and arbitration proceedings provided
by the National Futures Association or any domestic futures exchange. Amounts
received for foreign futures or foreign options transactions may not be
provided the same protection as funds received in respect of transactions on
United States futures exchanges. In addition, any profits that the Portfolio
might realize in trading could be eliminated by adverse changes in the
exchange rate of the currency in which the transaction is denominated, or the
Portfolio could incur losses as a result of changes in the exchange rate.
Transactions on foreign exchanges may include both commodities that are traded
on domestic exchanges or boards of trade and those that are not.
There can be no assurance that a liquid market will exist at a time when a
Portfolio seeks to close out a futures or a futures option position, and that
Portfolio would remain obligated to meet margin requirements until the
position is closed. In addition, many of the contracts discussed above are
relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market will develop or
continue to exist.
Foreign Currency Futures and Options Thereon
Foreign Currency Futures are contracts for the purchase or sale for future
delivery of foreign currencies ("foreign currency futures") which may also be
engaged in for cross-hedging purposes. Cross-hedging involves the sale of a
futures contract on one foreign currency to hedge against changes in exchange
rates for a different ("proxy") currency if there is an established historical
pattern of correlation between the two currencies. These investment techniques
will be used only to hedge against anticipated future changes in exchange
rates which otherwise might adversely affect the value of the Portfolio's
securities or adversely affect the prices of securities that the Portfolio has
purchased or intends to purchase at a later date. The successful use of
foreign currency futures will usually depend on the Portfolio Manager's
ability to forecast currency exchange rate movements correctly. Should
exchange rates move in an unexpected manner, the Portfolio may not achieve the
anticipated benefits of foreign currency futures or may realize losses.
Swap Agreements and Options on Swap Agreements
A Portfolio's current obligations (or rights) under a swap agreement will
generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement (the "net amount"). A Portfolio's current obligations under a
swap agreement will be accrued daily (offset against any amounts owing to the
Portfolio) and any accrued but unpaid net amounts owed to a swap counterparty
will be covered by segregated cash, U.S. Government securities, and/or liquid
securities marked-to-market daily, to avoid any potential leveraging of a
Portfolio. Swap agreements may include: (1) "currency exchange rate", which
involve the exchange by a Portfolio with another party of their respective
rights to make or receive payments is specified currencies; (2) "interest
rate", which involve the exchange by a Portfolio with another party of their
respective commitments to pay or receive interest; and (3) "interest rate
index", which involve the exchange by a Portfolio with another party of the
respective amounts payable with respect to a national principal amount at
interest rates equal to two specified indices; and other interest rate swap
arrangements such as: (1) "caps," under which, in return for a premium, one
party agrees to make payments to the other to the extent that interest rates
exceed a specified rate, or "cap"; (2) "floors," under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates fall below a certain level, or "floor"; and (3) "collars,"
under which one party sells a cap and purchases a floor or vice-versa in an
attempt to protect itself against interest rate movements exceeding given
minimum or maximum levels.
Generally, the swap agreement transactions in which a Portfolio will engage
are not regulated as futures or commodity option transactions under the
Commodity Exchange Act or by the Commodity Futures Trading Commission.
Risks of Swap Agreements. Whether a Portfolio's use of swap agreements will
be successful in furthering its investment objective will depend on a
Portfolio Manager's ability to predict correctly whether certain types
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of investments are likely to produce greater returns than other investments.
Because they are two-party contracts and because they may have terms of
greater than seven days, swap agreements may be considered to be illiquid
investments. It may not be possible to enter into a reverse swap or close out
a swap position prior to its original maturity and, therefore, a Portfolio may
bear the risk of such position until its maturity. Moreover, a Portfolio bears
the risk of loss of the amount expected to be received under a swap agreement
in the event of the default or bankruptcy of a swap agreement counterparty. A
Portfolio will enter into swap agreements only with counterparties that meet
certain standards for creditworthiness (generally, such counterparties would
have to be eligible counterparties under the terms of a Portfolio's repurchase
agreement guidelines unless otherwise specified in the investment policies of
the Portfolio). Certain tax considerations may limit a Portfolio's ability to
use swap agreements. The swaps market is a relatively new market and is
largely unregulated. It is possible that developments in the swaps market,
including potential government regulation, could adversely affect a
Portfolio's ability to terminate existing swap agreements or to realize
amounts to be received under such agreements. See the section "Taxation" for
more information.
Structured Notes
The value of the principal of and/or interest on such securities is
determined by reference to changes in the value of specific currencies,
interest rates, commodities, indices, or other financial indicators (the
"Reference") or the relative change in two or more References. The interest
rate or the principal amount payable upon maturity or redemption may be
increased or decreased depending upon changes in the applicable Reference. The
terms of the structured notes may provide that in certain circumstances no
principal is due at maturity and, therefore, result in the loss of a
Portfolio's investment. Structured notes may be positively or negatively
indexed, so that appreciation of the Reference may produce an increase or
decrease in the interest rate or value of the security at maturity. In
addition, changes in the interest rates or the value of the security at
maturity may be a multiple of changes in the value of the Reference.
Consequently, structured securities may entail a greater degree of market risk
than other types of fixed-income securities. Structured notes may also be more
volatile, less liquid and more difficult to accurately price than less complex
securities.
Warrants and Rights
Warrants or rights may be acquired as part of a unit or attached to
securities at the time of purchase without limitation. Warrants may be
considered speculative in that they have no voting rights, pay no dividends,
and have no rights with respect to the assets of the corporation issuing them.
Warrants basically are options to purchase equity securities at a specific
price valid for a specific period of time. They do not represent ownership of
the securities, but only the right to buy them. Warrants differ from call
options in that warrants are issued by the issuer of the security which may be
purchased on their exercise, whereas call options may be written or issued by
anyone. The prices of warrants do not necessarily move parallel to the prices
of the underlying securities.
Duration
Duration is a measure of average life of a bond on a present value basis,
which was developed to incorporate a bond's yield, coupons, final maturity and
call features into one measure. Duration is one of the fundamental tools that
may be used by the Adviser or Portfolio Manager in fixed income security
selection. In this discussion, the term "bond" is generally used to connote
any type of debt instrument.
Most notes and bonds have provided interest ("coupon") payments in addition
to a final ("par") payment at maturity. Some obligations also feature call
provisions. Depending on the relative magnitude of these payments, debt
obligations may respond differently to changes in the level and structure of
interest rates. Traditionally, a debt security's "term to maturity" has been
used as a proxy for the sensitivity of the security's price to changes in
interest rates (which is the "interest rate risk" or "volatility" of the
security). However, "term to maturity" measures only the time until a debt
security provides its final payment, taking no account of the pattern of the
security's payments prior to maturity.
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Duration is a measure of the average life of a fixed-income security on a
present value basis. Duration takes the length of the time intervals between
the present time and the time that the interest and principal payments are
scheduled or, in the case of a callable bond, expected to be received, and
weights them by the present values of the cash to be received at each future
point in time. For any fixed-income security with interest payments occurring
prior to the payment of principal, duration is always less than maturity. In
general, all other things being the same, the lower the stated or coupon rate
of interest of a fixed-income security, the longer the duration of the
security; conversely, the higher the stated or coupon rate of interest of a
fixed-income security, the shorter the duration of the security.
Although frequently used, the "term of maturity" of a bond is not a useful
measure of the longevity of a bond's cash flow because it refers only to the
time remaining to the repayment of principal or corpus and disregards earlier
coupon payments. Thus, for example, three bonds with the same maturity may not
have the same investment characteristics (such as risk or repayment time). One
bond may have large coupon payments early in its life, whereas another may
have payments distributed evenly throughout its life. Some bonds (such as zero
coupon bonds) make no coupon payments until maturity. Clearly, an investor
contemplating investing in these bonds should consider not only the final
payment or sum of payments on the bond, but also the timing and magnitude of
payments in order to make an accurate assessment of each bond. Maturity, or
the term to maturity, does not provide a prospective investor with a clear
understanding of the time profile of cash flows over the life of a bond.
Another way of measuring the longevity of a bond's cash flow is to compute a
simple average time to payment, where each year is weighted by the number of
dollars the bond pays that year. This concept is termed the "dollar-weighted
mean waiting time," indicating that it is a measure of the average time to
payment of a bond's cash flow. The critical shortcoming of this approach is
that it assigns equal weight to each dollar paid over the life of a bond,
regardless of when the dollar is paid. Since the present value of a dollar
decreases with the amount of time which must pass before it is paid, a better
method might be to weight each year by the present value of the dollars paid
that year. This calculation puts the weights on a comparable basis and creates
a definition of longevity which is known as duration.
A bond's duration depends upon three variables: (i) the maturity of the
bond; (ii) the coupon payments attached to the bond; and (iii) the bond's
yield to maturity. Yield to maturity, or investment return as used here,
represents the approximate return an investor purchasing a bond may expect if
he holds that bond to maturity. In essence, yield to maturity is the rate of
interest which, if applied to the purchase price of a bond, would be capable
of exactly reproducing the entire time schedule of future interest and
principal payments.
Increasing the size of the coupon payments on a bond, while leaving the
maturity and yield unchanged, will reduce the duration of the bond. This
follows from the fact that because bonds with higher coupon payments pay
relatively more of their cash flows sooner, they have shorter durations.
Increasing the yield to maturity on a bond (e.g., by reducing its purchase
price), while leaving the terms to maturity and coupon payments unchanged,
also reduces the duration of the bond. Because a higher yield leads to lower
present values for more distant payments relative to earlier payments, and, to
relatively lower weights attached to the years remaining to those payments,
the duration of the bond is reduced.
There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or
more years; however, their interest rate exposure corresponds to the frequency
of the coupon reset. Another example where the interest rate exposure is not
properly captured by duration is mortgage pass-throughs. The stated final
maturity is generally 30 years but current prepayment rates are more critical
in determining the securities' interest rate exposure. In these and other
similar situations, the Adviser or Portfolio Manager to a Portfolio will use
more sophisticated analytical techniques which incorporate the economic life
of a security into the determination of its interest rate exposure.
Futures, options, and options on futures have durations which, in general,
are closely related to the duration of the securities which underlie them.
Holding long futures or call option positions will lengthen the portfolio
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duration if interest rates go down and bond prices go up by approximately the
same amount that holding an equivalent amount of the underlying securities
would.
Short futures or put option positions have durations roughly equal to the
negative duration of the securities that underlie those positions, and have
the effect of reducing portfolio duration if interest rates go up and bond
prices go down by approximately the same amount that selling an equivalent
amount of the underlying securities would.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
Each Portfolio's investment goal as set forth under "About the Portfolios,"
in the Prospectus, and the investment restrictions as set forth below, are
fundamental policies of each Portfolio and may not be changed with respect to
any Portfolio without the approval of a majority of the outstanding voting
shares of that Portfolio. The vote of a majority of the outstanding voting
securities of a Portfolio means the vote, at an annual or special meeting of
(a) 67% or more of the voting securities present at such meeting, if the
holders of more than 50% of the outstanding voting securities of such
Portfolio are present or represented by proxy; or (b) more than 50% of the
outstanding voting securities of such Portfolio, whichever is the less. Under
these restrictions, a Portfolio may not:
(i) except for the REIT Portfolio, Financial Services Portfolio, Health
Sciences Portfolio, Technology Portfolio, and Telecommunications Portfolio
invest in a security if, as a result of such investment, more than 25% of its
total assets (taken at market value at the time of such investment) would be
invested in the securities of issuers in any particular industry, except that
this restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities (or repurchase agreements with
respect thereto). This restriction does not apply to the REIT Portfolio, which
will normally invest more than 25% of its total assets in securities of
issuers of real estate investment trusts and in industries related to real
estate. It also doesn't apply to the other Portfolios listed above which
normally invest more than 25% of their total assets in their particular
sectors.
(ii) with respect to 75% of its total assets (or, in the case of the
Strategic Value Portfolio, Focused 30 Portfolio, Mid-Cap Growth Portfolio,
Global Growth Portfolio and REIT Portfolio, with respect to 50% of its
assets), invest in a security if, as a result of such investment, more than 5%
of its total assets (taken at market value at the time of such investment)
would be invested in the securities of any one issuer, except that this
restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities;
(iii) invest in a security if, as a result of such investment, it would hold
more than 10% (taken at the time of such investment) of the outstanding voting
securities of any one issuer;
(iv) purchase or sell real estate (although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
which invest in real estate, or interests therein);
(v) borrow money or pledge, mortgage or hypothecate its assets, except that
a Portfolio may: (a) borrow from banks but only if immediately after each
borrowing and continuing thereafter there is asset coverage of 300%; and (b)
enter into reverse repurchase agreements and transactions in options, futures,
and options on futures as described in the Prospectus and in the Statement of
Additional Information (the deposit of assets in escrow in connection with the
writing of covered put and call options and the purchase of securities on a
"when-issued" or delayed delivery basis and collateral arrangements with
respect to initial or variation margin deposits for futures contracts will not
be deemed to be pledges of a Portfolio's assets);
(vi) lend any funds or other assets, except that a Portfolio may, consistent
with its investment objective and policies: (a) invest in debt obligations
including bonds, debentures or other debt securities, bankers' acceptances,
and commercial paper, even though the purchase of such obligations may be
deemed to be the making of loans; (b) enter into repurchase agreements and
reverse repurchase agreements; and (c) lend its portfolio securities to the
extent permitted under applicable law; and
(vii) act as an underwriter of securities of other issuers, except, when in
connection with the disposition of portfolio securities, it may be deemed to
be an underwriter under the federal securities laws.
50
<PAGE>
With respect to the Blue Chip, Aggressive Growth, Financial Services, Health
Sciences, Technology, Telecommunications, Capital Opportunities, Mid-Cap
Growth, and Global Growth Portfolios. The fundamental investment restrictions
set forth above may be modified so as to provide those Portfolios with the
ability to operate under new rules, guidelines and interpretations under the
1940 Act or under exemptive relief from the SEC without receiving prior
shareholder approval of the change.
Nonfundamental Investment Restrictions
Each Portfolio is also subject to the following restrictions and policies
(which are not fundamental and may therefore be changed without shareholder
approval) relating to the investment of its assets and activities. Unless
otherwise indicated, a Portfolio may not:
(i) invest for the purpose of exercising control or management;
(ii) sell property or securities short, except the Blue Chip, Aggressive
Growth, Mid-Cap Value, International Value, Mid-Cap Growth and Global Growth
Portfolios; or sell short against the box, except the Aggressive Equity,
Equity, I-Net Tollkeeper, Strategic Value, Focused 30, Mid-Cap Value,
International Value, Capital Opportunities, Mid-Cap Growth and Global Growth
Portfolios;
(iii) purchase warrants if immediately after and as a result of such
purchase more than 10% of the market value of the total assets of the
Portfolio would be invested in such warrants, except for the Diversified
Research, I-Net Tollkeeper, and International Large-Cap Portfolios;
(iv) except the Growth LT, I-Net Tollkeeper, Mid-Cap Value and International
Value Portfolios, purchase securities on margin (except for use of short-term
credit necessary for clearance of purchases and sales of portfolio securities)
but it may make margin deposits in connection with transactions in options,
futures, and options on futures;
(v) except the Growth LT, Mid-Cap Value and International Value Portfolios,
maintain a short position, or purchase, write, or sell puts, calls, straddles,
spreads, or combinations thereof, except as set forth in the Prospectus and in
the SAI for transactions in options, futures, and options on futures;
(vi) invest in securities that are illiquid, or in repurchase agreements
maturing in more than seven days, if as a result of such investment, more than
15% of the net assets of the Portfolio (taken at market value at the time of
such investment) would be invested in such securities, and with respect to the
Money Market Portfolio, more than 10% of the total assets of the Portfolio
(taken at market value at the time of such investment) would be invested in
such securities; and
(vii) purchase or sell commodities or commodities contracts, except that
subject to restrictions described in the Prospectus and in the SAI, (a) each
Portfolio other than the Money Market and Small-Cap Equity Portfolios may
engage in futures contracts and options on futures contracts; and (b) all
Portfolios may enter into foreign forward currency contracts.
Unless otherwise indicated, as in the restriction for borrowing or
hypothecating assets of a Portfolio, for example, all percentage limitations
listed above apply to each Portfolio only at the time into which a transaction
is entered. Accordingly, if a percentage restriction is adhered to at the time
of investment, a later increase or decrease in the percentage which results
from a relative change in values or from a change in a Portfolio's net assets
will not be considered a violation. For purposes of fundamental restriction
(v) and nonfundamental restriction (vii) as set forth above, an option on a
foreign currency shall not be considered a commodity or commodity contract.
For purposes of nonfundamental restriction (v), a short sale "against the box"
shall not be considered a short position.
ORGANIZATION AND MANAGEMENT OF THE FUND
The Fund was organized as a Massachusetts business trust on May 4, 1987, and
currently consists of twenty-two separate Portfolios. The assets of each
Portfolio are segregated, and your interest is limited to the Portfolio to
which proceeds from your Variable Contract's Accumulated Value is allocated.
The business and affairs of the Fund are managed under the direction of the
Board of Trustees under the Fund's Agreement and Declaration of Trust.
51
<PAGE>
Trustees and Officers
The Trustees and Executive Officers of the Fund, their business address, and
principal occupations during the past five years are:
<TABLE>
<CAPTION>
Business Affiliates and
Name and Address Position with the Fund Principal Occupations
---------------- ---------------------- -----------------------
<C> <C> <S>
Thomas C. Sutton* Chairman of the Chairman of the Board,
700 Newport Center Drive Board and Trustee Director and Chief Executive
Newport Beach, CA 92660 Officer of Pacific Life,
Age 58 Pacific Mutual Holding
Company and Pacific
LifeCorp; and similar
positions with other
subsidiaries and affiliates
of Pacific Life; Director of
Newhall Land & Farming;
Director of The Irvine
Company; Director of Edison
International; Former
Management Board Member of
PIMCO Advisors L.P.; Former
Equity Board Member of PIMCO
Advisors L.P.
Lucie H. Moore Trustee Former Partner with Gibson,
1825 Port Manleigh Place Dunn & Crutcher.
Newport Beach, CA 92660
Age 44
Richard L. Nelson Trustee Business Consultant; retired
8 Cherry Hills Lane Partner with Ernst & Young
Newport Beach, CA 92660 LLP; Former Director of
Age 70 Wynn's International, Inc.
Lyman W. Porter Trustee Professor Emeritus of
2639 Bamboo Street Management in the Graduate
Newport Beach, CA 92660 School of Management at the
Age 70 University of California,
Irvine. Former Member of the
Academic Advisory Board of
the Czechoslovak Management
Center and of the Board of
Trustees of the American
University of Armenia.
Alan Richards Trustee Retired Chairman of E. F.
7381 Elegans Place Hutton Insurance Group;
Carlsbad, CA 92009 Former Director of E. F.
Age 70 Hutton and Company, Inc.;
Chairman of IBIS Capital,
LLC; Former Director of
Western National
Corporation.
Glenn S. Schafer President President and Director of
700 Newport Center Drive Pacific Life, Pacific Mutual
Newport Beach, CA 92660 Holding Company and Pacific
Age 51 LifeCorp and similar
positions with other
subsidiaries and affiliates
of Pacific Life; Former
Management Board Member of
PIMCO Advisors L.P.; Former
Equity Board Member of PIMCO
Advisors L.P.
Brian D. Klemens Vice President Vice President and Treasurer
700 Newport Center Drive and Treasurer (12/98 to present); and
Newport Beach, CA 92660 Assistant Controller (4/94
Age 44 to 12/98) of Pacific Life.
Vice President and Treasurer
of other subsidiaries and
affiliates of Pacific Life.
Diane N. Ledger Vice President Vice President, Variable
700 Newport Center Drive and Assistant Regulatory Compliance,
Newport Beach, CA 92660 Secretary Pacific Life.
Age 61
Sharon A. Cheever Vice President Vice President and
700 Newport Center Drive and General Investment Counsel of
Newport Beach, CA 92660 Counsel Pacific Life.
Age 45
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Business Affiliates and
Name and Address Position with the Fund Principal Occupations
---------------- ---------------------- -----------------------
<C> <C> <S>
Audrey L. Milfs Secretary Vice President, Director and
700 Newport Center Drive Corporate Secretary of
Newport Beach, CA 92660 Pacific Life and similar
Age 55 positions with other
subsidiaries of Pacific
Life.
</TABLE>
--------
* Mr. Sutton is an "interested person" of the Fund (as that term is defined
in the Investment Company Act) because of his position with Pacific Life as
shown above.
Trustees other than those affiliated with Pacific Life Insurance Company
("Pacific Life" or the "Adviser") or a Portfolio Manager, currently receive an
annual fee of $15,000 and $1,500 for each Board of Trustees meeting attended,
including each Audit, Policy, or Nominating Committee meeting attended, plus
reimbursement of related expenses. In addition, the Chairman of the Fund's
Audit, Policy and Nominating Committees each receive an additional annual fee
of $2,000. The following table summarizes the aggregate compensation paid by
the Fund to each Trustee who was not affiliated with Pacific Life or a
Portfolio Manager in 1999. The table also shows total compensation paid to
these Trustees in 1999 by the Fund and PIMCO Funds: Multi-Manager Series, an
investment company managed by an affiliate of Pacific Life for which
Messrs. Nelson, Porter, and Richards (but not Mr. Sutton or Ms. Moore) also
serve as trustees (collectively, "Fund Complex").
<TABLE>
<CAPTION>
Pension or Estimated Total
Retirement Annual Compensation
Aggregate Benefits Accrued Benefits from Fund
Compensation as Part of Fund Upon Complex Paid
Name of Trustee from Fund Expenses Retirement to Trustees
--------------- ------------ ---------------- ---------- ------------
<S> <C> <C> <C> <C>
Richard L. Nelson......... $40,000 0 0 $105,500
Lyman W. Porter........... $40,000 0 0 $103,500
Alan Richards............. $40,000 0 0 $108,500
Lucie H. Moore............ $36,500 0 0 N/A
</TABLE>
None of the Trustees or Officers directly own shares of the Fund. As of
April 15, 2000, the Trustees and Officers as a group owned Variable Contracts
that entitled them to give voting instructions with respect to less than 1% of
the outstanding shares of the Fund.
Investment Adviser
Pacific Life serves as Investment Adviser to the Fund pursuant to an
Investment Advisory Agreement ("Advisory Contract") between Pacific Life and
the Fund.
Pacific Life is domiciled in California. Along with subsidiaries and
affiliates, Pacific Life's operations include life insurance, annuities,
pension and institutional products, group employee benefits, broker-dealer
operations and investment advisory services. The Pacific Life family of
companies has total assets and funds under management of $315 billion as of
December 31, 1999. Its principal offices are located at 700 Newport Center
Drive, Newport Beach, California 92660.
Pacific Life was originally organized on January 2, 1868, under the name
"Pacific Mutual Life Insurance Company of California" and reincorporated as
"Pacific Mutual Life Insurance Company" on July 22, 1936. On September 1,
1997, Pacific Life converted from a mutual life insurance company to a stock
life insurance company ultimately controlled by a mutual holding company.
Pacific Life is a subsidiary of Pacific LifeCorp, a holding company which, in
turn, is a subsidiary of Pacific Mutual Holding Company, a mutual holding
company. Under their respective charters, Pacific Mutual Holding Company must
always hold at least 51% of the outstanding voting stock of Pacific LifeCorp,
and Pacific LifeCorp must always own 100% of the voting stock of Pacific Life.
Owners of Pacific Life's annuity contracts and life insurance policies have
certain membership interests in Pacific Mutual Holding Company, consisting
principally of the right to vote on the election of the Board of Directors of
the mutual holding company and on other matters and certain rights upon
liquidation or dissolutions of the mutual holding company.
53
<PAGE>
Pacific Life is responsible for administering the affairs of and supervising
the investment program for the Fund. Pacific Life also furnishes to the Board
of Trustees, which has overall responsibility for the business and affairs of
the Fund, periodic reports on the investment performance of each Portfolio.
Under the terms of the Advisory Contract, Pacific Life is obligated to
manage the Fund's Portfolios in accordance with applicable laws and
regulations.
The Advisory Contract will continue in effect until December 31, 2000, and
from year to year thereafter, provided such continuance is approved annually
by (i) the holders of a majority of the outstanding voting securities of the
Fund or by the Board of Trustees, and (ii) a majority of the Trustees who are
not parties to such Advisory Contract or "interested persons", as defined in
the Investment Company Act of 1940 (the "1940 Act"), of any such party. The
Advisory Contract was originally approved by the Board of Trustees, including
a majority of the Trustees who are not parties to the Advisory Contract, or
interested persons of such parties, at its meeting held on July 21, 1987, and
by the shareholders of the Fund at a Meeting of Shareholders held on
October 28, 1988. An Addendum to the Advisory Contract for the Equity Index
Portfolio was approved by the Board of Trustees, including a majority of the
Trustees who are not parties to the Contract, or interested persons of such
parties, at a meeting held on October 28, 1988. The Advisory Contract was also
approved by the shareholders of the Equity Index Portfolio of the Fund at a
Meeting of Shareholders of the Equity Index Portfolio held on April 21, 1992.
An Addendum to the Advisory Contract which increased the advisory fee schedule
with respect to the High Yield Bond, Managed Bond, Government Securities,
Small-Cap Equity, Equity Income, Multi-Strategy, and International Value
Portfolios, and which included the Growth LT Portfolio as a Portfolio to which
the Adviser will perform services under the Advisory Contract, was approved by
the Board of Trustees, including a majority of the Trustees who are not
parties to the Contract, or interested persons of such parties, at a meeting
held on September 29, 1993, and was approved by shareholders of the High Yield
Bond, Managed Bond, Government Securities, Small-Cap Equity, Equity Income,
Multi-Strategy, and International Value Portfolios at a Special Meeting of
Shareholders on December 13, 1993. An Addendum to the Advisory Contract for
the Equity Portfolio was approved by the Board of Trustees, including a
majority of the Trustees who are not parties to the Advisory Contract or
interested persons of such parties, at a meeting held on August 12, 1994, and
by the sole shareholder of those Portfolios on September 6, 1994. An Addendum
to the Advisory Contract for the Aggressive Equity and Emerging Markets
Portfolios was approved by the Board of Trustees, including a majority of the
Trustees who are not parties to the Advisory Contract or interested persons of
such parties, at a meeting held on November 17, 1995, and by the sole
shareholder of those Portfolios on January 30, 1996. An Addendum to the
Advisory Contract for the Large-Cap Value, Mid-Cap Value, Small-Cap Index, and
REIT Portfolios was approved by the Board of Trustees, including a majority of
the Trustees who are not parties to the Advisory Contract or interested
persons of such parties, at a meeting held on August 6, 1998, and by the sole
shareholder of those Portfolios on December 21, 1998. An Addendum to the
Advisory Contract for the Diversified Research and International Large-Cap
Portfolios was approved by the Board of Trustees, including a majority of the
Trustees who are not parties to the Advisory Contract or interested persons of
such parties, at a meeting held on August 27, 1999, and by the sole
shareholder of those Portfolios on December 14, 1999. An Addendum to the
Advisory Contract for the I-Net Tollkeeper Portfolio was approved by the Board
of Trustees, including a majority of the Trustees who are not parties to the
Advisory Contract or interested persons of such parties, at a meeting held on
January 28, 2000 and by the sole shareholder of the Portfolio on April 10,
2000. An Addendum to the Advisory Contract for the Strategic Value and Focused
30 Portfolios was approved by the Board of Trustees, including a majority of
the Trustees who are not parties to the Advisory Contract or interested
persons of such parties, at a meeting held on June 21, 2000, and by the sole
shareholder of those Portfolios on September 27, 2000. An Addendum to the
Advisory Contract for the Blue Chip, Aggressive Growth, Financial Services,
Health Sciences, Technology, Telecommunications, Capital Opportunities, Mid-
Cap Growth and Global Growth Portfolios was approved by the Board of Trustees,
including a majority of the Trustees who are not parties to the Advisory
Contract or interested persons of such parties, at a meeting held on October
11, 2000, and by the sole shareholder of those Portfolios on . An
Addendum to the Advisory Contract which increased the advisory fee schedule
with respect to the International Value Portfolio, and to which the Adviser
will perform services under the Advisory Contract, was approved by the Board
of Trustees who are not parties to the Contract, or interested
54
<PAGE>
persons of such parties at a meeting held on October 11, 2000, and by the sole
shareholder of this Portfolio on . The Advisory Contract may be
terminated without penalty by vote of the Trustees or the shareholders of the
Fund, or by the Adviser, on 60 days' written notice by either party to the
Advisory Contract and will terminate automatically if assigned.
The Fund pays the Adviser, for its services under the Agreement, a fee based
on an annual percentage of the average daily net assets of each Portfolio. For
the Money Market Portfolio, the Fund pays .40% of the first $250 million of
the average daily net assets of the Portfolio, .35% of the next $250 million
of the average daily net assets of the Portfolio, and .30% of the average
daily net assets of the Portfolio in excess of $500 million. For the High
Yield Bond, Managed Bond, and Government Securities Portfolios, the Fund pays
.60% of the average daily net assets of each of the Portfolios. For the Small-
Cap Equity, Equity Income, Multi-Strategy, and Equity Portfolios, the Fund
pays .65% of the average daily net assets of each of the Portfolios. For the
Aggressive Equity and Capital Opportunities Portfolios, the Fund pays .80% of
the average daily net assets of the Portfolio. For the Growth LT Portfolio,
the Fund pays .75% of the average daily net assets of the Portfolio. For the
Equity Index Portfolio, the Fund pays .25% of the average daily net assets of
the Portfolio. For the Diversified Research and Mid-Cap Growth Portfolios, the
Fund pays .90% of the average daily net assets of the Portfolio. For the
International Large-Cap Portfolio, the Fund pays 1.05% of the average daily
net assets of the Portfolio. For the Small-Cap Index Portfolio, the Fund pays
.50% of the average daily net assets of the Portfolio. For the Large-Cap
Value, Mid-Cap Value, and International Value Portfolios, the Fund pays .85%
of the average daily net assets of each of the Portfolios. For the REIT
Financial Services, Health Sciences, Technology, Telecommunications, Global
Growth and Emerging Markets Portfolios, the Fund pays 1.10% of the average
daily net assets of each of the Portfolios. For the I-Net Tollkeeper
Portfolio, the Fund pays 1.50% of the average daily net assets of the
Portfolio. For the Strategic Value, Focused 30 and Blue Chip Portfolios, the
Fund pays .95% of the average daily net assets of each of the Portfolios. For
the Aggressive Growth Portfolio, the Fund pays 1.00% of the average daily net
assets of the Portfolio. The fee shall be computed and accrued daily and paid
monthly.
Net advisory fees paid or owed to Pacific Life for 1999 were as follows:
Aggressive Equity Portfolio--$2,428,084, Emerging Markets Portfolio--
$1,641,630, Small-Cap Equity Portfolio--$1,897,060, Equity Portfolio--
$4,542,082, Multi-Strategy Portfolio--$4,280,824, Equity Income Portfolio--
$9,869,169, Growth LT Portfolio--$15,561,994, Mid-Cap Value Portfolio--
$439,097, Equity Index Portfolio--$3,003,427, Small-Cap Index Portfolio--
$259,676, REIT Portfolio--$309,008, International Value Portfolio--
$10,752,012, Government Securities Portfolio--$1,902,459, Managed Bond
Portfolio--$5,736,488, Money Market Portfolio--$2,572,715, High Yield Bond
Portfolio--$2,551,011, and Large-Cap Value Portfolio--$729,158. The
Diversified Research and International Large-Cap Portfolios did not begin
operations until January 3, 2000, the I-Net Tollkeeper Portfolio did not begin
operations until May 1, 2000, the Strategic Value and Focused 30 Portfolios
did not begin operations until October 2, 2000, and the Blue Chip, Aggressive
Growth, Financial Services, Health Sciences, Technology, Telecommunications,
Capital Opportunities, Mid-Cap Growth and Global Growth Portfolios did not
begin operations until January 2, 2001.
Net advisory fees paid or owed to Pacific Life for 1998 were as follows:
Aggressive Equity Portfolio--$1,301,554, Emerging Markets Portfolio--
$1,135,155, Small-Cap Equity Portfolio--$1,647,286, Equity Portfolio--
$2,577,278, Multi-Strategy Portfolio--$2,986,639, Equity Income Portfolio--
$6,578,365, Growth LT Portfolio--$6,762,035, Equity Index Portfolio--
$1,888,470, International Value Portfolio--$7,820,564, Government Securities
Portfolio--$915,619, Managed Bond Portfolio--$3,687,063, Money Market
Portfolio--$1,802,788 and High Yield Bond Portfolio--$2,126,319. The Large-Cap
Value, Mid-Cap Value, Small-Cap Index and REIT Portfolios did not begin
operations until January 4, 1999. The Diversified Research and International
Large-Cap Portfolios did not begin operations until January 3, 2000, the I-Net
Tollkeeper Portfolio did not begin operations until May 1, 2000, the Strategic
Value and Focused 30 Portfolios did not begin operations until October 2,
2000, and the Blue Chip, Aggressive Growth, Financial Services, Health
Sciences, Technology, Telecommunications, Capital Opportunities, Mid-Cap
Growth and Global Growth Portfolios did not begin operations until January 1,
2001.
55
<PAGE>
Net advisory fees paid or owed to Pacific Life for 1997 were as follows:
Aggressive Equity Portfolio--684,226, Emerging Markets Portfolio--$868,075,
Small-Cap Equity Portfolio--$1,355,092, Equity Portfolio--$1,818,664, Multi-
Strategy Portfolio--$1,866,445, Equity Income Portfolio--$4,062,587, Growth LT
Portfolio--$4,193,552, Equity Index Portfolio--$1,080,856, International Value
Portfolio--$5,353,459, Government Securities Portfolio--$645,820, Managed Bond
Portfolio--$2,055,929, Money Market Portfolio--$1,521,271 and High Yield Bond
Portfolio--$1,466,135. The Large-Cap Value, Mid-Cap Value, Small-Cap Index and
REIT Portfolios did not begin operations until January 4, 1999. The
Diversified Research and International Large-Cap Portfolios did not begin
operations until January 3, 2000, the I-Net Tollkeeper Portfolio did not begin
operations until May 1, 2000, the Strategic Value and Focused 30 Portfolios
did not begin operations until October 2, 2000, and the Blue Chip, Aggressive
Growth, Financial Services, Health Sciences, Technology, Telecommunications,
Capital Opportunities, Mid-Cap Growth and Global Growth Portfolios did not
begin operations until January 2, 2001.
To help limit expenses effective July 1, 2000, Pacific Life has
contractually agreed to waive all or part of its investment advisory fees or
otherwise reimburse each Portfolio for expenses (including organizational
expenses, but, not including advisory fees, additional costs associated with
foreign investing and extraordinary expenses) that exceed an annual rate of
0.10% of its average daily net assets through December 31, 2001. There can be
no assurance that this policy will be continued beyond December 31, 2001. Such
waiver or reimbursement is subject to repayment to Pacific Life to the extent
such expenses fall below the 0.10% expense cap. For each Portfolio other than
the Blue Chip, Aggressive Growth, Financial Services, Health Sciences,
Technology, Telecommunications, Strategic Value, Focused 30, Capital
Opportunities, Mid-Cap Growth and Global Growth Portfolios, Pacific Life's
right to repayment is limited to amounts waived and/or reimbursed that exceed
the new 0.10% expense cap, but do not exceed the previously established 0.25%
expense cap to Pacific Life by a Portfolio. Any amounts repaid to Pacific Life
will have the effect of increasing expenses of the Portfolio, but not above
the 0.10% expense cap.
Other Expenses of the Fund
The Fund bears all costs of its operations. These costs may include expenses
for custody, audit fees, fees and expenses of the independent trustees,
organizational expenses and other expenses of its operations, including the
cost of support services, and may, if applicable, include extraordinary
expenses such as expenses for special consultants or legal expenses.
The Fund is also responsible for bearing the expense of various matters,
including, among other things, the expense of registering and qualifying the
Fund on state and federal levels, legal and accounting services, maintaining
the Fund's legal existence, shareholders' meetings and expenses associated
with preparing, printing and distributing reports, proxies and prospectuses to
shareholders.
The Fund and Pacific Life entered into an Agreement for Support Services
effective October 1, 1995, pursuant to which Pacific Life provides support
services such as those described above. Under the terms of the Agreement for
Support Services, it is not intended that Pacific Life will profit from these
services to the Fund.
Fund expenses directly attributable to a Portfolio are charged to that
Portfolio; other expenses are allocated proportionately among all the
Portfolios in relation to the net assets of each Portfolio.
The Fund paid Pacific Life $264,738 for its services under the Agreement for
Support Services during 1999, $231,976 during 1998, and $165,000 during 1997,
representing 0.003%, 0.003%, and 0.004%, respectively, of the Fund's average
daily net assets and anticipates that fees to be paid for 2000 under said
Agreement will be approximately 0.002% of the Fund's average daily net assets.
Portfolio Management Agreements
Pacific Life directly manages both the Money Market and the High Yield Bond
Portfolios. For the other twenty-one Portfolios Pacific Life employs other
investment advisory firms as Portfolio Manager, subject to Portfolio
Management Agreements, the terms of which are discussed below.
56
<PAGE>
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and A I M Capital Management, Inc. ("A I M"), 11 Greenway Plaza, Suite 100,
Houston, TX 77046, which became effective January 2, 2001, A I M is the
Portfolio Manager and provides investment advisory services to the Blue Chip
and Aggressive Growth Portfolios.
For the services provided, Pacific Life pays a monthly fee to A I M based on
an annual percentage of the average daily net assets of the Blue Chip and
Aggressive Growth Portfolios according to the following schedule:
<TABLE>
<CAPTION>
Blue Chip Portfolio
Rate (%) Break Point (assets)
-------- ---------------------
<S> <C>
.55% On first $500 million
.50% On excess
</TABLE>
<TABLE>
<CAPTION>
Aggressive Growth Portfolio
Rate (%) Break Point (assets)
-------- ---------------------
<S> <C>
.60% On first $500 million
.55% On excess
</TABLE>
A I M Capital Management, Inc. ("A I M") was founded in 1986 and together
with its affiliates manages over $176 billion as of June 30, 2000. A I M is an
indirect subsidiary of AMVESCAP PLC, an international investment management
company that manages more than $389 billion in assets worldwide as of June 30,
2000. AMVESCAP PLC is based in London, with money managers located in Europe,
North and South America, and the Far East.
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Alliance Capital Management L.P. ("Alliance Capital"), 1345 Avenue of the
Americas, New York, NY 10105, which became effective May 1, 1998, Alliance
Capital is the Portfolio Manager and provides investment advisory services to
the Aggressive Equity Portfolio.
For the services provided, Pacific Life pays a monthly fee to Alliance
Capital based on an annual percentage of the average daily net assets of the
Aggressive Equity Portfolio according to the following schedule:
<TABLE>
<CAPTION>
Aggressive Equity Portfolio
Rate (%) Break Point (assets)
-------- ---------------------
<S> <C>
.60% On first $100 million
.45% On next $400 million
.40% On excess
</TABLE>
From April 1, 1996 through April 30, 1998, pursuant to a Portfolio
Management Agreement between the Fund, the Adviser and Columbus Circle
Investors ("Columbus Circle"), Metro Center, One Station Place, 8th Floor,
Stamford, Connecticut 06902, Columbus Circle served as the Portfolio Manager
and provided investment advisory services to the Aggressive Equity Portfolio.
For the services provided for the year 1997 and from January 1, 1998 through
April 30, 1998, Pacific Life paid a monthly fee to Columbus Circle based on an
annual percentage of the average daily net assets of the Aggressive Equity
Portfolio according to the following schedule:
<TABLE>
<CAPTION>
Aggressive Equity Portfolio
Rate (%) Break Point (assets)
-------- ---------------------
<S> <C>
.55% On first $100 million
.50% On next $150 million
.45% On next $250 million
.40% On excess
</TABLE>
57
<PAGE>
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser
and Alliance Capital as described above, which became effective January 1,
2000, Alliance Capital is the Portfolio Manager and provides investment
advisory services to the Emerging Markets Portfolio. For the services
provided, Pacific Life pays a monthly fee to Alliance Capital based on an
annual percentage of the average daily net assets of the Emerging Markets
Portfolio according to the following schedule:
<TABLE>
<CAPTION>
Emerging Markets Portfolio
Rate (%) Break Point (assets)
-------- --------------------
<S> <C>
.85% On first $50 million
.75% On next $50 million
.70% On next $50 million
.65% On next $50 million
.60% On excess
</TABLE>
From April 1, 1996 to December 31, 1999, pursuant to a Portfolio Management
Agreement between the Fund, the Adviser and Blairlogie Capital Management
("Blairlogie"), 4th Floor, 125 Princes Street, Edinburgh EH2 4AD, Scotland,
Blairlogie served as the Portfolio Manager and provided investment advisory
services to the Emerging Markets Portfolio. For the services provided for the
years 1997, 1998 and 1999, Pacific Life paid a monthly fee to Blairlogie based
on an annual percentage of the average daily net assets of the Emerging
Markets Portfolio according to the following schedule:
<TABLE>
<CAPTION>
Emerging Markets Portfolio
Rate (%) Break Point (assets)
-------- --------------------
<S> <C>
.85% On first $50 million
.75% On next $50 million
.70% On next $50 million
.65% On next $50 million
.60% On excess
</TABLE>
Alliance Capital Management Corporation ("ACMC") is the general partner of
Alliance Capital and a wholly owned subsidiary of The Equitable Life Assurance
Society of the United States ("Equitable"). As of March 1, 2000, Equitable and
its subsidiaries were the beneficial owners of an approximately 55.7%
partnership interest in Alliance Capital, and Alliance Capital Management
Holding L.P. ("Alliance Holding") owned an approximately 41.87% partnership
interest in Alliance Capital. Equity interests in Alliance Holding are traded
on the New York Stock Exchange in the form of units. Approximately 98% of
Alliance Holding's units are owned by the public and management or employees
of Alliance Capital and approximately 2% are owned by Equitable. The general
partner of Alliance Holding is ACMC. Equitable, a New York life insurance
company, is a wholly owned subsidiary of AXA Financial, Inc. ("AXA
Financial"), a Delaware corporation whose shares are traded on the New York
Stock Exchange. As of March 1, 2000, AXA, a French insurance holding company,
owned approximately 60.3% of the issued and outstanding shares of the common
stock of AXA Financial.
Alliance Capital currently serves as investment adviser to other mutual
funds as well as individual, corporate, retirement, and charitable accounts.
As of December 31, 1999, Alliance Capital was retained as an investment
manager of employee benefit fund assets for 31 of the top 100 of America's
Fortune 500 companies.
Net fees paid or owed by Pacific Life to Alliance Capital for the Aggressive
Equity Portfolio for 1999 were $1,518,840, and from May 1, 1998 through
December 31, 1998 were $622,812. Net fees paid or owed by Pacific Life to
Columbus Circle from January 1, 1998 through April 30, 1998 were $251,083, and
for 1997 were $468,441.
58
<PAGE>
Net fees paid or owed by Pacific Life to Blairlogie for the Emerging Markets
Portfolio for 1999 were $1,141,570, for 1998 were $821,133, and for 1997 were
$642,976.
Pursuant to Portfolio Management Agreements between the Fund, the Adviser,
and Capital Guardian Trust Company ("Capital Guardian"), a wholly-owned
subsidiary of Capital Group International, Inc., which itself is wholly-owned
by The Capital Group Companies, Inc. all of which are located at 333 South
Hope Street, Los Angeles, California 90071, Capital Guardian is the Portfolio
Manager and provides investment advisory services to the Diversified Research,
Small-Cap Equity, and International Large-Cap Portfolios. For the services
provided, Pacific Life pays a monthly fee to Capital Guardian based on an
annual percentage of the average daily net assets of the Diversified Research,
Small-Cap Equity, and International Large-Cap Portfolios according to the
following schedules:
<TABLE>
<CAPTION>
Diversified Research Portfolio
Rate (%) Break-Point (assets)
-------- ---------------------
<S> <C>
.50% On first $150 million
.45% On next $150 million
.35% On next $200 million
.30% On next $500 million
.275% On next $1 billion
.25% On excess
</TABLE>
<TABLE>
<CAPTION>
Small-Cap Equity Portfolio
Rate (%) Break Point (assets)
-------- ------------------------
<S> <C>
.50% On first $30 million
.40% On next $30 million
.30% On excess
<CAPTION>
International Large-Cap Portfolio
Rate (%) Break-Point (assets)
-------- ------------------------
<S> <C>
.65% On first $150 million
.55% On next $150 million
.45% On next $200 million
.40% On next $500 million
.375% On next $1 billion
.35% On excess
</TABLE>
Capital Guardian is a California state chartered trust company organized in
1968 which provides fiduciary and investment management services to a limited
number of large accounts such as employee benefit plans, college endowment
funds, foundations, and individuals. Accounts managed by Capital Guardian had
combined assets, as of December 31, 1999, in excess of $122 billion. Capital
Guardian's research activities are conducted by affiliated companies that have
research facilities in Los Angeles, San Francisco, New York, Washington, D.C.,
Atlanta, London, Geneva, Hong Kong, Montreal, Singapore, and Tokyo.
Net fees paid or owed by Pacific Life to Capital Guardian for the Small-Cap
Equity Portfolio for 1999 were $966,856, for 1998 were $850,462, and for 1997
were $716,070. The Diversified Research and International Large-Cap Portfolios
did not begin operations until January 3, 2000.
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Goldman Sachs Asset Management ("Goldman Sachs"), 32 Old Slip, New York,
New York 10005, which became effective May 1, 1998, Goldman Sachs is the
Portfolio Manager and provides investment advisory services to the Equity
Portfolio.
59
<PAGE>
For the services provided, Pacific Life pays a monthly fee to Goldman Sachs
based on an annual percentage of the combined average daily net assets of the
Equity Portfolio according to the following schedule:
<TABLE>
<CAPTION>
Equity Portfolio
Rate (%) Break Point (assets)
-------- ---------------------
<S> <C>
.35% On first $100 million
.30% On next $100 million
.25% On next $800 million
.20% On excess
</TABLE>
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Goldman Sachs, as described above, which became effective May 1, 2000,
Goldman Sachs is the Portfolio Manager and provides investment advisory
services to the I-Net Tollkeeper PortfolioSM (I-Net Tollkeeper Portfolio is a
service mark of Goldman, Sachs & Co.).
For the services provided, Pacific Life pays a monthly fee to Goldman Sachs
based on an annual percentage of the average daily net assets of the I-Net
Tollkeeper Portfolio.
<TABLE>
<CAPTION>
I-Net Tollkeeper Portfolio
Rate (%) Break Point (assets)
-------- -------------------
<S> <C>
.95% On first $1 billion
.90% On excess
</TABLE>
Goldman Sachs is a unit of the Investment Management Division of Goldman,
Sachs & Co., which was founded in 1869. As of December 31, 1999, Goldman Sachs
and its affiliates manage, administer and distribute over $258.5 billion for
institutional and individual investors worldwide, including fixed income
assets in excess of $50.5 billion for which they acted as investment adviser.
The Goldman Sachs Group, L.P., which controlled Goldman Sachs Asset
Management, merged into the Goldman Sachs Group, Inc. as a result of an
initial public offering.
From January 1, 1995 through April 30, 1998, pursuant to a Portfolio
Management Agreement between the Fund, the Adviser, and Greenwich Street
Advisors Division of Smith Barney Mutual Funds Management Inc. ("Greenwich
Street Advisors"), 388 Greenwich Street, 23rd Floor, New York, New York 10048,
Greenwich Street Advisors served as the Portfolio Manager and provided
investment advisory services to the Equity Portfolio. For the services
provided, for the year 1997 and from January 1, 1998 through April 30, 1998,
Pacific Life paid a monthly fee to Greenwich Street Advisors based on an
annual percentage of the combined average daily net assets of the Equity
Portfolio according to the following schedule:
<TABLE>
<CAPTION>
Equity Portfolios
Rate (%) Break Point (assets)
-------- ---------------------
<S> <C>
.45% On first $100 million
.40% On next $100 million
.35% On next $200 million
.30% On next $600 million
.20% On excess
</TABLE>
Net Fees paid or owed by Pacific Life to Goldman Sachs in 1999 were $525,489
for the Bond and Income Portfolio and $1,858,012 for the Equity Portfolio, and
from May 1, 1998 through December 31, 1998 were $290,917 for the Bond and
Income Portfolio and $772,931 for the Equity Portfolio. Net fees paid or owed
by Pacific Life to Greenwich Street Advisors from January 1, 1998 through
April 30, 1998 were $147,029 for the Bond and Income Portfolio and $437,389
for the Equity Portfolio and for 1997 were $368,846 for the Bond and Income
Portfolio and $1,088,097 for the Equity Portfolio. The I-Net Tollkeeper
Portfolio did not begin operations until May 1, 2000.
60
<PAGE>
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and INVESCO Funds Group, Inc. ("INVESCO"), 7800 East Union Avenue, Suite 3800,
Denver, CO 80237, which became effective January 2, 2001, INVESCO is the
Portfolio Manager and provides investment advisory services to the Financial
Services, Health Sciences, Technology, and Telecommunications Portfolios.
For the services provided, Pacific Life pays a monthly fee to INVESCO based
on an annual percentage of the average daily net assets of the Financial
Services, Health Sciences, Technology, and Telecommunications Portfolios
according to the following schedule (assets will be consolidated for the four
portfolios with respect to breakpoints):
Financial Services, Health Sciences, Technology and Telecommunications
Portfolios
<TABLE>
<CAPTION>
Break Point
Rate (%) (assets)
-------- -------------------
<S> <C>
.50% On first $1 billion
.47% On excess
</TABLE>
INVESCO Funds Group, Inc. was founded in 1932 and manages over $42 billion
as of June 30, 2000. INVESCO is a subsidiary of AMVESCAP PLC, an international
investment management company that manages more than $389 billion in assets
worldwide as of June 30, 2000. AMVESCAP is based in London, with money
managers located in Europe, North and South America, and the Far East.
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and J.P. Morgan Investment Management Inc. ("J.P. Morgan Investment"), 522
Fifth Avenue, New York, New York 10036, J.P. Morgan Investment is the
Portfolio Manager and provides investment advisory services to the Multi-
Strategy and Equity Income Portfolios. For the services provided, Pacific Life
pays a monthly fee to J.P. Morgan Investment based on an annual percentage of
the combined average daily net assets of the Multi-Strategy and Equity Income
Portfolios according to the following schedule:
<TABLE>
<CAPTION>
Multi-Strategy and Equity Income Portfolios
Rate (%) Break Point (assets)
-------- ------------------------------
<S> <C>
.45% On first $100 million
.40% On next $100 million
.35% On next $200 million
.30% On next $350 million
.20% On excess
</TABLE>
J.P. Morgan Investment is an investment manager for corporate, public, and
union employee benefit funds, foundations, endowments, insurance companies,
government agencies and the accounts of other institutional investors. A
wholly-owned subsidiary of J.P. Morgan & Co. Incorporated ("Morgan"), J.P.
Morgan Investment was incorporated in the state of Delaware on February 7,
1984 and commenced operations on July 2, 1984. It was formed from the
Institutional Investment Group of Morgan Guaranty Trust Company of New York,
also a subsidiary of Morgan. Morgan acquired its first tax-exempt client in
1913 and its first pension account in 1940. As of December 31, 1999, Morgan,
through J.P. Morgan Investment and its other subsidiaries, had assets under
management of approximately $349 billion.
Net fees paid or owed by Pacific Life to J.P. Morgan Investment for 1999
were $1,651,512 for the Multi-Strategy Portfolio and $3,806,241 for the Equity
Income Portfolio, for 1998 were $1,263,563 for the Multi-Strategy Portfolio
and $2,783,163 for the Equity Income Portfolio, and for 1997 were $920,564 for
the Multi-Strategy Portfolio and $1,998,776 for the Equity Income Portfolio.
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Janus Capital Corporation ("Janus"), 100 Fillmore Street, Denver, Colorado
80206-4928, Janus is the Portfolio Manager and
61
<PAGE>
provides investment advisory services to the Strategic Value, Growth LT and
Focused 30 Portfolios. For the services provided, Pacific Life pays a monthly
fee to Janus based on an annual percentage of the average daily net assets of
each of the Strategic Value, Growth LT and Focused 30 Portfolios according to
the following schedule:
<TABLE>
<CAPTION>
Strategic Value, Growth LT and Focused 30 Portfolios
Rate (%) Break Point (assets)
-------- ----------------------------------
<S> <C>
.55% On first $100 million
.50% On next $400 million
.45% On excess
</TABLE>
Janus serves as investment adviser to the Janus Funds, as well as other
mutual funds and individual, corporate, charitable, and retirement accounts.
Stilwell Financial, Inc. ("Stilwell") owns approximately 81.5% of the
outstanding voting stock of Janus. Stilwell is a publicly traded holding
company whose primary subsidiaries are engaged in financial services.
Net fees paid or owed by Pacific Life to Janus for the Growth LT Portfolio
for 1999 were $9,666,426, for 1998 were $4,364,703 and for 1997 were
$2,813,259. The Strategic Value and Focused 30 Portfolios did not begin
operations until October 2, 2000.
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Lazard Asset Management ("Lazard"), 30 Rockefeller Plaza, New York, New
York 10112, which became effective January 1, 1999, Lazard is the Portfolio
Manager and provides investment advisory services to the Mid-Cap Value
Portfolio. For the services provided, Pacific Life pays a monthly fee to
Lazard based on an annual percentage of the average daily net assets of the
Mid-Cap Value Portfolio according to the following schedule:
<TABLE>
<CAPTION>
Mid-Cap Value Portfolio
Rate (%) Break Point (assets)
-------- ---------------------
<S> <C>
.55% On first $200 million
.50% On next $200 million
.45% On next $200 million
.40% On next $200 million
.30% On next $200 million
.25% On excess
</TABLE>
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Lazard as described above, which became effective January 2, 2001, Lazard
is the Portfolio Manager and provides investment advisory services to the
International Value Portfolio. For the services provided, Pacific Life pays a
monthly fee to Lazard based on an annual percentage of the average daily net
assets of the International Value Portfolio according to the following
schedule:
International Value Portfolio
<TABLE>
<CAPTION>
Break Point
Rate (%) (assets)
-------- -------------------
<S> <C>
.35% On first $2 billion
.30% On excess
</TABLE>
From June 1, 1997 through December 31, 2000, pursuant to a Portfolio
Management Agreement between the Fund, the Adviser, and Morgan Stanley Asset
Management ("MSAM"), a subsidiary of Morgan Stanley Dean Witter & Co., whose
address is 1221 Avenue of the Americas, New York, New York, 10020, MSAM served
as the Portfolio Manager and provided investment advisory services to the
International Value Portfolio.
62
<PAGE>
For the services provided, for the period June 1, 1997 through December 31,
2000, Pacific Life paid a monthly fee to MSAM at an annual rate of 0.35% based
on the average daily net assets of the International Value Portfolio.
From January 1, 1995 through May 31, 1997, pursuant to a Portfolio
Management Agreement between the Fund, the Adviser, and Templeton Investment
Counsel, Inc. ("Templeton"), Broward Financial Centre, Suite 2100, Fort
Lauderdale, Florida 33394-3091, Templeton served as the Portfolio Manager and
provided investment advisory services to the International Value Portfolio.
For the services provided, for the period January 1, 1997 through May 31,
1997, Pacific Life paid a monthly fee to Templeton based on an annual
percentage of the daily net assets of the International Value Portfolio
according to the following schedule:
International Value Portfolio
<TABLE>
<CAPTION>
Rate
(%) Break Point (assets)
---- --------------------
<S> <C>
.70% On first $25 million
.55% On next $25 million
.50% On next $50 million
.40% On excess
</TABLE>
Net fees paid or owed by Pacific Life to MSAM for the International Value
Portfolio for 1999 were $4,433,877, for 1998 were $3,222,413, and from June 1,
1997 through December 31, 1997 were $1,478,065. Net fees paid or owed by
Pacific Life to Templeton for the International Value Portfolio from January
1, 1997 to May 31, 1997 were $945,379.
Lazard, a division of Lazard Freres & Co. LLC ("Lazard Freres"), a New York
limited liability company, which is registered as an investment adviser with
the SEC and is a member of the New York, American and Chicago Stock Exchanges.
Lazard Freres provides its clients with a wide variety of investment banking,
brokerage and related services. Lazard and its affiliates provide investment
management services to client discretionary accounts with assets totaling
approximately $75 billion as of December 31, 1999. Lazard's clients are both
individuals and institutions, some of whose accounts have investment policies
similar to those of the Portfolio.
Net fees paid or owed by Pacific Life to Lazard for the Mid-Cap Value
Portfolio for 1999 were $284,822. The Mid-Cap Value Portfolio did not begin
operations until January 4, 1999.
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Massachusetts Financial Services Company ("MFS"), 500 Boylston Street,
Floor 21, Boston, MA 02116 which became effective January 2, 2001, MFS is the
Portfolio Manager and provides investment advisory services to the Capital
Opportunities, Mid-Cap Growth and Global Growth Portfolios.
For the services provided, Pacific Life pays a monthly fee to MFS based on
an annual percentage of the average daily net assets of the Capital
Opportunities, Mid-Cap Growth and Global Growth Portfolios according to the
following schedule (assets of the Capital Opportunities and Mid-Cap Growth
Portfolios will be consolidated with respect to break points):
Capital Opportunities and Mid-Cap Growth Portfolios
<TABLE>
<CAPTION>
Rate (%) Break Point (assets)
-------- ---------------------------
<S> <C>
.40% On first $300 million
.375% On next $300 million
.35% On next $300 million
.325% On next $600 million
.25% On excess over $1.5 billion
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Global Growth Portfolio
Rate (%) Break Point (assets)
-------- -------------------------
<S> <C>
.55% On first $200 million
.50% On next $300 million
.45% On next $500 million
.40% On excess over $1 billion
</TABLE>
Massachusetts Financial Services Company ("MFS") and its predecessor
organizations have a history of money management dating from 1924. Net assets
under the management of the MFS organization were approximately $151 billion
as of June 30, 2000.
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser
and Fund Asset Management, L.P., doing business as Mercury Asset Management US
("Mercury"), a subsidiary of Merrill Lynch & Company, Inc., World Financial
Center, 225 Liberty Street, New York, NY 10080, which became effective January
1, 2000, Mercury is the Portfolio Manager and provides investment advisory
services to the Equity Index and Small-Cap Index Portfolios. For the services
provided, Pacific Life pays a monthly fee to Mercury based on an annual
percentage of the combined average daily net assets of the Equity Index and
Small-Cap Index Portfolios, according to the following schedule:
<TABLE>
<CAPTION>
Equity Index and Small-Cap Index Portfolios
Rate (%) Break-Point (assets)
-------- ------------------------------
<S> <C>
.08% On first $100 million
.04% On next $100 million
.02% On excess
</TABLE>
From January 30, 1991, in the case of the Equity Index Portfolio, and
January 1, 1999, in the case of the Small-Cap Index Portfolio, through
December 31, 1999, pursuant to a Portfolio Management Agreement between the
Fund, the Adviser and Bankers Trust Company ("BTCo"), a wholly-owned-
subsidiary of Bankers Trust Corporation, and an indirect subsidiary of
Deutsche Bank AG, 130 Liberty Street, New York, New York 10006, BTCo served as
the Portfolio Manager and provided investment advisory services to the Equity
Index and Small-Cap Index Portfolios. For the services provided for the year
1998, Pacific Life paid to BTCo, at the beginning of each calendar quarter, a
fee based on the net assets of the Equity Index Portfolio according to the
following schedule, subject to a minimum fee of $100,000. For the services
provided for the year 1999, Pacific Life paid to BTCo, at the beginning of
each calendar quarter a fee based on the combined net assets of the Equity
Index and Small-Cap Index Portfolios according to the following schedule,
subject to a minimum fee of $100,000:
<TABLE>
<CAPTION>
Equity Index and Small-Cap Index Portfolios
Rate (%) Break-Point (assets)
-------- ------------------------------
<S> <C>
.08% On first $100 million
.04% On next $100 million
.02% On excess
</TABLE>
For the services provided, for the year 1997, Pacific Life paid to BTCo a
quarterly fee in advance, based on the net assets of the Equity Index
Portfolio at the beginning of each calendar quarter at an annual rate in
accordance with the following schedule, subject to a minimum fee of $100,000:
<TABLE>
<CAPTION>
Equity Index Portfolio
Rate (%) Break Point (assets)
-------- ---------------------
<S> <C>
.07% On first $100 million
.03% On next $100 million
.01% On excess
</TABLE>
64
<PAGE>
Net fees paid or owed by Pacific Life to BTCo for the Equity Index Portfolio
for 1999 were $435,388, and for the Small-Cap Index Portfolio were $9,430. Net
fees paid or owed by Pacific Life to BTCo for the Equity Index Portfolio for
1998 were $188,793, and for 1997 were $135,863. The Small-Cap Index Portfolio
did not begin operations until January 4, 1999.
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Morgan Stanley Asset Management ("MSAM"), a subsidiary of Morgan Stanley
Dean Witter & Co., whose address is 1221 Avenue of the Americas, New York, New
York 10020, MSAM is the Portfolio Manager and provides investment advisory
services to the REIT Portfolio. On December 1, 1998 Morgan Stanley Asset
Management Inc. changed its name to Morgan Stanley Dean Witter Investment
Management Inc. but continues to do business in certain instances using the
name Morgan Stanley Asset Management.
For the services provided, under the Agreement for the REIT Portfolio, which
became effective January 1, 1999, Pacific Life pays a monthly fee to MSAM
based on an annual percentage of the average daily net assets of the REIT
Portfolio according to the following schedule:
<TABLE>
<CAPTION>
REIT Portfolio
Rate (%) Break Point (assets)
-------- -------------------------
<S> <C>
.60% On first $100 million
.45% On next $150 million
.40% On next $250 million
.35% On next $500 million
.30% On excess over $1 billion
</TABLE>
Net fees paid or owed by Pacific Life to MSAM for the REIT Portfolio for
1999 were $168,796. The REIT Portfolio did not begin operations until January
4, 1999.
MSAM, together with its affiliated asset management companies, conducts a
worldwide portfolio management business and provides a broad range of
portfolio management services to customers in the United States and abroad. As
of December 31, 1999 MSAM, together with its affiliated institutional asset
management companies, had approximately $185 billion in assets under
management as an investment manager or as a fiduciary adviser.
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Pacific Investment Management Company ("PIMCO"), 840 Newport Center Drive,
Suite 300, Newport Beach, California 92660, PIMCO is the Portfolio Manager and
provides investment advisory services to the Government Securities and Managed
Bond Portfolios.
For the services provided, under the Agreement for the Government Securities
and Managed Bond Portfolios, which became effective January 2, 2001, Pacific
Life pays a monthly fee to PIMCO of 0.25% based on an annual percentage of the
average daily net assets of the Government Securities and Managed Bond
Portfolios.
For the services provided for the years 1997, 1998 and 1999, Pacific Life
paid a monthly fee to PIMCO based on an annual percentage of the combined
average daily net assets of the Government Securities and Managed Bond
Portfolios according to the following schedule:
<TABLE>
<CAPTION>
Government Securities and Managed Bond Portfolios
Rate (%) Break Point (assets)
-------- --------------------------------
<S> <C>
.50% On first $25 million
.375% On next $25 million
.25%
</TABLE>
65
<PAGE>
PIMCO is an investment counseling firm founded in 1971, and had
approximately $186 billion in assets under management as of December 31, 1999.
PIMCO is a subsidiary partnership of PIMCO Advisors L.P. ("PIMCO Advisors").
The general partners of PIMCO Advisors are PIMCO Partners, G.P. and PIMCO
Advisors Holdings L.P. ("PAH"). PIMCO Partners, G.P. is a general partnership
between PIMCO Holding LLC, a Delaware limited liability company and an
indirect wholly-owned subsidiary of Pacific Life Insurance Company, and PIMCO
Partners LLC, a California limited liability company controlled by the current
Managing Directors and two former Managing Directors of PIMCO. PIMCO Partners,
G.P. is the sole general partner of PAH. PIMCO also provides investment
advisory services to PIMCO Funds and several other mutual fund portfolios and
to private accounts for pension and profit sharing plans. PIMCO is registered
as an investment adviser with the SEC and a commodity trading adviser with the
CFTC.
On October 31, 1999, PIMCO Advisors, PAH and Allianz AG ("Allianz")
announced that they had reached a definitive agreement under which Allianz
would acquire majority ownership of PIMCO Advisors and its subsidiaries (the
"Allianz Transaction"). PIMCO is a subsidiary of PIMCO Advisors. The Allianz
Transaction was completed on May 5, 2000. Under the terms of the transaction,
Allianz acquired all of PAH, the publicly traded general partner of PIMCO
Advisors. Pacific Life retained an approximate 30% interest in PIMCO Advisors.
The Allianz Group (which includes Allianz and PIMCO) collectively has over
$650 billion in assets under management.
Absent an order from the SEC or other relief, the Government Securities and
Managed Bond Portfolios generally cannot engage in principal transactions with
"Affiliated Brokers" of Allianz, including Dresdner Bank AG, Deutsche Bank AG,
Bankers Trust Company, BT Alex Brown, Inc., and certain other affiliated
entities. As a result, the Portfolios' ability to purchase securities
underwritten by an Affiliated Broker or to utilize the Affiliated Brokers for
agency transactions will be subject to regulatory restrictions. PIMCO has
advised that it does not believe that the above restrictions on transactions
with the Affiliated Brokers would materially adversely affect its ability to
provide services to the Portfolios, the Portfolios' ability to take advantage
of market opportunities, or their overall performance.
Net fees paid or owed by Pacific Life to PIMCO for 1999 were $817,241 for
the Government Securities Portfolio and $2,463,247 for the Managed Bond
Portfolio, for 1998 were $400,557 for the Government Securities Portfolio and
$1,613,407 for the Managed Bond Portfolio, and for 1997 were $292,079 for the
Government Securities Portfolio and $929,041 for the Managed Bond Portfolio.
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Salomon Brothers Asset Management Inc ("SaBAM"), Seven World Trade Center,
New York, New York 10048, which became effective January 1, 1999, SaBAM is the
Portfolio Manager and provides investment advisory services to the Large-Cap
Value Portfolio. For the services provided, Pacific Life pays a monthly fee to
SaBAM based on an annual percentage of the average daily net assets of the
Large-Cap Value Portfolio according to the following schedule:
<TABLE>
<CAPTION>
Large-Cap Value Portfolio
Rate (%) Break Point (assets)
-------- ---------------------
<S> <C>
.45% On first $100 million
.40% On next $100 million
.35% On next $200 million
.30% On next $350 million
.25% On next $250 million
.20% On excess
</TABLE>
SaBAM, a wholly-owned subsidiary of Citigroup, Inc. was incorporated in 1987
and, together with SaBAM affiliates in London, Frankfurt, Tokyo and Hong Kong,
provides a broad range of fixed-income and equity investment advisory services
to various individuals and institutional clients located throughout the world,
and
66
<PAGE>
serves as investment adviser to various investment companies. As of December
31, 1999, SaBAM and such affiliates managed approximately $29 billion of
assets.
Net fees paid or owed by Pacific Life to SaBAM for the Large-Cap Value
Portfolio for 1999 were $376,747. The Large-Cap Value Portfolio did not begin
operations until January 4, 1999.
The Portfolio Management Agreements are not exclusive, and Alliance Capital,
Capital Guardian, Goldman Sachs, J.P. Morgan Investment, Janus, Lazard,
Mercury, MSAM, PIMCO, and SaBam may provide and currently are providing
investment advisory services to other clients, including other investment
companies.
Distribution of Fund Shares
Pacific Select Distributors, Inc. ("PSD") (formerly Pacific Mutual
Distributors, Inc.) serves as the Fund's Distributor pursuant to a
Distribution Contract (the "Distribution Contract") with the Fund. The
Distributor is not obligated to sell any specific amount of Fund shares. PSD
bears all expenses of providing services pursuant to the Distribution Contract
including the costs of sales presentations, mailings, advertising, and any
other marketing efforts by PSD in connection with the distribution or sale of
the shares.
As of March 31, 2000, Pacific Life beneficially owned 0% of the outstanding
shares of the Portfolios of the Fund. Pacific Asset Management LLC ("PAM"), a
wholly-owned subsidiary of Pacific Life, beneficially owned 45.27% of the
outstanding shares of the Diversified Research Portfolio and 17.84% of the
outstanding shares of the International Large-Cap Portfolio, including monies
paid in connection with the initial capital advances made to the Fund, and 0%,
of the outstanding shares of eighteen other Portfolios of the Fund. Pacific
Life and PAM would exercise voting rights attributable to any shares of the
Fund owned by them in accordance with voting instructions received by Owners
of the Policies issued by Pacific Life. To this extent, as of April 30, 2000,
Pacific Life did not exercise control over any Portfolio. As of April 30,
2000, Pacific Life owned 100% of the outstanding shares of the I-Net
Tollkeeper Portfolio. As of September 30, 2000, Pacific Life owned 100% of the
outstanding shares of the Strategic Value and Focused 30 Portfolios. As of
December 31, 2000, Pacific Life owned 100% of the outstanding shares of the
Blue Chip, Aggressive Growth, Financial Services, Health Sciences, Technology,
Telecommunications, Capital Opportunities, Mid-Cap Growth and Global Growth
Portfolios.
Purchases and Redemptions
Shares of the Fund are not sold directly to the general public. Shares of
the Fund are currently offered only for purchase by the Separate Accounts to
serve as an investment medium for the Variable Contracts issued or
administered by Pacific Life or its affiliates. For information on purchase of
a Variable Contract, consult a prospectus for the Separate Account. The shares
of the Large-Cap Value, Mid-Cap Value, Small-Cap Index, Diversified Research,
International Large-Cap, REIT, I-Net Tollkeeper, Strategic Value, Focused 30,
Blue Chip, Aggressive Growth, Financial Services, Health Sciences, Technology,
Telecommunications, Capital Opportunities, Mid-Cap Growth and Global Growth
Portfolios are not available for Pacific Select variable universal life
insurance policies. The shares of the Large-Cap Value, Mid-Cap Value, Small-
Cap Index, REIT, Small-Cap Equity, Aggressive Equity, Emerging Markets,
Diversified Research, International Large-Cap, I-Net Tollkeeper, Strategic
Value, Focused 30, Blue Chip, Aggressive Growth, Financial Services, Health
Sciences, Technology, Telecommunications, Capital Opportunities, Mid-Cap
Growth and Global Growth Portfolios are not available for Pacific Corinthian
variable annuity contracts.
Currently, each Portfolio offers shares of a single class. However, the Fund
is authorized to offer up to four additional classes of shares for each
Portfolio. These classes may be offered in the future to investors in
connection with individual retirement accounts, and certain other types of
qualified plans.
Shares of any Portfolio may be redeemed on any business day upon receipt of
a request for redemption from the insurance company whose separate account
owns the shares. Redemptions are effected at the per share
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net asset value next determined after receipt of the redemption request.
Redemption proceeds will ordinarily be paid within seven days following
receipt of instructions in proper form, or sooner, if required by law. The
right of redemption may be suspended by the Fund or the payment date postponed
beyond seven days when the New York Stock Exchange is closed (other than
customary weekend and holiday closings) or for any period during which trading
thereon is restricted because an emergency exists, as determined by the SEC,
making disposal of portfolio securities or valuation of net assets not
reasonably practicable, and whenever the SEC has by order permitted such
suspension or postponement for the protection of shareholders. If the Board of
Trustees should determine that it would be detrimental to the best interests
of the remaining shareholders of a Portfolio to make payment wholly or partly
in cash, the Portfolio may pay the redemption price in whole or part by a
distribution in kind of securities from the Portfolio, in lieu of cash, in
conformity with applicable rules of the SEC. If shares are redeemed in kind,
the redeeming shareholder might incur brokerage costs in converting the assets
into cash. Under the Investment Company Act of 1940, the Fund is obligated to
redeem shares solely in cash up to the lesser of $250,000 or 1 percent of its
net assets during any 90-day period for any one shareholder. The Fund may
suspend the right of redemption of shares of any Portfolio and may postpone
payment for more than seven days for any period: (i) during which the New York
Stock Exchange is closed other than customary weekend and holiday closings or
during which trading on the New York Stock Exchange is restricted; (ii) when
the SEC determines that a state of emergency exists which may make payment or
transfer not reasonably practicable; (iii) as the SEC may by order permit for
the protection of the security holders of the Fund; or (iv) at any other time
when the Fund may, under applicable laws and regulations, suspend payment on
the redemption of its shares. If the Board of Trustees should determine that
it would be detrimental to the best interests of the remaining shareholders of
a Portfolio to make payment wholly or partly in cash, the Portfolio may pay
the redemption price in whole or in part by a distribution in kind of
securities from the portfolio of the Portfolio, in lieu of cash, in conformity
with applicable rules of the SEC. If shares are redeemed in kind, the
redeeming shareholder might incur brokerage costs in converting the assets
into cash.
Exchanges Among the Portfolios
Variable Contract Owners do not deal directly with the Fund to purchase,
redeem, or exchange shares of a Portfolio, and Variable Contract Owners should
refer to the Prospectus for the applicable Separate Account for information on
the allocation of premiums and on transfers of accumulated value among options
available under the contract.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Investment Decisions
Investment decisions for the Fund and for the other investment advisory
clients of the Adviser, or applicable Portfolio Manager, are made with a view
to achieving their respective investment objectives. Investment decisions are
the product of many factors in addition to basic suitability for the
particular client involved (including the Fund). Thus, a particular security
may be bought or sold for certain clients even though it could have been
bought or sold for other clients at the same time. It also sometimes happens
that two or more clients simultaneously purchase or sell the same security, in
which event each day's transactions in such security are, insofar as possible,
averaged as to price and allocated between such clients in a manner which in
the opinion of the Adviser or Portfolio Manager is equitable to each and in
accordance with the amount being purchased or sold by each. There may be
circumstances when purchases or sales of portfolio securities for one or more
clients will have an adverse effect on other clients.
Brokerage and Research Services
The Adviser or Portfolio Manager for a Portfolio places all orders for the
purchase and sale of portfolio securities, options, and futures contracts and
other investments for a Portfolio through a substantial number of brokers and
dealers or futures commission merchants selected at its discretion. In
executing transactions, the Adviser or Portfolio Manager will attempt to
obtain the best net results for a Portfolio taking into account such
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factors as price (including the applicable brokerage commission or dollar
spread), size of order, the nature of the market for the security, the timing
of the transaction, the reputation, experience and financial stability of the
broker-dealer involved, the quality of the service, the difficulty of
execution and operational facilities of the firms involved, and the firm's
risk in positioning a block of securities. In transactions on stock exchanges
in the United States, payments of brokerage commissions are negotiated. In
effecting purchases and sales of portfolio securities in transactions on
United States stock exchanges for the account of the Fund, the Adviser or
Portfolio Manager may pay higher commission rates than the lowest available
when the Adviser or Portfolio Manager believes it is reasonable to do so in
light of the value of the brokerage and research services provided by the
broker effecting the transaction. In the case of securities traded on some
foreign stock exchanges, brokerage commissions may be fixed and the Adviser or
Portfolio Manager may be unable to negotiate commission rates for these
transactions. In the case of securities traded on the over-the-counter
markets, there is generally no stated commission, but the price includes an
undisclosed commission or markup. Consistent with the policy of obtaining the
best net results, a portion of a Portfolio's brokerage and futures
transactions, including transactions on a national securities exchange, may be
conducted through an affiliated broker.
There is generally no stated commission in the case of fixed-income
securities, which are traded in the over-the-counter markets, but the price
paid by the Fund usually includes an undisclosed dealer commission or mark-up.
In underwritten offerings, the price paid by the Fund includes a disclosed,
fixed commission or discount retained by the underwriter or dealer.
Transactions on U.S. stock exchanges and other agency transactions involve the
payment by the Fund of negotiated brokerage commissions. Such commissions vary
among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. In the case of securities traded on some foreign stock exchanges,
brokerage commissions may be fixed and the Adviser or Portfolio Manager may be
unable to negotiate commission rates for these transactions.
Some securities considered for investment by the Fund's Portfolios may also
be appropriate for other clients served by the Adviser or Portfolio Manager.
If a purchase or sale of securities consistent with the investment policies of
a Portfolio and one or more of these clients served by the Adviser or
Portfolio Manager is considered at or about the same time, transactions in
such securities will be allocated among the Portfolio and clients in a manner
deemed fair and reasonable by the Adviser or Portfolio Manager. Although there
is no specified formula for allocating such transactions, the various
allocation methods used by the Adviser or Portfolio Manager, and the results
of such allocations, are subject to periodic review by the Fund's Adviser and
Board of Trustees.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional
investors to receive research services from broker-dealers which execute
portfolio transactions for the clients of such advisers. Consistent with this
practice, the Adviser or Portfolio Manager for a Portfolio may receive
research services from many broker-dealers with which the Adviser or Portfolio
Manager places the Portfolio's portfolio transactions. These services, which
in some cases may also be purchased for cash, include such matters as general
economic and security market reviews, industry and company reviews,
evaluations of securities and recommendations as to the purchase and sale of
securities. Some of these services may be of value to the Adviser or Portfolio
Manager in advising its various clients (including the Portfolio), although
not all of these services are necessarily useful and of value in managing a
Portfolio. The advisory fee paid by the Portfolio is not reduced because the
Adviser or Portfolio Manager and its affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Adviser or Portfolio Manager may cause a Portfolio to pay a broker-dealer,
which provides "brokerage and research services" (as defined in the Act) to
the Adviser or Portfolio Manager, an amount of disclosed commission for
effecting a securities transaction for the Portfolio in excess of the
commission which another broker-dealer would have charged for effecting that
transaction.
During the years 1999, 1998, and 1997, respectively, the following
Portfolios incurred brokerage commissions as follows: the Aggressive Equity
Portfolio--$1,119,434, $855,826 and $296,940, the Emerging Markets Portfolio--
$600,207, $373,834 and $712,505, the Small-Cap Equity Portfolio--$268,990,
$251,753 and $225,232, the
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Equity Portfolio--$368,208, $725,654 and $706,250 of which $18,759 (5.1%) and
$8,633 (1.2%) was paid to Goldman, Sachs & Co. in 1999 and 1998 respectively,
an affiliate of Goldman Sachs Asset Management, and $6,900 (0.95%) and $61,512
(8.71%) was paid to Smith Barney Inc. and $4,500 (0.62%) and $23,700 (3.36%)
was paid to Robinson Humphrey Co., Inc., in 1998 and 1997 respectively,
affiliates of Greenwich Street Advisors, the Multi-Strategy Portfolio--
$671,967, $455,757 and $283,791, the Equity Income Portfolio--$2,018,844,
$1,529,206 and $1,162,083, the Growth LT Portfolio--$4,255,430, $1,517,836 and
$1,057,621, the Equity Index Portfolio--$215,322, $140,167 and $157,624, the
International Value Portfolio-- $3,194,813, $2,177,935 and $1,606,247 of which
$30,863 (0.97%), $41,033 (1.88%) and $39,617 (2.47%) was paid to Morgan
Stanley & Co., respectively, an affiliate of Morgan Stanley Asset Management,
the Government Securities Portfolio--$89,603, $29,467 and $21,349, the Managed
Bond Portfolio--$255,937, $122,103 and $41,315, the High Yield Bond
Portfolio--$5,250, $2,720 and $2,500. During the year ended 1999, the
following Portfolios incurred brokerage commissions as follows: the Mid-Cap
Value Portfolio--$280,370, the Small-Cap Index Portfolio--$124,792, the REIT
Portfolio--$144,524 and the Large-Cap Value Portfolio--$283,668 of which $114
(0.04%) was paid to Salomon Smith Barney Inc., an affiliate of Salomon
Brothers Asset Management Inc.
During the fiscal year ended December 31, 1999, the Government Securities
Portfolio, the Managed Bond Portfolio, the Equity Income Portfolio, the Multi-
Strategy Portfolio, and the Large-Cap Value Portfolio acquired and sold
securities of its regular broker-dealers. On December 31, 1999, the Government
Securities Portfolio held securities of Merrill Lynch & Co., Morgan Stanley
Dean Witter, and J.P. Morgan valued at $2,900,389, $3,590,692, and $3,800,840,
respectively; the Managed Bond Portfolio held securities of Donaldson Lufkin &
Jenrette, Bear Stearns, Lehman Brothers, Inc. and Goldman, Sachs & Co. valued
at $2,152,456, $24,817,987, $19,461,587, and $9,612,636, respectively; the
Equity Income Portfolio held securities of Goldman, Sachs & Co. and
BankAmerica Corp. valued at $18,168,769 and $14,003,718, respectively; the
Multi-Strategy Portfolio held securities of Goldman, Sachs & Co. valued at
$4,634,025; and the Large-Cap Value Portfolio held securities of Morgan
Stanley Dean Witter valued at $4,782,125, each of which is a broker or dealer
regularly used for brokerage transactions by that Portfolio.
Portfolio Turnover
For reporting purposes, each Portfolio's portfolio turnover rate is
calculated by dividing the value of the lesser of purchases or sales of
portfolio securities for the fiscal year by the monthly average of the value
of portfolio securities owned by the Portfolio during the fiscal year. In
determining such portfolio turnover, long-term U.S. Government securities are
included. Short-term U.S. Government securities and all other securities whose
maturities at the time of acquisition were one year or less are excluded. A
100% portfolio turnover rate would occur, for example, if all of the
securities in the portfolio (other than short-term securities) were replaced
once during the fiscal year. The portfolio turnover rate for each of the
Portfolios will vary from year to year, depending on market conditions.
The portfolio turnover rates are not expected to exceed: 0% for the Money
Market Portfolio; 400% for the Managed Bond and Government Securities
Portfolios; 200% for the Aggressive Equity, Financial Services, Health
Sciences, Technology, Telecommunications and Multi-Strategy Portfolios; and
150% for all other Portfolios. For the Portfolios other than the Money Market
Portfolio, portfolio turnover could be greater in periods of unusual market
movement and volatility.
NET ASSET VALUE
Shares of each Portfolio are sold at their respective net asset values
(without a sales charge) computed after receipt of a purchase order. Net asset
value of a share is determined by dividing the value of a Portfolio's net
assets by the number of its shares outstanding. That determination is made
once each business day, Monday through Friday, exclusive of federal holidays
usually at or about 4:00 p.m. Eastern time, on each day that the New York
Stock Exchange is open for trading. The New York Stock Exchange and other
exchanges usually close for
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trading at 4:00 p.m. Eastern time. In the event that the New York Stock
Exchange or other exchanges close early, the Fund normally will deem the
closing price of each Portfolio's assets to be the price of those assets at
4:00 p.m., Eastern time. Net asset value will not be determined on the
following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day. To calculate a Portfolio's net asset value, a Portfolio's
assets are valued and totaled, liabilities are subtracted, and the balance,
called net assets, is divided by the number of shares outstanding. In general,
the value of assets is based on actual or estimated market value, with special
provisions for assets not having readily available market quotations and
short-term debt securities. With respect to the Portfolios that invest in
foreign securities, the value of foreign securities that are traded on stock
exchanges outside the United States are based upon the price on the exchange
as of the close of business of the exchange immediately preceding the time of
valuation. Securities traded in over-the-counter markets outside the United
States are valued at the last available price in the over-the-counter market
prior to the time of valuation. Trading in securities on exchanges and over-
the-counter markets in European and Pacific Basin countries is normally
completed well before 4:00 p.m., Eastern time. In addition, European and
Pacific Basin securities trading may not take place on all business days in
New York. Furthermore, trading takes place in Japanese markets on certain
Saturdays and in various foreign markets on days which are not business days
in New York and on which the Fund's net asset value is not calculated.
Quotations of foreign securities in foreign currencies are converted to U.S.
dollar equivalents using the foreign exchange quotation in effect at the time
net asset value is computed. The calculation of the net asset value of any
Portfolio which invests in foreign securities which are principally traded in
a foreign market may not take place contemporaneously with the determination
of the prices of portfolio securities of foreign issuers used in such
calculation. Further, under the Fund's procedures, the prices of foreign
securities are determined using information derived from pricing services and
other sources every day that the Fund values its shares. Prices derived under
these procedures will be used in determining net asset value. Information that
becomes known to the Fund or its agents after the time that net asset value is
calculated on any business day (which may be after 4:00 p.m. Eastern time) may
be assessed in determining net asset value per share after the time of receipt
of the information, but will not be used to retroactively adjust the price of
the security so determined earlier or on a prior day. Events affecting the
values of portfolio securities that occur between the time their prices are
determined and the time a Portfolio's net asset value is determined may not be
reflected in the calculation of net asset value. If events materially
affecting net asset value occur during such period, the securities would be
valued at fair market value as determined by the management and approved in
good faith by the Board of Trustees of the Fund. In determining the fair value
of securities, the Fund may consider available information including
information that becomes known after 4:00 p.m. Eastern time, and the values
that are determined will be deemed to be the price at 4:00 p.m. Eastern time.
The Money Market Portfolio's portfolio securities are valued using the
amortized cost method of valuation. This involves valuing a security at cost
on the date of acquisition and thereafter assuming a constant accretion of a
discount or amortization of a premium to maturity, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Portfolio would receive if it sold the instrument. During such periods the
yield to investors in the Portfolio may differ somewhat from that obtained in
a similar investment company which uses available market quotations to value
all of its portfolio securities.
The Commission's regulations require the Money Market Portfolio to adhere to
certain conditions. The Portfolio is required to maintain a dollar-weighted
average portfolio maturity of 90 days or less, to limit its investments to
instruments having remaining maturities of 13 months or less (except
securities held subject to repurchase agreements having 13 months or less to
maturity) and to invest only in securities that meet specified quality and
credit criteria.
All other Portfolios are valued as follows:
Portfolio securities for which market quotations are readily available are
stated at market value. Market value is determined on the basis of last
reported sales price, or, if no sales are reported, the mean between
representative bid and asked quotations obtained from a quotation reporting
system or from established market
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makers. In other cases, securities are valued at their fair value as
determined in good faith by the Board of Trustees of the Fund, although the
actual calculations may be made by persons acting under the direction of the
Board. Money market instruments are valued at market value, except that
instruments maturing in sixty days or less are valued using the amortized cost
method of valuation.
The value of a foreign security is determined in its national currency based
upon the price on the foreign exchange as of its close of business immediately
preceding the time of valuation. Securities traded in over-the-counter markets
outside the United States are valued at the last available price in the over-
the-counter market prior to the time of valuation.
Debt securities, including those to be purchased under firm commitment
agreements (other than obligations having a maturity of sixty days or less at
their date of acquisition), are normally valued on the basis of quotes
obtained from brokers and dealers or pricing services, which take into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics, and other market data. Debt obligations having a maturity of
sixty days or less are generally valued at amortized cost unless the amortized
cost value does not approximate market value. Certain debt securities for
which daily market quotations are not readily available may be valued,
pursuant to guidelines established by the Board of Trustees, with reference to
debt securities whose prices are more readily obtainable and whose durations
are comparable to the securities being valued.
When a Portfolio writes a put or call option, the amount of the premium is
included in the Portfolio's assets and an equal amount is included in its
liabilities. The liability thereafter is adjusted to the current market value
of the option. The premium paid for an option purchased by the Portfolio is
recorded as an asset and subsequently adjusted to market value. The values of
futures contracts are based on market prices. Quotations of foreign securities
in foreign currency are converted to U.S. dollar equivalents at the prevailing
market rates quoted by the custodian on the morning of valuation.
PERFORMANCE INFORMATION
The Fund may, from time to time, include the yield and effective yield of
its Money Market Portfolio, the yield of the remaining Portfolios, and the
total return of all Portfolios in advertisements, sales literature, or reports
to shareholders or prospective investors. Total return information for the
Fund will not be advertised or included in sales literature unless accompanied
by comparable performance information for a Separate Account to which the Fund
offers its shares.
Current yield for the Money Market Portfolio will be based on the change in
the value of a hypothetical investment (exclusive of capital charges) over a
particular 7-day period, less a pro-rata share of Portfolio expenses accrued
over that period (the "base period"), and stated as a percentage of the
investment at the start of the base period (the "base period return"). The
base period return is then annualized by multiplying by 365/7, with the
resulting yield figure carried to at least the nearest hundredth of one
percent. "Effective yield" for the Money Market Portfolio assumes that all
dividends received during an annual period have been reinvested. Calculation
of "effective yield" begins with the same "base period return" used in the
calculation of yield, which is then annualized to reflect weekly compounding
pursuant to the following formula:
Effective Yield = [(Base Period Return + 1) (To the power of 365/7)]-1
For the 7-day period ending December 31, 1999, the current yield of the
Money Market Portfolio was 5.62% and the effective yield of the Portfolio was
5.77%.
Quotations of yield for the remaining Portfolios will be based on all
investment income per share earned during a particular 30-day period
(including dividends and interest), less expenses accrued during the period
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("net investment income"), and are computed by dividing net investment income
by the maximum offering price per share on the last day of the period,
according to the following formula:
2[( a-b +1)(to the power of 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.
For the 30 day period ended December 31, 1999, the yield of the remaining
Portfolios that had commenced operations on or before that date was as
follows: (0.10)% for the Aggressive Equity Portfolio, 2.49% for the Emerging
Markets Portfolio, 0.32% for the Small-Cap Equity Portfolio, 0.15% for the
Equity Portfolio, 2.84% for the Multi-Strategy Portfolio, 1.08% for the Equity
Income Portfolio, (0.17)% for the Growth LT Portfolio, 0.59% for the Mid-Cap
Value Portfolio, 1.04% for the Equity Index Portfolio, 0.60% for the Small-Cap
Index Portfolio, 5.99% for the REIT Portfolio, 0.90% for the International
Value Portfolio, 5.47% for the Government Securities Portfolio, 6.31% for the
Managed Bond Portfolio, 9.77% for the High Yield Bond Portfolio, and 0.94% for
the Large-Cap Value Portfolio. The Diversified Research and International
Large-Cap Portfolios did not begin operations until January 3, 2000, the I-Net
Tollkeeper Portfolio did not begin operations until May 1, 2000, the Strategic
Value and Focused 30 Portfolios did not begin operations until October 2,
2000, and the Blue Chip, Aggressive Growth, Financial Services, Health
Sciences, Technology, Telecommunications, Capital Opportunities, Mid-Cap
Growth and Global Growth Portfolios did not begin operations until January 2,
2001.
Quotations of average annual total return for a Portfolio will be expressed
in terms of the average annual compounded rate of return of a hypothetical
investment in the Portfolio over certain periods that will include a period of
one year (or, if less, up to the life of the Portfolio), calculated pursuant
to the following formula: P (1 + T)(to the power of n) n = ERV (where P = a
hypothetical initial payment of $1,000, T = the total return for the period, n =
the number of periods, and ERV = the ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the period). Quotations of total return
may also be shown for other periods. All total return figures reflect the
deduction of a proportional share of Portfolio expenses on an annual basis, and
assume that all dividends and distributions are reinvested when paid.
For the one year period ended December 31, 1999, the total return for each
Portfolio that had commenced operations on or before that date was as follows:
27.35% for the Aggressive Equity Portfolio, 53.56% for the Emerging Markets
Portfolio, 47.52% for the Small-Cap Equity Portfolio, 38.54% for the Equity
Portfolio, 7.04% for the Multi-Strategy Portfolio, 13.26% for the Equity
Income Portfolio, 98.08% for the Growth LT Portfolio, 5.22% for the Mid-Cap
Value Portfolio, 20.59% for the Equity Index Portfolio, 19.36% for the Small-
Cap Index Portfolio, (0.01)% for the REIT Portfolio, 22.82% for the
International Value Portfolio, (1.95)% for the Government Securities
Portfolio, (1.91)% for the Managed Bond Portfolio, 4.94% for the Money Market
Portfolio, 2.90% for the High Yield Bond Portfolio, and 11.46% for the Large-
Cap Value Portfolio. The Diversified Research and International Large-Cap
Portfolios did not begin operations until January 3, 2000, the I-Net
Tollkeeper Portfolio did not begin operations until May 1, 2000, the Strategic
Value and Focused 30 Portfolios did not begin operations until October 2,
2000, and the Blue Chip, Aggressive Growth, Financial Services, Health
Sciences, Technology, Telecommunications, Capital Opportunities, Mid-Cap
Growth and Global Growth Portfolios did not begin operations until January 2,
2001.
For the five year period ended December 31, 1999, the average annual total
return for each Portfolio that had commenced operations on or before that date
was as follows: 25.13% for the Small-Cap Equity Portfolio, 27.59% for the
Equity Portfolio, 16.36% for the Multi-Strategy Portfolio, 23.25% for the
Equity Income
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Portfolio, 41.17% for the Growth LT Portfolio, 28.11% for the Equity Index
Portfolio, 13.81% for the International Value Portfolio, 7.48% for the
Government Securities Portfolio, 7.88% for the Managed Bond Portfolio, 5.23%
for the Money Market Portfolio, and 8.83% for the High Yield Bond Portfolio.
The Aggressive Equity and Emerging Markets Portfolios did not begin operations
until April 1, 1996. The Large-Cap Value, Mid-Cap Value, Small-Cap Index and
REIT Portfolios did not begin operations until January 4, 1999. The
Diversified Research and International Large-Cap Portfolios did not begin
operations until January 3, 2000, the I-Net Tollkeeper Portfolio did not begin
operations until May 1, 2000, the Strategic Value and Focused 30 Portfolios
did not begin operations until October 2, 2000, and the Blue Chip, Aggressive
Growth, Financial Services, Health Sciences, Technology, Telecommunications,
Capital Opportunities, Mid-Cap Growth and Global Growth Portfolios did not
begin operations until January 2, 2001.
For the ten year period ended December 31, 1999, the average annual total
returns for each Portfolio was as follows: 16.59% for the Small-Cap Equity
Portfolio, 17.73% for the Equity Portfolio, 11.47% for the Multi-Strategy
Portfolio, 14.67% for the Equity Income Portfolio, 8.28% for the International
Value Portfolio, 7.41% for the Government Securities Portfolio, 7.97% for the
Managed Bond Portfolio, 4.93% for the Money Market Portfolio, and 10.39% for
the High Yield Bond Portfolio. Based upon the period from the commencement of
operations of the Growth LT Portfolio on January 4, 1994 until December 31,
1999, the average annual total return for the Growth LT Portfolio was 36.12%.
Based upon the period from the commencement of operations of the Equity Index
Portfolio on January 30, 1991 until December 31, 1999, the average annual
total return for the Equity Index Portfolio was 20.01%. Based upon the period
from the commencement of operations of the Aggressive Equity and Emerging
Markets Portfolios on April 1, 1996 until December 31, 1999, the average
annual total return for each of these Portfolios was 13.60% and 1.79%,
respectively. The Large-Cap Value, Mid-Cap Value, Small-Cap Index, and REIT
Portfolios did not begin operations until January 4, 1999. The Diversified
Research and the International Large-Cap Portfolios did not begin operations
until January 3, 2000, the I-Net Tollkeeper Portfolio did not begin operations
until May 1, 2000, the Strategic Value and Focused 30 Portfolios did not begin
operations until October 2, 2000, and the Blue Chip, Aggressive Growth,
Financial Services, Health Sciences, Technology, Telecommunications, Capital
Opportunities, Mid-Cap Growth and Global Growth Portfolios did not begin
operations until January 2, 2001.
The performance results for the Aggressive Equity, Equity Income, Multi-
Strategy, Equity, and International Value Portfolios are based, in part, on
performance results when these Portfolios were advised by different Portfolio
Managers. Alliance Capital began serving as Portfolio Manager to the
Aggressive Equity Portfolio on May 1, 1998, J.P. Morgan Investment began
serving as Portfolio Manager to the Equity Income and Multi-Strategy
Portfolios on January 1, 1994, Morgan Stanley began serving as Portfolio
Manager to the International Value Portfolio on June 1, 1997, and Goldman
Sachs began serving as Portfolio Manager to the Equity Portfolio on May 1,
1998. The performance results for the Equity Portfolio are based, in part, on
the performance results of the predecessor series of Pacific Corinthian
Variable Fund, the assets of which were acquired by the Fund on December 31,
1994. The performance results for the Emerging Markets, Equity Index, Small-
Cap Index, and International Value Portfolios are based on performance results
when these Portfolios were advised by different Portfolio Managers. Alliance
Capital began serving as Portfolio Manager to the Emerging Markets Portfolio
on January 1, 2000, Mercury began serving as Portfolio Manager to the Equity
Index and Small-Cap Index Portfolios on January 1, 2000, and Lazard began
serving as Portfolio Manager to the International Value Portfolio on January
2, 2001.
Performance information for a Portfolio may be compared, in advertisements,
sales literature, and reports to shareholders to (i) various indices so that
investors may compare a Portfolio's results with those of a group of unmanaged
securities widely regarded by investors as representative of the securities
markets in general; (ii) other groups of mutual funds tracked by Lipper
Analytical Services Inc., a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets, or
tracked by other services, companies, publications, or persons who rank mutual
funds on overall performance or other criteria; and (iii) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
investment in the Portfolio. Unmanaged indexes may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
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Quotations of yield or total return for the Fund will not take into account
charges and deductions against any Separate Accounts to which the Fund shares
are sold or charges and deductions against the Contracts issued or
administered by Pacific Life or its subsidiaries. The Portfolio's yield and
total return should not be compared with mutual funds that sell their shares
directly to the public since the figures provided do not reflect charges
against the Separate Accounts or the Contracts. Performance information for
any Portfolio reflects only the performance of a hypothetical investment in
the Portfolio during the particular time period on which the calculations are
based. Performance information should be considered in light of the
Portfolio's investment objectives and policies, characteristics and quality of
the portfolios and the market conditions during the given time period, and
should not be considered as a representation of what may be achieved in the
future.
TAXATION
Each Portfolio intends to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986 (the
"Code").
To qualify as a regulated investment company, each Portfolio generally must,
among other things: (i) derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to securities loans,
and gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to its business of investing
in such stock, securities or currencies; (ii) diversify its holdings so that,
at the end of each quarter of the taxable year, (a) at least 50% of the market
value of the Portfolio's assets is represented by cash, U.S. Government
securities, the securities of other regulated investment companies and other
securities, with such other securities of any one issuer limited for the
purposes of this calculation to an amount not greater than 5% of the value of
the Portfolio's total assets and 10% of the outstanding voting securities of
such issuer, and (b) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities or the securities of other regulated investment companies); and
(iii) distribute at least 90% of its investment company taxable income (which
includes, among other items, dividends, interest, and net short-term capital
gains in excess of any net long-term capital losses) each taxable year.
As a regulated investment company, a Portfolio generally will not be subject
to U.S. federal income tax on its investment company taxable income and net
capital gains (any net long-term capital gains in excess of the sum of net
short-term capital losses and capital loss carryovers from prior years), if
any, that it distributes to shareholders. Each Portfolio intends to distribute
to its shareholders, at least annually, substantially all of its investment
company taxable income and any net capital gains. In addition, amounts not
distributed by a Portfolio on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax. To
avoid the tax, a Portfolio must distribute (or be deemed to have distributed)
during each calendar year, (i) at least 98% of its ordinary income (not taking
into account any capital gains or losses) for the calendar year, (ii) at least
98% of its capital gains in excess of its capital losses for the twelve month
period ending on October 31 of the calendar year (adjusted for certain
ordinary losses), and (iii) all ordinary income and capital gains for previous
years that were not distributed during such years. To avoid application of the
excise tax, each Portfolio intends to make its distributions in accordance
with the calendar year distribution requirement. A distribution will be
treated as paid on December 31 of the calendar year if it is declared by a
Portfolio during October, November, or December of that year to shareholders
of record on a date in such a month and paid by the Portfolio during January
of the following calendar year. Such distributions will be taxable to
shareholders (the Separate Accounts) for the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received.
Each Portfolio also intends to comply with diversification regulations under
Section 817(h) of the Code, that apply to mutual funds underlying variable
contracts. Generally, a Portfolio will be required to diversify its
investments so that on the last day of each quarter of a calendar year no more
than 55% of the value of its total assets is represented by any one
investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments, and no more than 90% is
represented by any four investments. For this purpose, securities of a given
issuer generally are treated as one investment, but each U.S. Government
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agency and instrumentality is treated as a separate issuer. Compliance with
the diversification rules under Section 817(h) of the Code generally will
limit the ability of any Portfolio, and in particular, the Government
Securities Portfolio, to invest greater than 55% of its total assets in direct
obligations of the U.S. Treasury (or any other issuer) or to invest primarily
in securities issued by a single agency or instrumentality of the
U.S. Government.
If a Portfolio invests in shares of a foreign investment company, the
Portfolio may be subject to U.S. federal income tax on a portion of an "excess
distribution" from, or of the gain from the sale of part or all of the shares
in, such company. In addition, an interest charge may be imposed with respect
to deferred taxes arising from such distributions or gains. The Portfolio may
be eligible to elect alternative tax treatment that would mitigate the effects
of owning foreign investment company stock.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Portfolio accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time that Portfolio actually collects such receivables or
pays such liabilities generally are treated as ordinary income or ordinary
loss. Similarly, on disposition of debt securities denominated in a foreign
currency and on disposition of certain futures contracts, forward contracts,
and options, gains or losses attributable to fluctuations in the value of
foreign currency between the date of acquisition of the security or contract
and the date of disposition also are treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of a Portfolio's investment company
taxable income to be distributed to its shareholders as ordinary income.
The Treasury Department announced that it would issue future regulations or
rulings addressing the circumstances in which a variable contract owner's
control of the investments of a separate account may cause the contract owner,
rather than the insurance company, to be treated as the owner of the assets
held by the separate account. If the contract owner is considered the owner of
the securities underlying the separate account, income and gains produced by
those securities would be included currently in the contract owner's gross
income. It is not known what standards will be set forth in the regulations or
rulings.
In the event that the rules or regulations are adopted there can be no
assurance that the Portfolios will be able to operate as currently described
in the Prospectus, or that the Trust will not have to change any Portfolio's
investment objective or investment policies. While each Portfolio's investment
objective is fundamental and may be changed only by a vote of a majority of
its outstanding shares, the Trustees have reserved the right to modify the
investment policies of the Portfolios as necessary to prevent any such
prospective rules and regulations from causing the contract owners to be
considered the owners of the shares of the Portfolios underlying the Separate
Accounts.
Distributions
Distributions by a Portfolio of any investment company taxable income (which
includes, among other items, dividends, interest, and any net realized short-
term capital gains in excess of net realized long-term capital losses),
whether received in cash or reinvested in additional Portfolio shares, will be
treated as ordinary income for tax purposes in the hands of a shareholder (a
Separate Account). Distributions of net capital gains (the excess of any net
long-term capital gains over net short-term capital losses), whether received
in cash or reinvested in additional Portfolio shares, will generally be
treated by a Separate Account as either "20% Rate Gain" or "28% Rate Gain,"
depending upon the Portfolio's holding period for the assets sold, regardless
of the length of time a Separate Account has held Portfolio shares.
Hedging Transactions
The diversification requirements applicable to a Portfolio's assets may
limit the extent to which a Portfolio will be able to engage in transactions
in options, futures contracts, or forward contracts.
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OTHER INFORMATION
Concentration Policy
Under each Portfolio's investment restrictions, except the REIT Portfolio's,
a Portfolio may not invest in a security if, as a result of such investment,
more than 25% of its total assets (taken at market value at the time of such
investment) would be invested in the securities of issuers in any particular
industry, except securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities (or repurchase agreements with respect thereto).
Mortgage-related securities, including CMOs, that are issued or guaranteed by
the U.S. Government, its agencies or instrumentalities ("government issued")
are considered government securities. The Portfolios take the position that
mortgage-related securities, whether government issued or privately issued, do
not represent interests in any particular "industry" or group of industries,
and therefore, the concentration restriction noted above does not apply to
such securities. For purposes of complying with this restriction, the Fund, in
consultation with its Portfolio Managers, utilizes its own industry
classifications.
Brokerage Enhancement Plan
The Fund has adopted a Brokerage Enhancement Plan (the "Plan") pursuant to
Rule 12b-1 under the 1940 Act, under which the Fund may enter into agreements
or arrangements with brokers or dealers, pursuant to which brokerage
transactions can be directed on behalf of a Portfolio to the participating
broker-dealer to execute the transaction in return for credits, other
compensation or other types of benefits to be awarded to the Fund.
The credits, compensation or benefits earned as a result of directed
brokerage can be used in a number of ways to promote the distribution of the
Fund's shares. These ways include paying for all or part of the expenses for:
(i) PSD to participate in or sponsor seminars, sales meetings, conferences,
and other events held by the broker-dealer; (ii) broker/dealers to conduct due
diligence on the Fund or the variable contracts (to help that broker-dealer
defray the expenses of its due diligence); (iii) disseminating sales
literature about the Fund or the variable contracts (to help defray its
related expenses); or (iv) placing the Fund or the variable contracts on a
list of eligible funds or variable contracts that may be offered by that
broker-dealer's registered representatives (to help compensate it for the
associated expenses).
PSD can indirectly benefit from the Plan in that securities brokerage
allocated to a broker-dealer may help defray, in whole or in part,
distribution expenses that otherwise would be borne by PSD or an affiliate.
The Plan also permits credits generated by securities transactions from one
Portfolio to inure to the benefits of that Portfolio, of any other Portfolio,
or to the Fund as a whole.
The Plan provides that it is subject to annual renewal by the Board,
including those Trustees of the Fund who are not "interested persons" of the
Fund (as defined in the 1940 Act) and who have no direct or indirect financial
interest in the operation of the Plan or any agreements related to it (the
"Rule 12b-1 Trustees"), and that PSD provide the Trustees with a written
report of securities transactions directed under the Plan, currently on a
quarterly basis. The Plan also provides that it may be terminated at any time
by the vote of a majority of the Rule 12b-1 Trustees, and that all material
Plan amendments must be approved by a vote of the Rule 12b-1 Trustees.
Capitalization
The Fund is a Massachusetts business trust established under a Declaration
of Trust dated May 4, 1987. The capitalization of the Fund consists solely of
an unlimited number of shares of beneficial interest with a par value of
$0.001 each. The Board of Trustees may establish additional Portfolios (with
different investment objectives and fundamental policies) at any time in the
future. Establishment and offering of additional Portfolios will not alter the
rights of the Fund's shareholders. When issued, shares are fully paid,
redeemable, freely transferable, and non-assessable by the Fund. Shares do not
have preemptive rights or subscription rights. In liquidation of a Portfolio
of the Fund, each shareholder is entitled to receive his pro rata share of the
net assets of that Portfolio.
Under Massachusetts law, shareholders could under certain circumstances, be
held personally liable for the obligations of the Fund. However, the
Declaration of Trust disclaims liability of the shareholders, Trustees, or
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officers of the Fund for acts or obligations of the Fund, which are binding
only on the assets and property of the Fund and requires that notice of the
disclaimer be given in each contract or obligation entered into or executed by
the Fund or the Trustees. The Declaration of Trust provides for
indemnification out of Fund property for all loss and expense of any
shareholder held personally liable for the obligations of the Fund. The risk
of a shareholder incurring financial loss on account of shareholder liability
is limited to circumstances in which the Fund itself would be unable to meet
its obligations and thus should be considered remote.
Expenses incurred in connection with the Fund's organization and
establishment of the Aggressive Equity Portfolio and Emerging Markets
Portfolio in 1996 and the public offering of the shares of those Portfolios,
aggregated approximately $23,410 per Portfolio. These costs have been deferred
by the Aggressive Equity and Emerging Markets Portfolios and are being
amortized by them over a period of five years from the beginning of operations
of each of those Portfolios. These costs have been deferred and are being
amortized over a period of five years at the rates of 10%, 15%, and 25% in
years one, two, and three through five, respectively. At December 31, 1999,
the unamortized balance of such expenses amounted to $5,856 each for the
Aggressive Equity Portfolio and the Emerging Markets Portfolio.
Expenses incurred in connection with the Fund's organization and
establishment of the Diversified Research and International Large-Cap
Portfolios in 1999 and the public offering of the shares of those Portfolios,
aggregated approximately $19,733 per Portfolio. Expenses incurred in
connection with the Fund's organization and establishment of the I-Net
Tollkeeper Portfolio in 2000 and the public offering of the shares of the
Portfolio aggregated approximately $40,804. Estimated expenses incurred in
connection with the Fund's organization and establishment of the Strategic
Value and Focused 30 Portfolios in 2000 and the public offering of the shares
of those Portfolios were approximately $37,608 per Portfolio. Estimated
expenses incurred in connection with the Fund's organization and establishment
of the Blue Chip, Aggressive Growth, Financial Services, Health Sciences,
Technology, Telecommunications, Capital Opportunities, Mid-Cap Growth and
Global Growth Portfolios in 2001 and the public offering of the shares of
those Portfolios were approximately $ per Portfolio. These costs will be
expensed and charged separately to each of the Portfolios during each
Portfolio's first period of operations.
Voting Rights
Shareholders of the Fund are given certain voting rights. Each share of each
Portfolio will be given one vote, unless a different allocation of voting
rights is required under applicable law for a mutual fund that is an
investment medium for variable insurance products.
Under the Declaration of Trust and Massachusetts business trust law, the
Fund is not required to hold annual meetings of Fund shareholders to elect
Trustees or for other purposes. It is not anticipated that the Fund will hold
shareholders' meetings unless required by law, although special meetings may
be called for a specific Portfolio, or for the Fund as a whole, for purposes
such as electing or removing Trustees, changing fundamental policies, or
approving a new or amended advisory contract or portfolio management
agreement. In this regard, the Fund will be required to hold a meeting to
elect Trustees to fill any existing vacancies on the Board if, at any time,
fewer than a majority of the Trustees have been elected by the shareholders of
the Fund. In addition, the Declaration of Trust provides that the holders of
not less than two-thirds of the outstanding shares or other voting interests
of the Fund may remove a person serving as Trustee either by declaration in
writing or at a meeting called for such purpose. The Trustees are required to
call a meeting for the purpose of considering the removal of a person serving
as Trustee, if requested in writing to do so by the holders of not less than
10% of the outstanding shares or other voting interests of the Fund. In
accordance with current laws, it is anticipated that an insurance company
issuing a Variable Contract that participates in the Fund will request voting
instructions from Variable Contract Owners and will vote shares or other
voting interests in the Separate Account in proportion to the voting
instructions received. The Fund's shares do not have cumulative voting rights.
Custodian and Transfer Agency and Dividend Disbursing Services
State Street Bank and Trust Company of California, NA ("State Street"), a
national banking association chartered by the Comptroller of the Currency,
with a principal office at 633 West 5th Street, Los Angeles, CA 90071,
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serves as Custodian of the Fund. Under the agreement with the Fund, State
Street is permitted to hold assets of the Fund in an account that it maintains
or at its parent, State Street Bank and Trust Company ("State Street Boston"),
a Massachusetts banking corporation with a principal place of business at 225
Franklin Street, Boston, Massachusetts 02110. Pursuant to rules or other
exemptions under the 1940 Act, the Fund may maintain foreign securities and
cash for the Fund in the custody of certain eligible foreign banks and
securities depositories. Chase Manhattan Bank, ("Chase"), a New York State
chartered bank, with principal offices at 270 Park Avenue, New York, NY 10081]
currently serves as sub-custodian of the Fund for foreign securities. Chase,
together with certain of its foreign branches and agencies and foreign banks
and securities depositories acting as sub-custodian to Chase, maintain custody
of the securities and other assets of foreign issuers for the Fund. The sub-
custodial arrangements with Chase are expected to terminate by the end of the
year 2000.
State Street Boston will become the foreign sub-custodian upon termination
of the arrangements with Chase. State Street Boston will place and maintain
the foreign assets of the Fund in the care of eligible foreign custodians
determined by State Street Boston and will monitor the appropriateness of
maintaining foreign assets with eligible custodians, which does not include
mandatory securities depositories.
Pacific Life provides dividend disbursing and transfer agency services to
the Fund.
Financial Statements
The financial statements of the Fund as of December 31, 1999, including the
notes thereto, are incorporated by reference in this Statement of Additional
Information from the Annual Report of the Fund dated as of December 31, 1999.
The financial statements have been audited by Deloitte & Touche LLP,
independent auditors.
Independent Auditors
Deloitte & Touche LLP serves as the independent auditors for the Fund. The
address of Deloitte & Touche LLP is 695 Town Center Drive, Suite 1200, Costa
Mesa, California 92626.
Counsel
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006-2401,
passes upon certain legal matters in connection with the shares offered by the
Fund and also acts as outside counsel to the Fund.
Code of Ethics
The Fund and each of its Portfolio Managers have adopted codes of ethics
which have been approved by the Fund's Board of Trustees. Subject to certain
limitations and procedures, these codes permit personnel that they cover,
including employees of the Investment Adviser or Portfolio Managers who
regularly have access to information about securities purchased for the Fund,
to invest in securities for their own accounts. This could include securities
that may be purchased by Portfolios of the Fund. The codes are intended to
prevent these personnel from taking inappropriate advantage of their positions
and to prevent fraud upon the Fund. The Fund's Code of Ethics requires
reporting to the Board of Trustees on compliance violations.
Registration Statement
This Statement of Additional Information and the Prospectus do not contain
all the information included in the Fund's Registration Statement filed with
the SEC under the Securities Act of 1933 with respect to the securities
offered hereby, certain portions of which have been omitted pursuant to the
rules and regulations of the SEC. The Registration Statement, including the
exhibits filed therewith, (and including specifically all applicable Codes of
Ethics), are on file with and may be examined at the offices of the SEC in
Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract or other documents referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
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APPENDIX
Description of Bond Ratings
Corporate Bonds: Bonds rated Aa by Moody's are judged by Moody's to be of
high quality by all standards. Together with bonds rated Aaa (Moody's highest
rating) they comprise what are generally known as high-grade bonds. Aa bonds
are rated lower than Aaa bonds because margins of protection may not be as
large as those of Aaa bonds, or fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make the long-
term risks appear somewhat larger than those applicable to Aaa securities.
Bonds which are rated A by Moody's possess many favorable investment
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.
Moody's Baa rated bonds 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 rated AA by Standard & Poor's are judged by Standard & Poor's to be
high-grade obligations and in the majority of instances differ only in small
degree from issues rated AAA (Standard & Poor's highest rating). Bonds rated
AAA are considered by Standard & Poor's to be the highest grade obligations
and possess the ultimate degree of protection as to principal and interest.
With AA bonds, as with AAA bonds, prices move with the long-term money market.
Bonds rated A by Standard & Poor's, regarded as upper medium grade, have a
strong capacity and interest, although they are somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions.
Standard & Poor's BBB rated bonds, or medium-grade category bonds, are
borderline between definitely sound obligations and those where the
speculative element begins to predominate. These bonds have adequate asset
coverage and normally are protected by satisfactory earnings. Their
susceptibility to changing conditions, particularly to depressions,
necessitates constant watching. These bonds generally are more responsive to
business and trade conditions than to interest rates. This group is the lowest
which qualifies for commercial bank investment.
The ratings from AA to CCC may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the rating categories.
Moody's Ba rated bonds are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds rated Ba. Bonds which are rated B by Moody's 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 rated Caa by Moody's are considered to be of poor standing. Such
issues may be in default or there may be elements of danger with respect to
principal or interest. Bonds rated Ca are considered by Moody's to be
speculative in a high degree, often in default. Bonds rated C, the lowest
class of bonds under Moody's bond ratings, are regarded by Moody's as having
extremely poor prospects.
Moody's also applies numerical indicators 1, 2 and 3 to rating categories.
The modifier 1 indicates that the security is in the higher end of its rating
category; 2 indicates a mid-range ranking; and 3 indicates a ranking toward
the lower end of the category.
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A bond rated BB, B, CCC, and CC by Standard & Poor's 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 CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposure to adverse conditions.
Commercial Paper: The Prime rating is the highest commercial paper rating
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation
of the issuer's products in relation to competition and customer acceptance;
(4) liquidity; (5) amount and quality of long-term debt; (6) trend of earnings
over a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by management
of obligations which may be present or may arise as a result of public
interest questions and preparations to meet such obligations. Issuers with
this Prime category may be given ratings 1, 2 or 3, depending on the relative
strengths of these factors.
Commercial paper rated A by Standard & Poor's has the following
characteristics: (i) liquidity ratios are adequate to meet cash requirements;
(ii) long-term senior debt rating should be A or better, although in some
cases BBB credits may be allowed if other factors outweigh the BBB rating,
(iii) the issuer should have access to at least two additional channels of
borrowing; (iv) basic earnings and cash flow should have an upward trend with
allowances made for unusual circumstances; and (v) typically the issuer's
industry should be well established and the issuer should have a strong
position within its industry and the reliability and quality of management
should be unquestioned. Issuers rated A are further referred to by use of
numbers 1, 2 and 3 to denote relative strength with this highest
classification.
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Form No. 15-17595-18
Form No. 484-1A
<PAGE>
PACIFIC SELECT FUND
Part C: OTHER INFORMATION
Item 23. Exhibits
--------
(a)(1) Agreement and Declaration of Trust/7/
(a)(2) Establishment and Designation of Shares of
Beneficial Interest in the Equity Index Series/1/
(a)(3) Written Instrument Amending the Amended and
Restated Agreement and Declaration of Trust -
I-Net Tollkeeper
(a)(4) Written Instrument Amending the Amended and
Restated Agreement and Declaration of Trust -
Focused 30 and Strategic Value
(a)(5) Form of Written Instrument Amending the Amended
and Restated Agreement and Declaration of Trust -
Bond and Income Portfolio
(a)(6) Form of Written Instrument Amending the Amended
and Restated Agreement and Declaration of Trust -
Global Growth, Mid-Cap Growth, Capital
Opportunities, Technology, Financial Services,
Telecommunications, Health Sciences, Aggressive
Growth and Blue Chip
(b) By-Laws of Registrant/7/
(c) Instruments Defining Rights of Holders of
Securities/1/
(d)(1) Investment Advisory Agreement/1/
(d)(2) Portfolio Management Agreement - Capital Guardian
Trust Company/1/
(d)(3) Addendum to Goldman Sachs Portfolio Management
Agreement/8/
(d)(4) Portfolio Management Agreement - J.P. Morgan
Investment Management Inc./1/
(d)(5) Portfolio Management Agreement - Janus Capital
Corporation/1/
(d)(6) Portfolio Management Agreement - Morgan Stanley
Asset Management/4/
(d)(7) Portfolio Management Agreement - Alliance Capital
Management L.P./5/
(d)(8) Portfolio Management Agreement - Goldman Sachs
Asset Management/5/
II-1
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(d)(9) Portfolio Management Agreement - Pacific
Investment Management Company/9/
(d)(10) Addendum to Advisory Agreement - Large-Cap,
Mid-Cap, Small-Cap Index, REIT/6/
(d)(11) Addendum to Portfolio Management Agreement -
Janus Capital Corporation/3/
(d)(12) Addendum to Portfolio Management Agreement -
J.P. Morgan Investment Management Inc./3/
(d)(13) Addendum to Portfolio Management Agreement -
Pacific Investment Management Company/3/
(d)(14) Addendum to Advisory Agreement - International
Large-Cap and Diversified Research/7/
(d)(15) Portfolio Management Agreement - Salomon Brothers
Asset Management Inc/6/
(d)(16) Portfolio Management Agreement - Lazard Asset
Management/6/
(d)(17) Addendum to Portfolio Management Agreement -
Morgan Stanley Asset Management/6/
(d)(18) Addendum to Advisory Agreement - I-Net
Tollkeeper/8/
(d)(19) Portfolio Management Agreement - Capital Guardian
Trust Company/7/
(d)(20) Portfolio Management Agreement - Mercury/7/
(d)(21) Addendum to Portfolio Management
Agreement - Alliance Capital Management L.P./7/
(d)(22) Addendum to Advisory Agreement - Focused 30 and
Strategic Value
(d)(23) Addendum to Portfolio Management Agreement -
Janus Capital Corporation
(d)(24) Form of Addendum to Advisory Agreement - Global
Growth, Mid-Cap Growth, Capital Opportunities,
Technology, Financial Services,
Telecommunications, Health Sciences, Aggressive
Growth, Blue Chip, International Value
(d)(25) Form of Portfolio Management Agreement -
AIM
(d)(26) Form of Portfolio Management Agreement -
INVESCO
(d)(27) Form of Portfolio Management Agreement -
MFS
(d)(28) Form of Portfolio Management Agreement - Lazard
Asset Management
(d)(29) Form of Amendment to Portfolio Management
Agreement - Pacific Investment Management
Company
(e)(1) Distribution Agreement/7/
(e)(2) Addendum to Distribution Agreement - I-Net
Tollkeeper Portfolio/8/
(e)(3) Addendum to Distribution Agreement - Focused
30 and Strategic Value
(e)(4) Form of Exhibit A to Distribution Agreement -
Global Growth, Mid-Cap Growth, Capital
Opportunities, Technology, Financial Services,
Telecommunications, Health Sciences, Aggressive
Growth and Blue Chip
(f) Not Applicable
(g)(1) Custodian Agreement/1/
(g)(2) Custodian Agreement Fee Schedule/3/
(g)(3) Addendum to Custodian Agreement - Large-Cap,
Mid-Cap, Small-Cap Index, REIT/6/
(g)(4) Addendum to Custodian Agreement - International
Large-Cap and Diversified Research/7/
(g)(5) Addendum to Custodian Agreement - I-Net
Tollkeeper/8/
(g)(6) Assignment, Amendment and Consent Agreement of
Custody Agreement
(g)(7) Form of Exhibit A to Assignment, Amendment and
Consent of Custody Agreement - Global Growth,
Mid-Cap Growth, Capital Opportunities,
Technology, Financial Services,
Telecommunications, Health Sciences, Aggressive
Growth, and Blue Chip
(h)(1) Agency Agreement/1/
(h)(2) Participation Agreement/8/
(h)(3) Agreement for Support Services/2/
(h)(4) Addendum to Agency Agreement - Large-Cap,
Mid-Cap, Small-Cap Index, REIT/6/
(h)(5) Addendum to Agency Agreement - International
Large-Cap and Diversified Research/7/
(h)(6) Addendum to Agency Agreement - I-Net
Tollkeeper/9/
(h)(7) Addendum to Participation Agreement - I-Net
Tollkeeper/8/
(h)(8) Addendum to Agency Agreement - Focused 30 and
Strategic Value
(h)(9) Addendum to Participation Agreement - Focused 30
and Strategic Value
(h)(10) Form of Schedule of Portfolios to Agency
Agreement - Global Growth, Mid-Cap Growth,
Capital Opportunities, Technology, Financial
Services, Telecommunications, Health Sciences,
Aggressive Growth, and Blue Chip
(h)(11) Form of Addendum to Participation Agreement -
Global Growth, Mid-Cap Growth, Capital
Opportunities, Technology, Financial Services,
Telecommunications, Health Sciences, Aggressive
Growth, and Blue Chip
(h)(12) Expense Limitation Agreement
(h)(13) Amendment to Expense Limitation Agreement -
Strategic Value and Focused 30
(h)(14) Form of Schedule A to Expense Limitation
Agreement - Global Growth, Mid-Cap Growth,
Capital Opportunities, Technology, Financial
Services, Telecommunications, Health Sciences,
Aggressive Growth, and Blue Chip
(i) Opinion and Consent of Counsel/1/
(j) Not Applicable
(k) Not Applicable
(l) Not Applicable
(m) Brokerage Enhancement Plan/8/
(m)(1) Revised Schedule A to Brokerage Enhancement
Plan - I-Net Tollkeeper/9/
(m)(2) Revised Schedule A to Brokerage Enhancement
Plan - Focused 30 and Strategic
Value
(m)(3) Form of Schedule A to Brokerage Enhancement
Plan - Global Growth, Mid-Cap Growth, Capital
Opportunities, Technology, Financial Services,
Telecommunications, Health Sciences, Aggressive
Growth, and Blue Chip
(n) Not Applicable
(o) Not Applicable
(p)(1) Code of Ethics - Pacific Select Fund/7/
(p)(2) Code of Ethics - Alliance Capital Management
L.P./9/
(p)(3) Code of Ethics - Capital Guardian Trust
Company/9/
(p)(4) Code of Ethics - Goldman Sachs Asset
Management/9/
(p)(5) Code of Ethics - J.P. Morgan Investment
Management Inc./9/
(p)(6) Code of Ethics - Janus Capital
Corporation/9/
(p)(7) Code of Ethics - Lazard Asset Management/9/
(p)(8) Code of Ethics - Mercury
(p)(9) Code of Ethics - Morgan Stanley Asset
Management/9/
(p)(10) Code of Ethics - Pacific Investment Management
Company/9/
(p)(11) Code of Ethics - Salomon Brothers Asset
Management Inc/9/
(p)(12) Code of Ethics - Pacific Life Insurance Company
Securities Division/9/
(p)(13) Code of Ethics - AIM
(p)(14) Code of Ethics - INVESCO
(p)(15) Code of Ethics - MFS
------------
/1/ Included in Registrant's Form Type N1A/A, Accession No. 0000898430-95-
002464 filed on November 22, 1995 and incorporated by reference herein.
/2/ Included in Registrant's Form Type N1A/A, Accession No. 0000898430-96-
000275 filed on February 1, 1996 and incorporated by reference herein.
/3/ Included in Registrant's Form Type N1A/B, Accession No. 0001017062-97-
000728 filed on April 25, 1997 and incorporated by reference herein.
/4/ Included in Registrant's Form Type N1A/A, Accession No. 0001017062-97-
001012 filed on May 16, 1997 and incorporated by reference herein.
/5/ Included in Registrant's Form Type N1A/A, Accession No. 0001017062-98-
000424 filed on March 2, 1998 and incorporated by reference herein.
/6/ Included in Registrant's Form Type N1A/A, Accession No. 0001017062-98-
001954 filed on September 4, 1998 and incorporated by reference herein.
/7/ Included in Registrant's Form Type N1A/A, Accession Number 0001017062-00-
000474 filed on February 16, 2000 and incorporated by reference herein.
/8/ Included in Registrant's Form Type N1A/B, Accession Number 0001017062-00-
000983 filed on April 26, 2000 and incorporated by reference herein.
/9/ Included in Registrant's Form Type N1A/A, Accession Number 0001017062-00-
001495 filed on July 14, 2000 and incorporated by reference herein.
Item 24. Persons Controlled by or Under Common Control with the Fund
-----------------------------------------------------------
Pacific Life Insurance Company ("Pacific Life"), on its own behalf and on
behalf of its Separate Account A, Separate Account B, Pacific Select Variable
Annuity, Pacific Select Exec, Pacific COLI, Pacific COLI II, Pacific COLI III,
Pacific Select, and Pacific Corinthian Variable Account Separate Accounts
("Separate Accounts"), owns of record the outstanding shares of the Series of
Registrant. Pacific Life Insurance Company will vote fund shares in accordance
with instructions received from Policy Owners having interests in the Variable
Accounts of its Separate Accounts.
Item 25. Indemnification
---------------
II-2
<PAGE>
Reference is made to Article V of the Registrant's Declaration of
Trust.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 ("Act") may be permitted to trustees, officers and controlling persons
of the Registrant by the Registrant pursuant to the Declaration of Trust or
otherwise, the Registrant is aware that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and, therefore, is unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by trustees, officers or controlling
persons of the Registrant in connection with the successful defense of any act,
suit or proceeding) is asserted by such trustees, officers or controlling
persons in connection with the shares being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issues.
Item 26. Business and Other Connections of the Investment Adviser
--------------------------------------------------------
Each investment adviser, and the trustees or directors and officers of each
investment adviser and their business and other connections are as follows:
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
------------------------- ----------------------- --------------------------------------------
<S> <C> <C>
Pacific Life Insurance Company
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
------------------------- ----------------------- --------------------------------------------
<S> <C> <C>
Pacific Life Thomas C. Sutton Director, Chairman of the Board and Chief
Executive Officer of Pacific Life Insurance
Company, January 1990 to present; Director,
Chairman of the Board and Chief Executive
Officer of Pacific Mutual Holding Company and
Pacific LifeCorp, August 1997 to present;
Director (March 1989 to present) and Chairman
(July 1989 to present) of Pacific Life & Annuity
Company (formerly PM Group Life Insurance Co.);
Director of: Mutual Service Corporation,
PM Realty Advisors, Inc., Pacific Financial
Products, Inc., and similar positions with
various affiliated companies of Pacific Life
Insurance Company; Director of: Newhall Land &
Farming; Edison International; The Irvine Company
and Former Chairman of the American Council of
Life Insurance; and Former Director of: Pacific
Corinthian Life Insurance Company, Cadence
Capital Management Corporation, NFJ Investment
Group, Inc., Pacific Financial Asset Management
Corporation, Pacific Investment Management
Company, Pacific Select Distributors, Inc.
(formerly Pacific Mutual Distributors, Inc.), and
former Management Board member of PIMCO Advisors L.P.
Pacific Life Glenn S. Schafer Director (November 1994 to present) and President
(January 1995 to present) of Pacific Life Insurance
Company; Director and President of Pacific Mutual
Holding Company and Pacific LifeCorp, August 1997
to present; Director of: Pacific Life & Annuity
Company (formerly PM Group Life Insurance Company);
Mutual Service Corporation; PM Realty Advisors, Inc.;
and similar positions with various affiliated companies
of Pacific Life Insurance Company; Former Director
of Pacific Corinthian Life Insurance Company; Pacific
Select Distributors, Inc. (formerly Pacific Mutual
Distributors, Inc.); and former Management Board member
of PIMCO Advisors L.P.
Pacific Life David R. Carmichael Director (since August 1997), Senior Vice President
and General Counsel of Pacific Life Insurance
Company, April 1992 to present; Senior Vice
President and General Counsel of Pacific Mutual
Holding Company and Pacific LifeCorp, August 1997
to present; Senior Vice President and General
Counsel of Pacific Life & Annuity Company (formerly
PM Group Life Insurance Company), July 1998 to present;
Director of Pacific Life & Annuity (formerly PM Group
Life Insurance Company); and Association of California
Health and Life Insurance Companies. Former Director of
Pacific Corinthian Life Insurance Company; and Association
of Life Insurance Counsel.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
------------------------- ----------------------- --------------------------------------------
<S> <C> <C>
Pacific Life Audrey L. Milfs Director (since August 1997), Vice President (since
April 1991) and Corporate Secretary (since July
1983) of Pacific Life Insurance Company; Vice
President and Secretary of Pacific Mutual Holding
Company and Pacific LifeCorp, August 1997 to
present; Director of Pacific Life & Annuity Company
(formerly PM Group Life Insurance Company); Pacific
Financial Products, Inc.; PM Realty Advisors, Inc.;
Vice President and Secretary to several affiliated
companies of Pacific Life Insurance Company
Pacific Life Khanh T. Tran Director (since August 1997), Senior Vice President
and Chief Financial Officer of Pacific Life
Insurance Company, June 1996 to present; Vice
President and Treasurer of Pacific Life Insurance
Company, November 1991 to June 1996; Senior Vice
President and Chief Financial Officer to several
affiliated companies of Pacific Life Insurance
Company, 1990 to present
Pacific Life Edward R. Byrd Vice President and Controller of Pacific
Life Insurance Company, August 1992 to present;
Director (since January 1998), Vice President and
CFO of Pacific Select Distributors, Inc.
(formerly Pacific Mutual Distributors, Inc.);
Vice President and Controller of Pacific Mutual
Holding Company and Pacific LifeCorp, August
1997 to present; and similar positions with
various affiliated companies of Pacific Life
Insurance Company.
Pacific Life Brian D. Klemens Vice President and Treasurer of Pacific Life
Insurance Company, December 1998 to Present; and
Assistant Vice President and Assistant Controller
of Pacific Life Insurance Company, April 1994 to
December 1998; Vice President and Treasurer of
several affiliated companies of Pacific Life
Insurance Company (February 1999 to present)
Pacific Life Larry J. Card Executive Vice President of Pacific Life Insurance
Company, January 1995 to present; Executive Vice
President of Pacific Mutual Holding Company and
Pacific LifeCorp, August 1997 to present and
similar positions with various affiliated
companies of Pacific Life Insurance Company.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
---------------------- ----------------------- --------------------------------------------
<S> <C> <C>
Pacific Investment Investment Adviser
Management
Company
("PIMCO")
PIMCO Augustine Ariza, Jr. Vice President
PIMCO Michael R. Asay Senior Vice President
PIMCO George C. Allan Senior Vice President
PIMCO Tamara J. Arnold, CFA Senior Vice President
PIMCO Brian P. Baker Vice President (SINGAPORE)
PIMCO Leslie A. Barbi Executive Vice President
PIMCO Stephen B. Beaumont Vice President
PIMCO William R. Benz, CFA Managing Director
PIMCO Gregory A. Bishop Vice President
PIMCO Andrew Brick Senior Vice President
PIMCO John B. Brynjolfsson Senior Vice President
PIMCO Robert W. Burns Managing Director
PIMCO Sabrina C. Callin Vice President
PIMCO Marcia K. Clark Vice President
PIMCO Jerry L. Coleman Vice President
PIMCO Cyrille Conseil Vice President
PIMCO Douglas Cummings Vice President
PIMCO Wendy W. Cupps Senior Vice President
PIMCO Chris P. Dialynas Managing Director
PIMCO David J. Dorff Vice President
PIMCO Michael G. Dow Senior Vice President
PIMCO Anita Dunn Vice President
PIMCO Sandra Durn Vice President
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
---------------------- ----------------------- --------------------------------------------
<S> <C> <C>
PIMCO A. Benjamin Ehlert, CFA, Executive Vice President
CIC
PIMCO Mohamed A. El-Erian Managing Director
PIMCO Robert A. Ettl Executive Vice President
PIMCO Stephanie D. Evans Vice President
PIMCO Robert M. Fitzgerald Chief Financial Officer, Treasurer (PALP)
PIMCO Teri Frisch Vice President
PIMCO Steve A. Foulke Vice President
PIMCO Yuri P. Garbuzov Vice President
PIMCO William H. Gross, CFA Managing Director
PIMCO John L. Hague Managing Director
PIMCO Gordon C. Hally, CIC Executive Vice President
PIMCO Pasi M. Hamalainen Managing Director
PIMCO John P. Hardaway Senior Vice President
PIMCO Brent R. Harris, CFA Managing Director
PIMCO Joseph Hattesohl Vice President
PIMCO Raymond C. Hayes Vice President
PIMCO David C. Hinman Senior Vice President
PIMCO Lisa Hocson Vice President
PIMCO Douglas M. Hodge, CFA Executive Vice President
PIMCO Brent L. Holden, CFA Managing Director
PIMCO Dwight F. Holloway, Jr., Senior Vice President (LONDON)
CFA, CIC
PIMCO Mark T. Hudoff Senior Vice President
PIMCO Margaret E. Isberg Managing Director
PIMCO Thomas J. Kelleher Vice President
PIMCO James M. Keller Senior Vice President
PIMCO Raymond G. Kennedy, CFA Senior Vice President
PIMCO Mark R. Kiesel Vice President
PIMCO Sharon K. Kilmer Executive Vice President
PIMCO Steven Kirkbaumer Vice President
PIMCO John S. Loftus, CFA Managing Director
PIMCO David Lown Vice President
PIMCO Joseph McDevitt Executive Vice President
PIMCO Andre J. Mallegol Vice President
PIMCO Scott W. Martin Vice President
PIMCO Michael E. Martini Vice President
PIMCO Scott A. Mather Senior Vice President
PIMCO Benjamin L. Mayer Vice President
PIMCO Dean S. Meiling, CFA Managing Director
PIMCO Jonathan D. Moll Vice President
PIMCO Mark E. Metsch Vice President
PIMCO Kristen M. Monson Senior Vice President
PIMCO James F. Muzzy, CFA Managing Director
PIMCO Doris Nakamura Vice President
PIMCO Mark D. Nellemann Vice President
PIMCO Vinh T. Nguyen Controller (PALP)
PIMCO Douglas J. Ongaro Vice President
PIMCO Thomas J. Otterbein, CFA Senior Vice President
PIMCO Kumar N. Palghat Vice President
PIMCO Keith Perez Vice President
PIMCO Mohan V. Phansalkar Senior Vice President, Senior
Legal Counsel
PIMCO Elizabeth M. Philipp Vice President
PIMCO David J. Pittman Vice President
PIMCO William F. Podlich III Managing Director
PIMCO William C. Powers Managing Director
PIMCO Terry A. Randall Vice President
PIMCO Mark Romano Vice President
PIMCO Scott L. Roney, CFA Senior Vice President (JAPAN)
PIMCO Michael J. Rosborough Senior Vice President
PIMCO Cathy T. Rowe Vice President
PIMCO Seth R. Ruthen Vice President
PIMCO Jeffrey M. Sargent Vice President
PIMCO Ernest L. Schmider Managing Director, Secretary,
Chief Administrative and Legal Officer
PIMCO Leland T. Scholey, CFA Senior Vice President
PIMCO Stephen O. Schulist Vice President
PIMCO Iwona E. Scibisz Vice President
PIMCO Denise C. Seliga Vice President
PIMCO Rita J. Seymour Vice President
PIMCO Christopher Sullivan, CFA Vice President
PIMCO Kyle J. Theodore Vice President
PIMCO Lee Thomas Managing Director
PIMCO William S. Thompson, Chief Executive Officer and Managing
Jr. Director
PIMCO Ronaele K. Trinidad Vice President
PIMCO Benjamin L. Trosky, CFA Managing Director
PIMCO Richard E. Tyson Vice President
PIMCO Peter A. Van de Zilver Vice President
PIMCO Koichi Watanabe Vice President (JAPAN)
PIMCO Marilyn Wegener Vice President
PIMCO Richard M. Weil Assistant Secretary, General Counsel
PIMCO Paul C. Westhead Vice President, Managing Director,
Director of Corporate Services and General Counsel
PIMCO George H. Wood, CFA Executive Vice President
PIMCO Michael A. Yetter Senior Vice President
PIMCO David Young Vice President (LONDON)
PIMCO Changhong Zhu Vice President
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
------------------------- ----------------------- --------------------------------------------
<S> <C> <C>
Capital Guardian Trust Investment Adviser
Company
Capital Guardian Trust Timothy D. Amour Director, Capital Guardian Trust Company,
Company Capital Research and Management Company and
Capital Management Services, Inc.; Chairman
and Chief Executive Officer, Capital Research
Company.
Capital Guardian Trust Donnalisa Barnum Senior Vice President, Capital
Company Guardian Trust Company; Vice
President, Capital International
Limited and Capital International, Inc.
Capital Guardian Trust Andrew F. Barth Director, Capital Guardian Trust Company and
Company Capital Research and Management Company;
Director and Research Director, Capital
International Research, Inc.; President, Capital
Guardian Research Company; Formerly Director and
Executive Vice President, Capital Guardian
Research Company.
Capital Guardian Trust Michael D. Beckman Senior Vice President, Treasurer and Director,
Company Capital Guardian Trust Company; Director,
Capital Guardian Trust Company of Nevada;
Treasurer, Capital International Research, Inc.
and Capital Guardian Research Company; Director
and Treasurer, Capital Guardian (Canada), Inc.;
Formerly Chairman and Director, Capital
International Asia Pacific Management Company.
Capital Guardian Trust Michael A. Burik Senior Counsel, The Capital Group Companies,
Company Inc.; Senior Vice President, Capital Guardian
Trust Company.
Capital Guardian Trust Elizabeth A. Burns Senior Vice President, Capital Guardian
Company Trust Company
Capital Guardian Trust Larry P. Clemmensen Director of Capital Guardian Trust
Company Company, American Funds Distributors, Inc.;
Chairman of the Board, and Director of American
Funds Service Company; Director and President,
The Capital Group Companies, Inc. and Capital
Management Services, Inc.; Senior Vice
President and Director, Capital Research and
Management Company; Treasurer, Capital
Strategy Research, Inc.;
Capital Guardian Trust Kevin G. Clifford Director and President, American Funds
Company Distributors, Inc.; Director, Capital
Guardian Trust Company
Capital Guardian Trust Roberta A. Conroy Senior Vice President, Director and Counsel,
Company Capital Guardian Trust Company; Senior Vice
President and Secretary, Capital
International, Inc.; Assistant General
Counsel, The Capital Group Companies, Inc.,
Secretary, Capital Guardian International,
Inc.; Formerly, Secretary, Capital Management
Services, Inc.
Capital Guardian Trust John B. Emerson Senior Vice President, Capital Guardian Trust
Company Company; Director, Capital Guardian Trust
Company, a Nevada Corporation.
Capital Guardian Trust Michael R. Ericksen Senior Vice President, Capital Guardian
Company Trust Company; Senior Vice President and
Director, Capital International, Limited
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
------------------------- ----------------------- ----------------------------------------------
<S> <C> <C>
Capital Guardian Trust David I. Fisher Vice Chairman and Director, Capital
Company International, Inc., Capital International
Limited and Capital International K.K.;
Chairman and Director, Capital International
S. A. and Capital Guardian Trust Company;
Director and President, Capital International
Limited (Bermuda); Director, The Capital Group
Companies, Inc., Capital International
Research, Inc., Capital Group Research, Inc.
and Capital Research and Management Company.
Capital Guardian Trust Richard N. Havas Senior Vice President, Capital Guardian Trust
Company, Capital International, Inc. and
Capital International Limited; Director and
Senior Vice President, Capital International
Research, Inc.; Director and Senior Vice
President Capital Guardian (Canada), Inc.
Capital Guardian Trust Frederick M. Hughes, Jr. Senior Vice President, Capital
Company Guardian Trust Company
Capital Guardian Trust William H. Hurt Senior Vice President and Director, Capital
Company Guardian Trust Company; Chairman and Director,
Capital Guardian Trust Company, a Nevada
Corporation and Capital Strategy Research,
Inc.; Formerly, Director, The Capital Group
Companies, Inc.
Capital Guardian Trust Peter C. Kelly Senior Vice President, Capital Guardian Trust
Company Company; Assistant General Counsel, The
Capital Group Companies, Inc.; Director and
Senior Vice President, Capital International,
Inc.
Capital Guardian Trust Robert G. Kirby Chairman Emeritus, Capital Guardian Trust
Company; Senior Partner, The Capital Group
Companies, Inc.
Capital Guardian Trust Nancy J. Kyle Senior Vice President and Director,
Company Capital Guardian Trust Company; President, and
Director, Capital Guardian (Canada), Inc.
Capital Guardian Trust Karin L. Larson Director, The Capital Group Companies, Inc.,
Company Capital Group Research, Inc., Capital Guardian
Trust Company, Director and Chairman, Capital
Guardian Research Company and Capital
International Research, Inc., Formerly,
Director and Senior Vice President, Capital
Guardian Research Company.
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
------------------------- ----------------------- --------------------------------------------
<S> <C> <C>
Capital Guardian Trust James R. Mulally Senior Vice President and Director,
Company Capital Guardian Trust Company; Senior
Vice President, Capital International
Limited; Vice President, Capital Research
Company; Formerly, Director, Capital Guardian
Research Company
Capital Guardian Trust Shelby Notkin Senior Vice President, Capital
Company Guardian Trust Company; Director, Capital
Guardian Trust Company, a Nevada Corporation
Capital Guardian Trust Mary M. O'Hern Senior Vice President, Capital
Company Guardian Trust Company and Capital
International Limited; Vice President,
Capital International, Inc.
Capital Guardian Trust Jeffrey C. Paster Senior Vice President, Capital Guardian
Company Trust Company
Capital Guardian Trust Robert V. Pennington Senior Vice President, Capital Guardian
Company Trust Company; President and Director, Capital
Guardian Trust Company, a Nevada Corporation
Capital Guardian Trust Jason M. Pilalas Director, Capital Guardian Trust Company; Senior
Company Vice President and Director, Capital
International Research, Inc.; Formerly,
Director and Senior Vice President, Capital
Guardian Research Company.
Capital Guardian Trust Robert Ronus President and Director, Capital Guardian Trust
Company Company; Chairman and Director, Capital
Guardian (Canada), Inc., Director, Capital
International, Inc. and Capital Guardian
Research Company; Senior Vice President,
Capital International, Inc.; Capital
International Limited and Capital
International S.A.; Formerly, Chairman,
Capital Guardian International Research
Company and Director, Capital International,
Inc.
Capital Guardian Trust James F. Rothenberg Director, American Funds Distributors, Inc.,
Company American Funds Service Company, The Capital
Group Companies, Inc., Capital Group Research,
Inc., Capital Guardian Trust Company and
Capital Management Services, Inc.; Director
and President, Capital Research and
Management, Inc.; Formerly, Director of
Capital Guardian Trust Company, a Nevada
Corporation, and Capital Research Company.
Capital Guardian Trust Theodore R. Samuels Senior Vice President and Director, Capital
Company Guardian Trust Company; Director, Capital
International Research, Inc.; Formerly,
Director, Capital Guardian Research Company
Capital Guardian Trust Lionel A. Sauvage Senior Vice President, Capital Guardian
Company Trust Company; Vice President,
Capital International Research, Inc.;
Formerly, Director, Capital Guardian
Research Company
Capital Guardian Trust John H. Seiter Executive Vice President and Director,
Company Capital Guardian Trust Company; Senior Vice
President, Capital Group International, Inc.;
Vice President, The Capital Group Companies,
Inc.
</TABLE>
II-10
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
------------------------- ----------------------- --------------------------------------------
<S> <C> <C>
Capital Guardian Trust Eugene P. Stein Executive Vice President and Director,
Company Capital Guardian Trust Company; Formerly,
Director, Capital Guardian Research
Company
Capital Guardian Trust Karen Skinner-Twoney Vice President, Capital Guardian Trust
Company Company; Director, Vice President and
Treasurer, Capital Guardian Trust Company, a
Nevada Corporation.
Capital Guardian Trust Philip A. Swan Senior Vice President, Capital Guardian
Company Trust Company
Capital Guardian Trust Shaw B. Wagener Director, Capital Guardian Trust Company,
Company Capital International Asia Pacific Management
Company S.A., Capital Research and Management
Company and Capital International Management
Company S.A.; President and Director, Capital
International, Inc.; Senior Vice President,
Capital Group International, Inc.
Capital Guardian Trust Eugene M. Waldron Senior Vice President, Capital Guardian Trust
Company Company
Capital Guardian Trust Joanne Weckbacher Senior Vice President, Capital Guardian Trust
Company Company.
</TABLE>
II-11
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
------------------------- ----------------------- --------------------------------------------
<S> <C> <C>
J.P. Morgan Investment Adviser
Investment
Management Inc.
J.P. Morgan Keith M. Schappert President, Chairman, Director and Managing
Investment Director, J.P. Morgan Investment Management
Management Inc. Inc.; Managing Director, Morgan Guaranty
Trust Company of New York
J.P. Morgan Isabel H. Sloane Director and Managing Director, J.P. Morgan
Investment Investment Management Inc.; Managing Director,
Management Inc. Morgan Guaranty Trust Company of New York
J.P. Morgan Hendrik Van Riel Director and Managing Director,
Investment J.P. Morgan Investment Management Inc.;
Management Inc. Managing Director, Morgan Guaranty
Trust Company of New York
J.P. Morgan Kenneth W. Anderson Director and Managing Director, J.P. Morgan
Investment Investment Management Inc.; Managing
Management Inc. Director, Morgan Guaranty Trust Company
of New York
J.P. Morgan John W. Schmidlin Director, Managing Director, J.P. Morgan
Investment Investment Management Inc.; Managing Director,
Management Inc. Morgan Guaranty Trust Company of New York
J.P. Morgan Anthony Della Pietra Chief Legal Officer and Managing Director,
Investment J.P. Morgan Investment Management Inc.;
Management Inc. Managing Director, Morgan Guaranty Trust
Company of New York
J.P. Morgan Thomas J. Smith Chief Compliance Officer, Vice President;
Investment Vice President, Morgan Guaranty Trust
Management Inc. Company of New York
J.P. Morgan Ronald R. Dewhurst Director and Managing Director, J.P. Morgan
Investment Investment Management Inc.; Managing Director,
Management Inc. Morgan Guaranty Trust Company of New York
J.P. Morgan Gerard W. Lillis Director and Managing Director, J.P. Morgan
Investment Investment Management Inc.; Managing Director,
Management Inc. Morgan Guaranty Trust Company of New York
</TABLE>
II-12
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
------------------------- ----------------------- --------------------------------------------
<S> <C> <C>
Janus Capital Investment Adviser
Corporation
Janus Capital Thomas H. Bailey President, Director, Chairman of the
Corporation Board and Chief Executive Officer
Janus Capital James P. Craig, III Director, Vice Chairman and Chief Investment
Corporation Officer
Janus Capital Thomas A. Early Vice President, General Counsel and
Corporation Secretary
Janus Capital Michael E. Herman Director
Corporation
Janus Capital Thomas A. McDonnell Director
Corporation
Janus Capital Landon H. Rowland Director
Corporation
Janus Capital Michael Stolper Director
Corporation
Janus Capital Mark B. Whiston Vice President and Chief Marketing
Corporation Officer
Janus Capital Marjorie G. Hurd Vice President and Chief Operations Officer
Corporation
Janus Capital Steven R. Goodbarn Treasurer and Chief Financial
Corporation Officer, 1992 to present, Vice
President of Finance, June 1995
to present
</TABLE>
II-13
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
----------------------- ---------------------- ------------------------------
<S> <C> <C>
Morgan Stanley Asset Investment Adviser
Management
Morgan Stanley Asset Barton M. Biggs Director, Chairman and
Management Managing Director
Morgan Stanley Asset Peter Dominic Managing Director and Member
Management Caldecott of Executive Committee
Morgan Stanley Asset Marna C. Whittington Chief Operating Officer,
Management Managing Director, and Member
of Executive Committee
Morgan Stanley Asset Donald P. Ryan Principal and Compliance Officer
Management
Morgan Stanley Asset Harold J. Schaaff, Jr. Managing Director, General Counsel
Management and Secretary
Morgan Stanley Asset Alexander C. Frank Treasurer
Management
Morgan Stanley Asset Richard B. Worley President, Director, Portfolio
Management Manager and Member of Executive
Committee
Morgan Stanley Asset Thomas L. Bennett Member of Executive Committee
Management and Portfolio Manager
Morgan Stanley Asset Alan E. Goldberg Member of Executive Committee
Management
</TABLE>
II-14
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
------------------------- ----------------------- ---------------------------------------------
<S> <C> <C>
Goldman Sachs Asset Investment Adviser
Management
Goldman Sachs Asset Robert J. Hurst Vice Chairman, Goldman, Sachs & Co.
Management
Goldman Sachs Asset Henry M. Paulson, Jr. Chief Executive Officer and Chairman,
Management Goldman, Sachs & Co.
Goldman Sachs Asset John A. Thain President and Co-Chief Operating Officer,
Management Goldman, Sachs & Co.
Goldman Sachs Asset John L. Thornton President and Co-Chief Operating Officer,
Management Goldman, Sachs & Co.
</TABLE>
II-15
<PAGE>
<TABLE>
<CAPTION>
Adviser and Governing
Board of Directors Name of Individual Business and Other Connections
-------------------------------- ------------------------------- ---------------------------------------------------------
<S> <C> <C>
Alliance Capital Management L.P. Investment Adviser
Alliance Capital Management L.P. Dave H. Williams Director; Chairman of the Board, Alliance Capital
Management Corporation; Director of The Equitable
Companies Incorporated; Director of The Equitable Life
Assurance Society of the United States; Senior Vice
President of AXA (husband of Reba W. Williams)
Alliance Capital Management L.P. Michael Hegarty Director; Vice Chairman and Chief Operating Officer;
The Equitable Companies Incorporated; President, Chief
Operating Officer and Director, The Equitable Life
Assurance Society of the U.S.
Alliance Capital Management L.P. Benjamin D. Holloway Director; Consultant to the Continental Companies;
Director Emeritus of the Duke University Management
Corporation, Chairman of the Touro National Heritage
Trust, a Regent of The Cathedral of St. John the Divine
and a Trustee of Duke University (Emeritus) and the
American Academy in Rome
Alliance Capital Management L.P. Denis Duverne Director; Senior Vice President - International Life,
AXA; Director of various subsidiaries of the AXA Group;
Director of Donaldson Lufkin & Jenrette and The
Equitable Life Assurance Society of the United States
Alliance Capital Management L.P. Herve Hatt Director; Senior Vice President, AXA
Alliance Capital Management L.P. Frank Savage Director; Chairman of Alliance Capital Management
International, a division of Alliance Capital Management
LP; Director of Alliance Capital Finance Group
Incorporated, a subsidiary of the Partnership; Senior
Vice President of The Equitable Life Assurance Society
of the United States
Alliance Capital Management L.P. Luis J. Bastida Director; Chief Financial Officer and Member of the
Executive Committee of Banco Bilbao Vizcaya, S.A.
Alliance Capital Management L.P. Henri de la Croix de la Castries Director; Senior Executive Vice President - Financial
Services and Life Insurance Activities of AXA
Alliance Capital Management L.P. Kevin C. Dolan Director; Chief Executive Officer, AXA Investment
Managers Paris
Alliance Capital Management L.P. Reba W. Williams Director; Director of Special Projects at Alliance
Capital Management Corporation (wife of Dave H. Williams)
Alliance Capital Management L.P. Peter D. Noris Director; Executive Vice President and Chief Investment
Officer of The Equitable Companies Incorporated,
Executive Vice President and Chief Investment Officer of
The Equitable Life Assurance Society of the U.S.
Alliance Capital Management L.P. Robert B. Zoellick Director; President and CEO of the Center for Strategic
and International Studies, an independent non-profit
public policy institute; Director of Janus Intercable,
Said Holdings, the Advisory Council of Enron Corp., and
several non-profit entities, including the Council on
Foreign Relations, the German Marshall Fund, the Eurasia
Foundation, the European Institute, the American Council
on Germany, the National Bureau of Asian Research and the
Overseas Development Council
Alliance Capital Management L.P. Donald H. Brydon Director; Chairman and Chief Executive Officer, AXA
Investment Managers S.A.
Alliance Capital Management L.P. Edward D. Miller Director; President, Chief Executive Officer and Director
of The Equitable Companies Incorporated; Chairman of the
Board and Chief Executive Officer of The Equitable Life
Assurance Society of the United States; Senior Executive
Vice President, AXA
Alliance Capital Management L.P. Stanley B. Tulin Director; Executive Vice President and Chief Financial
Officer, The Equitable Companies Incorporated; Vice
Chairman and Chief Financial Officer, The Equitable Life
Assurance Society of the U.S.; Director of Donaldson,
Lufkin & Jenrette and the Jewish Theological Seminary;
Fellow of the Society of Actuaries, member and Treasurer
of the American Academy of Actuaries
Alliance Capital Management L.P. John D. Carifa Director, President and Chief Operating Officer
Alliance Capital Management L.P. Bruce W. Calvert Director and Chief Executive Officer
Alliance Capital Management L.P. Alfred Harrison Director and Vice Chairman
Alliance Capital Management L.P. David R. Brewer, Jr. Senior Vice President and General Counsel
Alliance Capital Management L.P. Robert H. Joseph, Jr. Senior Vice President and Chief Financial Officer
Alliance Capital Management L.P. Mark R. Manley Senior Vice President, Counsel, Compliance Officer and
Assistant Secretary
</TABLE>
Salomon Brothers Asset Management Inc. ("SABAM")
SABAM, an indirect, wholly-owned subsidiary of Citigroup, is an investment
adviser registered under the Investment Advisers Act of 1940 (the "Advisers
Act") and renders investment advice to a wide variety of individual,
institutional and investment advisory clients.
The list required by this Item 26 of officers and directors of SABAM, together
with information as to any other business, profession, vocation or employment of
a substantial nature engaged in by such officers and directors during the past
two years, is hereby incorporated by reference to Schedules A and D of Form ADV
filed by SABAM pursuant to the Advisers Act (SEC File No. 801-32046).
II-16
<PAGE>
<TABLE>
<CAPTION>
Adviser and Governing
Board of Directors Name of Individual Business and Other Connections
----------------------- -------------------------- ------------------------------------------------------------------------------
<S> <C> <C>
Lazard Eileen D. Alexanderson Managing Director
Lazard Charles L. Carroll Managing Director
Lazard Norman Eig General Member; Vice Chairman of Lazard Freres & Co LLC; Director and Co-Chief
Executive of Lazard Asset Management Limited; Director of Lazard Asset
Management Holdings, Limited; Director of Lazard Investment Funds Limited;
Director of Lazard Asset Management (CI) Holdings, Ltd.; Managing Director of
Lazard Asset Management (Deutschland); Member of the Supervisory Board of
Lazard Strategic Coordination Company
Lazard Herbert W. Gullquist General Member; Vice Chairman of Lazard Freres & Co LLC; Director and Co-Chief
Executive of Lazard Asset Management Limited; Director of Lazard Far East
Investors (Holdings) Limited; Director of Lazard Asset Management Holdings
Limited; Managing Director of Lazard Asset Management (Deutschland); Member of
the Supervisory Board of Lazard Strategic Coordination company
Lazard Melvin L. Heineman General Member
Lazard Gerald B. Mazzari Managing Director
Lazard Robert P. Morgenthau Managing Director; Director of Lazard Investment Funds Limited; Director of
Lazard Global Equity Fund plc; Director of Lazard Global Liquidity Fund plc;
Director of Lazard Strategic Yield Fund plc; Director of Lazard Global Bond
Fund plc; Director of Global Funds Management plc; Director of Bitteroot
Enterprises
Lazard John R. Reinsberg Managing Director; Director of Lazard Asset Management Pacific Co.; Member of
the Supervisory Board of Lazard Strategic Coordination Company
Lazard Michael S. Rome Managing Director
Lazard Michael P. Triguboff Managing Director; Managing Director and Director of Lazard Japan Asset
Management Pacific Co.; Director of Lazard Japan Asset Management (K.K.)
Lazard Kenneth C. Weiss Managing Director
Lazard Alexander E. Zagoreos Managing Director; Director of Lazard Asset Management; Director of Flemings
Continental European Investment Trust plc, Director of Gartmore Emerging
Pacific Investments plc; Director of Jupiter International Green Investment
Trust plc; Director of Taiwan Opportunities Fund Limited; Director of The
Egypt Trust; Director of The Greek Progress Fund; Director of Lazard Emerging
World Fund; Director of The World Trust Fund; Director of Lazard Select Fund;
Director of Ermitage Selz Fund; Director of New Zealand Investment Trust plc;
Director of Latin American Investment Trust plc; Director of Taiwan American
Fund Limited
Mercury Jeffrey M. Peek President of Mercury; President of Merrill Lynch Asset Management, L.P.
("MLAM"); President and Director of Princeton Services; Executive Vice
President of ML & Co.; Managing Director and Co-Head of the Investment Banking
Division of Merrill Lynch in 1997
Mercury Terry K. Glenn Executive Vice President of Mercury; Executive Vice President of MLAM;
Executive Vice President and Director of Princeton Services; President and
Director of Princeton Funds Distributor, Inc.; Director of FDS; President of
Princeton Administrators, L.P.
Mercury Gregory A. Bundy Chief Operating Officer and Managing Director of Mercury; Chief Operating
Officer and Managing Director of MLAM; Chief Operating Officer and Managing
Director of Princeton Services; Co-CEO of Merrill Lynch Australia from 1997 to
1999
Mercury Donald C. Burke Senior Vice President and Treasurer of Mercury; Senior Vice President and
Treasurer of MLAM since 1999; Senior Vice President and Treasurer of Princeton
Services; Vice President of Princeton Funds Distributor, Inc.; First Vice
President of MLAM from 1997 to 1999; Vice President of MLAM from 1990 to 1997;
Director of Taxation of MLAM since 1990
Mercury Michael G. Clark Senior Vice President of Mercury; Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Director and Treasurer of Princeton Funds
Distributor, Inc.
Mercury Robert C. Doll Senior Vice President of Mercury; Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Chief Investment Officer of Oppenheimer
Funds, Inc. in 1999 and Executive Vice President thereof from 1991 to 1999
Mercury Linda L. Federici Senior Vice President of Mercury; Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Mercury Vincent R. Giordano Senior Vice President of Mercury; Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Mercury Michael J. Hennewinkel Senior Vice President, Secretary and General Counsel of Mercury; Senior Vice
President, Secretary and General Counsel of MLAM; Senior Vice President of
Princeton Services
Mercury Philip L. Kirstein Senior Vice President of Mercury; Senior Vice President of MLAM; Senior Vice
President, General Counsel, Director and Secretary of Princeton Services
Mercury Debra W. Landsman-Yaros Senior Vice President of Mercury; Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Vice President of Princeton Funds
Distributor, Inc.
Mercury Joseph T. Monagle, Jr. Senior Vice President of Mercury; Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Mercury Brian A. Murdock Senior Vice President of Mercury; Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Director of Princeton Funds Distributor, Inc.
Mercury Gregory D. Upah Senior Vice President of Mercury; Senior Vice President of MLAM; Senior Vice
President of Princeton Services
AIM Robert Grahm Director and Senior Vice President, Fund Management Company; Director and
President, A I M Advisors, Inc.; Director and Senior Vice President, A I M
Fund Services, Inc.; Director and Senior Vice President, A I M Distributors,
Inc.; Director and Senior Vice President, A I M Capital Management, Inc.;
Director, President and Chief Financial Officer, A I M Management Group Inc.;
Director and Chief Executive Officer, Managed Products Group, AMVESCAP, PLC.
AIM Gary T. Crum Director and President, A I M Capital Management, Inc.; Director and Executive
Vice President, A I M Management Group Inc.; Director and Senior Vice
President, A I M Advisors, Inc.; and Director, A I M Distributors, Inc. and
AMVESCAP PLC.
AIM Melville B. Cox Vice President and Chief Compliance Officer, A I M Advisors, Inc., A I M
Capital Management, Inc., A I M Distributors, Inc., A I M Fund Services, Inc.
and Fund Management Company.
AIM Dana R. Sutton Vice President and Fund Controller, A I M Advisors, Inc.; and Assistant Vice
President and Assistant Treasurer, Fund Management Company.
AIM Edgar M. Larsen Vice President, A I M Capital Management, Inc.
AIM Dawn M. Hawley Vice President, A I M Fund Services, Inc.; Director and Senior Vice President,
A I M Advisors, Inc.; Vice President and Treasurer, A I M Distributors, Inc.;
Vice President, Treasurer, Fund Management Company; Vice President, A I M
Capital Management, Inc.; Senior Vice President, Chief Financial Officer and
Treasurer, A I M Management Group Inc.
AIM Robert G. Alley Assistant General Counsel and Assistant Secretary, A I M Fund Services, Inc.
AIM Nancy L. Martin Assistant General Counsel and Assistant Secretary, A I M Fund Services, Inc.;
Vice President, Assistant General Counsel, and Assistant Secretary, A I M
Advisors, Inc.; Assistant General Counsel, A I M Distributors, Inc.; Assistant
General Counsel, Fund Management Company; Vice President, A I M Capital
Management, Inc.; Assistant General Counsel and Assistant Secretary, A I M
Management Group Inc.
AIM Stuart W. Coco Senior Vice President, A I M Capital Management, Inc.; Vice President, A I M
Advisors, Inc.
AIM Karen D. Kelley Vice President, A I M Advisors, Inc.; Senior Vice President, A I M Capital
Management, Inc.
AIM Jonathan C. Schoolar Senior Vice President, A I M Capital Management, Inc.; Vice President, A I M
Advisors, Inc.
AIM Ronald D. Stein Vice President, A I M Advisors, Inc.; Senior Vice President, A I M Capital
Management, Inc.
MFS Jeffrey L. Shames Director, Chairman and Chief Executive Officer
MFS Arnold D. Scott Director, Senior Executive Vice President
MFS John W. Ballen Director, President and Chief Investment Officer
MFS Kevin R. Parke Director, Executive Vice President, Chief Equity Officer
MFS Thomas J. Cashman, Jr. Director, Executive Vice President
MFS Joseph W. Dello Russo Director, Executive Vice President, Chief Financial Officer and Chief
Administrative Officer
MFS James Prieur Director; President and Director, Sun Life Assurance Company of Canada;
Officer and/or Director of various subsidiaries and affiliates of Sun Life.
MFS William W. Scott Director, Executive Vice President
MFS Donald A. Stewart Director; Chairman, Sun Life Assurance Company of Canada; Officer and/or
Director of various subsidiaries and affiliates of Sun Life.
MFS William W. Stinson Director; Director, Sun Life Assurance Company of Canada; Director, United
Dominion Industries Limited, Charlotte, NC; Director, PanCanadian Petroleum
Limited, Calgary, Alberta, Canada; Director, LWT Services, Inc., Calgary,
Alberta, Canada; Director, Western Star Trucks, Inc., Kelowna, British
Columbia, Canada; Director, Westshore Terminals Income Fund, Vancouver,
British Columbia, Canada; Director (until 4/99), Canadian Pacific ltd.,
Calgary, Alberta, Canada
MFS Stephen E. Cavan Senior Vice President, General Counsel and Secretary
MFS Robert T. Burns Senior Vice President, Associate General Counsel and an Assistant Secretary
MFS Thomas B. Hastings Vice President and Treasurer
INVESCO Mark Hurst Williamson President, Chief Executive Officer & Chairman of the Board
INVESCO Raymond Roy Cunningham Senior Vice President-National Sales Manager & Director
INVESCO William Joseph Galvin, Jr. Senior Vice President & Assistant Secretary & Director
INVESCO Mark David Greenberg Senior Vice President
INVESCO Brian Bruce Hayward Senior Vice President
INVESCO Ronald Lyn Grooms Senior Vice President, Treasurer & Director
INVESCO Richard William Healey Senior Vice President-Marketing & Director
INVESCO William Ralph Keithler Senior Vice President
INVESCO Trent Edward May Senior Vice President
INVESCO Charles Peter Mayer Senior Vice President
INVESCO Timothy John Miller Senior Vice President & Director
INVESCO Donovan Jerald Senior Vice President
( Jerry ) Paul
INVESCO Glen Alan Payne Senior Vice President, Secretary & General Counsel
INVESCO John Richard Schroer II Senior Vice President
INVESCO Marie Ellen Aro Vice President-Retirement and Third Party Marketing
INVESCO Jeffrey R. Botwinick Vice President, Regional Wholesaler
INVESCO Michael K. Brugman Vice President, Senior Regional Wholesaler
INVESCO Ingeborg Sieg Cosby Vice President
INVESCO Stacie L. Cowell Vice President
INVESCO Rhonda Dixon-Gunter Vice President, Broker/Dealer Services
INVESCO Delta Lynn Donohue Vice President-Investment Operations
INVESCO Harvey T. Fladeland Vice President, Senior Regional Wholesaler
INVESCO Linda Jean Gieger Vice President
INVESCO Richard Ray Hinderlie Vice President
INVESCO Stuart Abbitt Holland Vice President, Senior Regional Wholesaler
INVESCO Thomas Michael Hurley Vice President-Product Development & Information Management
INVESCO Patricia Frances Johnston Vice President
INVESCO Campbell Crawford Judge Vice President, Senior Regional Wholesaler
INVESCO Thomas Austin Kolbe Vice President, Manager of Institutional Sales
INVESCO Peter Middleton Lovell Vice President
INVESCO James Frank Lummanick Vice President and Assistant General Counsel
INVESCO Thomas Andrew Mantone, Jr. Vice President
INVESCO George Adalbert Matyas Vice President, Senior Regional Wholesaler
INVESCO Corey McCabe McClintock Vice President, Senior Regional Wholesaler
INVESCO Douglas J. McEldowney Vice President
INVESCO Frederick R. (Fritz) Meyer Vice President
INVESCO Stephen Alfred Moran Vice President - Brand Management
INVESCO Jeffrey Glenn Morris Vice President
INVESCO Laura Mulvany Parsons Vice President
INVESCO Jon Brian Pauley Vice President-Electronic Commerce
INVESCO Thomas Edward Pellowe Vice President, National Accounts Manager
INVESCO Dean Crawford Phillips Vice President, Senior Regional Wholesaler
INVESCO Pamela Jean Piro Vice President & Assistant Treasurer
INVESCO Sean F. Reardon Vice President, Regional Wholesaler
INVESCO Dale A. Reinhardt Vice President and Controller
INVESCO Anthony Robert Rogers Vice President, Eastern Regional Sales Manager
INVESCO Gary J. Rulh Vice President
INVESCO Thomas R. Samuelson Vice President
INVESCO James Boyd Sandidge Vice President, Western Regional Sales Manager
INVESCO Thomas Hurley Scanlan Vice President, Regional Wholesaler
INVESCO Harvey T. Schwartz Vice President, Senior Regional Wholesaler
INVESCO John Stoddart Segner Vice President
INVESCO Reagan Andrew Shopp Vice President, Senior Regional Wholesaler
INVESCO Terri Berg Smith Vice President
INVESCO Tane' There'se Taylor Vice President & Assistant General Counsel
INVESCO Thomas Robert Wald Vice President
INVESCO Alan Ira Watson Vice President
INVESCO Judy Paulette Wiese Vice President & Assistant Secretary
INVESCO Vaughn Alexander Greenlees Assistant Vice President, Regional Wholesaler
INVESCO Matthew A. Kunze Assistant Vice President, Regional Wholesaler
INVESCO Christopher Thomas Lawson Assistant Vice President, Regional Wholesaler
INVESCO Michael David Legoski Assistant Vice President-Internal Sales Development
INVESCO William Stewart Mechling Assistant Vice President, Regional Wholesaler
INVESCO Donald Ray Paddack Assistant Vice President
INVESCO Craig Jeffrey St. Thomas Assistant Vice President, Regional Vice President
INVESCO Kent Thomas Schmeckpeper Assistant Vice President-Account Relationship Manager
INVESCO C. Vince Sellers Assistant Vice President, Regional Wholesaler
INVESCO Jeraldine Elizabeth Kraus Assistant Secretary
</TABLE>
II-17
<PAGE>
Item 27. Principal Underwriters
----------------------
(a) Pacific Select Distributors, Inc. ("PSD") (formerly Pacific Mutual
Distributors, Inc.) member, NASD & SIPC serves as Distributor of
Shares of Pacific Select Fund. PSD is a subsidiary of Pacific
Life.
(b)
<TABLE>
<CAPTION>
Name and Principal/10/ Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
------------------------- ------------------------- ---------------------
<S> <C> <C>
Audrey L. Milfs Vice President and Secretary
Secretary
Edward R. Byrd Director, Vice President None
and Chief Financial Officer
Gerald W. Robinson Director, Chairman and CEO None
John L. Dixon Director and President None
Thomas H. Oliver Director None
John W. Poff Vice President None
Patricia A. Thompson Assistant Vice President None
Jane M. Guon Assistant Secretary None
Adrian S. Griggs Vice President None
Kathleen Hunter Vice President None
Alyce E. Peterson Assistant Vice President None
Brian D. Klemens Vice President and Treasurer Vice President and
Treasurer
</TABLE>
Item 28. Location of Accounts and Records
--------------------------------
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940
and the rules under that section will be maintained by Pacific Life at
700 Newport Center Drive, Newport Beach, California 92660.
Item 29. Management Services
-------------------
Not applicable
Item 30. Undertakings
------------
The registrant hereby undertakes:
Not applicable
-----------------
/10/ Principal business address for all individuals listed is 700 Newport
Center Drive, Newport Beach, California 92660
II-18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement under Rule
485(a) under the Securities Act and has duly caused this Post-Effective
Amendment No. 31 to the Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Newport Beach, and State
of California, on this 18th day of October, 2000.
PACIFIC SELECT FUND
By:
__________________________________
Glenn S. Schafer*
President
*By: /s/ DIANE N. LEDGER
_______________________________
Diane N. Ledger
as attorney-in-fact
II-19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 31 to the Registration Statement has been signed below
by the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Chairman and Trustee , 2000
------------------------------------ (Chief Executive Officer) -----------
Thomas C. Sutton*
Vice President and Treasurer , 2000
------------------------------------ (Vice President and Treasurer) -----------
Brian D. Klemens*
President , 2000
------------------------------------ (President) -----------
Glenn S. Schafer*
Trustee , 2000
------------------------------------ ----------
Richard L. Nelson*
Trustee , 2000
------------------------------------ ----------
Lyman W. Porter*
Trustee , 2000
------------------------------------ ----------
Alan Richards*
Trustee , 2000
------------------------------------ ----------
Lucie H. Moore*
* By: /s/ DIANE N. LEDGER October 18, 2000
------------------------------------
Diane N. Ledger
as attorney-in-fact
</TABLE>
PART C
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
above constitutes and appoints David R. Carmichael, Sharon A. Cheever, Diane N.
Ledger, Jeffrey S. Puretz, Jane A. Kanter, Keith T. Robinson, and Robin Yonis
Sandlaufer his or her true and lawful attorney-in-fact and agent, each with full
power of substitution and resubstitution for him or her in his or her name,
place and stead, in any and all Registration Statements applicable to Pacific
Select Fund and any amendments or supplements thereto, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorney-in-fact and agent, or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue thereof.
II-20
