SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. __13__
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. ___14__
(Check appropriate box or boxes)
USLICO Series Fund
(Exact Name of Registrant as Specified in Charter)
20 Washington Avenue South, Route 1212, Minneapolis, Minnesota 55401
(Address of Principal Executive Offices) (Zip Code)
Registrants' Telephone Number: (612) 372-5782
Robert B. Saginaw, Esquire
20 Washington Avenue South
Minneapolis, MN 55401
(Name and Address of Agent for Service)
It is proposed that this filing will become effective
(check appropriate box)
_____ Immediately upon filing pursuant to paragraph (b) of Rule 485
__X__ On April 30, 1999 pursuant to paragraph (b) of Rule 485
_____ 60 days after filing pursuant to paragraph (a) of Rule 485
_____ on April 30, 1999 pursuant to paragraph (a) of Rule 485
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USLICO Series Fund
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Form N-1A Item No. Caption in Part A Prospectus
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Item 1. Front and Back Cover Pages Front and Back Cover Pages
Item 2. Risk/Return Summary; Investments, Risk/Return Summary; Investment
Risks and Performance Objectives, Principal Investment
Strategies, and Related Risks
Item 3 Risk/Return Summary; Fee Table Non-Applicable
Item 4 Investment Objectives, Principal Investment Objectives, Principal
Investment Strategies, and Investment Strategies, and
Related Risks Related Risks; General Portfolio
Policies
Item 5 Management's Discussion of Fund Risk/Return Summary, Investment
Performance Objectives, Principal Investment
Strategies, and Related Risks;
Performance Information For Last
10 Years
Item 6 Management, Organization and Management of the Portfolios
Capital Structure
Item 7 Shareholder Information Pricing Fund Shares
Item 8 Distribution Arrangements Distribution and Taxes
Item 9 Financial Highlights Information Financial Highlights
This cross reference sheet relates to the Statements of
Additional Information for:
Form N-1A Item No. Caption in Part A Prospectus
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Item 10 Cover Page and Table of Contents Cover Page and Table of Contents
Item 11 Fund History General Information
Item 12 Description of the Fund and Its General Information; General Portfolio
Investments and Risks Policies; Description of Securities and
Investment Techniques
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Item 13 Management of the Fund Management of the Fund
Item 14 Control Persons and Principal Control Persons and Principal
Holders of Securities Holders of Securities
Item 15 Investment Advisory and Other The Investment Adviser and
Services Sub-Adviser; Distribution of Fund Shares;
Custodian; Administrative Services
Agreement
Item 16 Brokerage Allocation and Other Portfolio Transactions and
Practices Brokerage
Item 17 Capital Stock and Other Securities
Item 18 Purchase, Redemption and Pricing Suspension of Redemptions; Net Asset Value
of Shares
Item 19 Taxation of the Fund Taxation
Item 20 Underwriters Distribution of Fund Shares
Item 21 Calculation of Performance Data Calculation of Performance Data
Item 22 Financial Statements Financial Statements
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Part C
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C to this Post-Effective Amendment No. 13.
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USLICO SERIES FUND
PROSPECTUS
April 30, 1999
The four Portfolios of the Fund are as follows:
The Stock Portfolio
The Money Market Portfolio
The Bond Portfolio
The Asset Allocation Portfolio
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is April 30, 1999
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TABLE OF CONTENTS
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Types Of Investors For Whom The Fund Is Intended................................. 2
The Stock Portfolio.............................................................. 3
Risk/Return Summary.......................................................... 3
The Money Market Portfolio....................................................... 4
Risk/Return Summary.......................................................... 4
The Bond Portfolio............................................................... 4
Risk/Return Summary.......................................................... 4
The Asset Allocation Portfolio................................................... 5
Risk/Return Summary.......................................................... 5
Performance Information For Last 10 Years........................................ 6
Investment Objectives, Principal Investment Strategies, and Related Risks of the
Stock Portfolio.............................................................. 11
Investment Objectives, Principal Investment Strategies, and Related Risks of the
Money Market Portfolio....................................................... 12
Investment Objectives, Principal Investment Strategies, and Related Risks of the
Bond Portfolio............................................................... 14
Investment Objectives, Principal Investment Strategies, and Related Risks of the
Asset Allocation Portfolio................................................... 15
General Portfolio Policies....................................................... 18
Risk Factors and Special Considerations.......................................... 20
Management of the Portfolios..................................................... 21
Pricing of Fund Shares........................................................... 23
Distribution and Taxes........................................................... 23
Financial Highlights............................................................. 23
Glossary of Investment Terms..................................................... 28
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To Obtain More Information Please Refer To The Back Cover.
TYPES OF INVESTORS FOR WHOM THE FUND IS INTENDED
Shares of the USLICO SERIES FUND (the "Fund") are sold only to insurance
companies and are used to fund variable life insurance policies ("Policies").
The Policies were offered by ReliaStar United Services Life Insurance Company
(now merged into ReliaStar Life Insurance Company) and ReliaStar Life Insurance
Company of New York (the "insurance companies") and sold with a prospectus
describing the Policies and with a prospectus of the Fund. The insurance
companies are affiliated with the Investment Adviser of the Fund. The Fund has
four different Portfolios, each with different investment objectives and
strategies. The Portfolios are the (1) Stock Portfolio; (2) Money Market
Portfolio; (3) Bond Portfolio; and (4) Asset Allocation Portfolio. Because
Policy owners may instruct the insurance companies which Portfolio(s) they want
to use to fund their Policies, this prospectus gives you important information
about the Portfolios which you should know about before investing. Please read
this prospectus and keep it for future reference.
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THE STOCK PORTFOLIO
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RISK/RETURN SUMMARY
Investment Goal: The Stock Portfolio seeks intermediate and long-term growth of capital.
Investment Focus U.S. Common Stocks with medium to large market capitalizations.
Principal Investment
Strategies: o Identifying companies with above-average growth potential.
o Investing primarily in common stocks.
o Investment at least 70% of total assets in securities of companies with large market
capitalizations (those with market capitalizations similar to companies in the
S&P Index 500).
o Potentially investing in companies with smaller or medium market capitalizations.
o Investing primarily in domestic issuers.
o Investing primarily in "value" stocks.
o Using fundamental analysis of each issuer's financial condition and industry position and
market and economic conditions to select investments.
Principal Investment Risks: o STOCK MARKET VOLATILITY. Stock markets are volatile and can decline significantly in
response to adverse issuer, political, regulatory, market or economic developments.
Different parts of the market can react differently to these developments.
o ISSUER-SPECIFIC CHANGES. The value of an individual security or particular type of
security can be more volatile than the market as a whole and can perform differently than
the value of the market as a whole. The value of securities of smaller issuers can be more
volatile than that of larger issuers.
o FOREIGN EXPOSURE. Entities located in foreign countries can be affected by adverse political,
regulatory, market or economic developments in those countries.
o CHANGES IN VALUES. When you sell your shares of the fund, they could be worth more or less
than what you paid for them. Loss of money is a risk. Values are not guaranteed.
o NOT GUARANTEED BY FDIC. An investment in the Portfolio is not a deposit of the bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
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THE MONEY MARKET PORTFOLIO
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RISK/RETURN SUMMARY
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Investment Goal: Seeks as high a level of current income consistent with preservation of
capital and liquidity.
Investment Focus: Short-term U.S. Governmental Securities and Money Market instruments.
Principal Investment
Strategies: o Purchases U.S. Governmental Securities and U.S. dollar denominated high
quality money market instruments rated A-1 by S&P or P-1 by Moody's, and
repurchase agreements, as follows:
Principal Investment Risks: o SOLVENCY RISK. Defaults in paying principal and/or interest by an issuer.
o INTEREST RATE CHANGES. Interest rate increases can cause the price of a U.S.
Government or a money market security to decrease.
o FOREIGN EXPOSURE. Entities located in foreign countries can be affected by adverse
political, regulatory, market or economic developments in those countries.
o FINANCIAL SERVICES EXPOSURE. Changes in government regulation or economic downturns
can have a significant negative affect on issuers in the financial services sector.
o ISSUER-SPECIFIC CHANGES. A decline in the credit quality of an issuer or the provider
of credit support or a maturity-shortening structure for a security can cause the price
of a money market security to decrease.
o NOT GUARANTEED BY FDIC. An investment in the fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency. Although the fund
seeks to preserve the value of your investment at $1.00 per share, it is possible
to lose money by investing in the fund.
THE BOND PORTFOLIO
RISK/RETURN SUMMARY
Investment Goal: High level of income consistent with prudent risk and the preservation of
capital.
Investment Focus: Investment grade bonds - rated in top four rating categories of either S&P
or Moody's.
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Principal Investment
Strategies: o Investing in U.S. dollar-denominated investment-grade bonds.
o Managing the fund to have similar overall interest rate risk to the Lehman Brothers
Aggregate Bond Index.
o Allocating assets across different market sectors and maturities.
o Analyzing a security's structural features,
current pricing and trading opportunities,
and the credit quality of its issuer to
select investments.
Principal Investment Risks: o SOLVENCY RISK. Default in payment of principal and/or interest by an issuer.
o CREDIT RISK. A decline in the credit quality of an issuer can cause the price of a bond to
decrease.
o INTEREST RATE CHANGES. Interest rate increases can cause the price of a debt security to decrease.
o FOREIGN EXPOSURE. Entities located in foreign countries can be affected by adverse political,
regulatory, market or economic developments in those countries.
o PREPAYMENT. The ability of an issuer of a debt security to repay principal prior to a security's
maturity can cause greater price volatility if interest rates change and less income if called in a
lower interest rate environment.
o ISSUER-SPECIFIC CHANGES. The value of an individual security or particular type of
security can be more volatile than the market as a whole and can perform differently than
the value of the market as a whole.
o CHANGES IN VALUES. Values are not guaranteed. When you sell your shares of the fund, they
could be worth more or less than what you paid for them.
o NOT GUARANTEED BY FDIC. An investment in the Portfolio is not a deposit of the bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
THE ASSET ALLOCATION PORTFOLIO
RISK/RETURN SUMMARY
Investment Goal: Seeks to obtain high total return with reduced risk over the long term by
allocating its assets among stocks, bonds, and short-term instruments.
Investment Focus: U.S. Common Stocks, investment grade bonds and money market instruments.
Principal Investment
Strategies: o Allocating the fund's assets among stocks, bonds, and short-term money market instruments.
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o Adjusting allocation among asset classes.
o Investing primarily in domestic issuers.
o Analyzing an issuer using fundamental and/or quantitative factors and evaluating each
security's current price relative to estimated long-term value to select
investments.
o Entering into repurchase agreements maturing in seven days or less.
Principal Investment Risks: o STOCK MARKET VOLATILITY. Stock markets are volatile and can decline
significantly in response to adverse issuer, political, regulatory,
market or economic developments. Different parts of the market can
react differently to these developments.
o INTEREST RATE CHANGES. Interest rate increases can cause the price of a debt
security to decrease.
o SOLVENCY RISK. Default in payment of principal and/or interest by an issuer.
o CREDIT RISK. A decline in the credit quality of an issuer can cause the price of
its bond to decrease.
o FOREIGN EXPOSURE. Foreign markets can be more volatile than the U.S. market due
to increased risks of adverse issuer, political, regulatory, market or economic
developments and can perform differently than the U.S. market.
o PREPAYMENT. The ability of an issuer of a debt security to repay principal prior
to a security's maturity can cause greater price volatility if interest rates
change and less income if called in a lower interest rate environment.
o ISSUER-SPECIFIC CHANGES. The value of an individual security or particular type of
security can be more volatile than the market as a whole and can perform differently
than the value of the market as a whole. The value of securities of smaller issuers
can be more volatile than that of larger issues.
o CHANGES IN VALUES. Values are not guaranteed, you may lose money. When you sell your
shares of the fund, they could be worth more or less
than what you paid for them.
NOT GUARANTEED BY FDIC. An investment in the Portfolio is not a deposit of the bank and
is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
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PERFORMANCE INFORMATION FOR LAST 10 YEARS
The bar charts and the performance information listed below illustrate the risks
and volatility of investing in the Portfolios. The charts shows the changes in
each Portfolio's performance from year to year for the past 10 calendar years.
The additional information shows the highest and lowest returns for a quarter
during those 10 years and compares its average annual returns for 1,
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5 and 10 years to an index. How each Portfolio has performed in the past is not
necessarily an indication of how it will perform in the future.
The bar charts reflect the management fees and expenses of the Fund but the
performance figures generally do not reflect charges assessed by the insurance
company separate accounts. If such charges had been reflected, the returns would
be less than those shown below. Performance assumes reinvestment of income and
capital gain distributions.
PERFORMANCE OF THE STOCK PORTFOLIO
CHART
[Bar Graph Appears Here]
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
24.13% -6.60% 17.55% 5.69% 10.53% 2.76% 31.92% 22.90% 25.06% 6.00%
BEST AND WORST QUARTER DURING LAST 10 YEARS
Best Quarter Worst Quarter
14% -8.0%
Three months Three months
ending 6/30/97 ending 9/30/98
COMPARING RETURNS WITH THE S&P 500 INDEX
This table compares the Stock Portfolio's average annual total returns for 1,
5 and 10 years ending December 31, 1998 to those of the S&P 500 Index.
- --------------------- ------------------ ---------------------- ----------------
1 Year 5 Years 10 Years
- --------------------- ------------------ ---------------------- ----------------
- --------------------- ------------------ ---------------------- ----------------
Stock Portfolio 6.00% 17.17% 13.40%
- --------------------- ------------------ ---------------------- ----------------
- --------------------- ------------------ ---------------------- ----------------
S&P 500 Index 28.58% 24.06% 19.21%
- --------------------- ------------------ ---------------------- ----------------
INFORMATION ON THE S&P 500 INDEX
The Standard and Poor's ("S&P") 500 Index contains 500 widely held common
stocks. The index includes industrial, technology, utility, financial and
transportation stocks. Calculations of its performance assumes reinvestment of
dividends. You cannot invest directly in the index. It does not have an
investment adviser and does not pay any commissions or expenses. If it had
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expenses, its performance would be lower. In order to outperform the index over
any specific time frame, a fund must return to investors an amount greater than
that provided by the index plus total operating expenses.
PERFORMANCE OF THE MONEY MARKET PORTFOLIO
CHART
[Bar Graph Appears Here]
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
8.00% 7.00% 5.00% 3.00% 2.00% 4.00% 5.00% 5.00% 5.00% 5.00%
BEST AND WORST QUARTER DURING LAST 10 YEARS
Best Quarter Worst Quarter
3.3% .92%
Three months Three months
ending 6/30/98 ending 9/30/98
THE PORTFOLIO'S AVERAGE ANNUAL RETURNS
This table provides information on the Portfolio's average annual total returns
for 1, 5 and 10 years ending December 31, 1998:
- -------------------------- ----------------- ------------------ ----------------
1 Year 5 Years 10 Years
- -------------------------- ----------------- ------------------ ----------------
- -------------------------- ----------------- ------------------ ----------------
Money Market Portfolio 5% 4.80% 4.89%
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THE PORTFOLIO'S SEVEN DAY YIELD
The Portfolio's 7 day yield, as of the end of December 31, 1998 was as follows:
5.58%.
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PERFORMANCE OF THE BOND PORTFOLIO
CHART
[Bar Graph Appears Here]
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
12.25% 4.20% 14.20% 7.74% 10.48% -3.72% 18.07% 2.70% 7.09% 4.30%
BEST AND WORST QUARTER DURING LAST 10 YEARS
Best Quarter Worst Quarter
6.2% -3.2%
Three month period Three month period
ending 6/30/97 ending 9/30/98
COMPARING RETURNS WITH THE LEHMAN BROTHERS AGGREGATE BOND INDEX
This table compares the Portfolio's average annual total returns for 1, 5 and 10
years ending December 31, 1998 to those of the Lehman Brothers Aggregate Bond
Index.
- ----------------------------- ---------------- ----------------- ---------------
1 Year 5 Years 10 Years
- ----------------------------- ---------------- ----------------- ---------------
- ----------------------------- ---------------- ----------------- ---------------
Bond Portfolio 4.30% 5.43% 7.56%
- ----------------------------- ---------------- ----------------- ---------------
- ----------------------------- ---------------- ----------------- ---------------
Lehman Brothers Aggregate 8.69% 7.27% 9.26%
Bond Index
- ----------------------------- ---------------- ----------------- ---------------
INFORMATION ON THE LEHMAN BROTHERS AGGREGATE BOND INDEX
The Lehman Brothers Aggregate Bond Index is a broad, unmanaged index of
securities of fixed income instruments. You cannot invest directly in an index.
It does not have an investment adviser and does not pay any commissions or
expenses. If had expenses, its performance would be lower. In order to
outperform the index over any specific time frame, a fund must return to
investors an amount greater than that provided by the index plus total operating
expenses.
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PERFORMANCE OF THE ASSET ALLOCATION PORTFOLIO
CHART
[Bar Graph Appears Here]
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
16.85% 0.83% 14.68% 7.47% 10.83% -1.33% 25.15% 12.44% 16.62% 5.51%
BEST AND WORST QUARTER DURING LAST 10 YEARS
Best Quarter Worst Quarter
7.6% -6.2%
Three months Three months
ending 6/30/97 ending 9/30/98
COMPARING RETURNS WITH THE S&P 500 AND LEHMAN INDICES
This table compares the Portfolio's average annual total returns for 1, 5 and 10
years ending December 31, 1998 to those of the S&P 500 and Lehman Indices.
- ---------------------------------- --------------- ------------- ---------------
1 Year 5 Years 10 Years
- ---------------------------------- --------------- ------------- ---------------
- ---------------------------------- --------------- ------------- ---------------
Asset Allocation Portfolio 5.51% 11.31% 10.64%
- ---------------------------------- --------------- ------------- ---------------
- ---------------------------------- --------------- ------------- ---------------
S&P 500 Index 28.58% 24.06% 19.21%
- ---------------------------------- --------------- ------------- ---------------
- ---------------------------------- --------------- ------------- ---------------
Lehman Brothers Aggregate 8.69% 7.27% 9.26%
Bond Index
- ---------------------------------- --------------- ------------- ---------------
INFORMATION ON THE S&P 500 AND LEHMAN INDICES
The Standard and Poor's ("S&P") 500 Index contains 500 widely held common
stocks. The index includes industrial, technology, utility, financial and
transportation stocks. Calculations of its performance assumes reinvestment of
dividends. The Lehman Brothers Aggregate Bond Index ("Lehman Bond Index")is a
broad, unmanaged Index of securities of fixed income instruments.
You cannot invest directly in either the S&P or the Lehman Bond Index. Neither
has an investment adviser and neither pays any commissions or expenses. If an
Index had expenses, its performance would be lower. In order to outperform an
index over any specific time frame, a
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fund must return to investors an amount greater than that provided by the index
plus total operating expenses.
INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES, AND RELATED RISKS OF THE
STOCK PORTFOLIO
The information below is intended to provide detailed information on the Stock
Portfolio's investment objectives, strategies used in seeking to achieve those
objectives and the risks of investing in this Portfolio.
1. INVESTMENT OBJECTIVES
The Stock Portfolio's primary objective is to achieve intermediate and
long-term growth of capital. Its secondary objective is to receive a
reasonable level of income.
2. PRINCIPAL INVESTMENT STRATEGIES
The Stock Portfolio invests primarily in U.S. common stocks listed on
national securities exchanges, and believed to offer above average
growth potential. Under normal circumstances at least 70% of its assets
will be invested in such common stocks and other equity securities. No
more than 25% of the Portfolio's assets are invested in a single
industry and no more than 5% may be invested in any single company. The
investment managers of the Stock Portfolio are "value oriented" in their
investment philosophy, which means they proceed from the premise that
investment value and return can best be realized through buying
companies with a low price relative to current earnings. This "bottom
up" approach seeks to identify companies whose earnings growth suggests
an increasing stream of future dividend income and whose share price is
believed to be undervalued. Consistent with this investment philosophy,
the Portfolio typically consists of large cap stocks with relatively low
valuations and high current dividend yields.
The Portfolio's investments are rotated among various market sectors
based on the investment manager's research and view of the economy. The
Portfolio may buy and sell securities frequently, resulting in portfolio
turnover and higher transaction costs.
From time to time the Portfolio will, on its common stock portfolio,
write covered call options that are traded on a U. S. securities
exchange or board of trade. It will do so when the Portfolio manager
believes the price of the stock will remain relatively stable, thus
allowing the Fund to enjoy the premium income and enhance its return.
(See "Options" under "Risk Factors and Special Considerations" in this
prospectus.)
This Portfolio will retain a flexible approach to the investment of
funds and the Portfolio's composition may vary with the economic
outlook. The Portfolio may invest in U.S. Governmental securities,
commercial paper, and other money market instruments, including
repurchase agreements maturing in seven days or less with Federal
Reserve System banks or with dealers in U.S. Government Securities.
When, in the judgment of the investment manager, current cash needs or
market or economic conditions warrant a temporary defensive position,
the Portfolio may invest to a greater degree in such short-term U.S.
Government securities, commercial paper, and other
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money market instruments. Taking temporary defensive positions may
reduce the chances of the Portfolio achieving its investment objectives.
3. THE RISKS OF INVESTING
Since the Stock Portfolio invests primarily in U.S. common stocks, its
returns may, and probably will vary. Your cash values and maybe the
death benefit of your Policy will vary with the investment performance
of the Portfolio(s) you select. Poor performance could result in the
cash values in your insurance Policy declining. The cash values in your
Policy are not guaranteed. Loss of money is a risk of investing in the
Stock Portfolio. Your Policy's death benefit is guaranteed by the
insurance company which issued your Policy not to decline below its
minimum death benefit amount. However, if the death benefit is above the
minimum, poor performance would reduce the benefit, but not below the
minimum amount. The Portfolio is intended as a long term investment
vehicle for variable life insurance policies and is not designed to
provide policy owners with a means of speculating on short-term stock
market movements. There is no assurance the investment objectives will
be achieved. While the Portfolio may compare its performance returns,
for benchmark purposes, to the performance returns of broad based
indices such as the S&P 500 (see below), the Portfolio is not managed to
replicate the securities contained in those indices, and may achieve
returns less than those indices.
In entering into a Repurchase Agreement, the Portfolio bears the risk of
loss in the event the other party to the transaction defaults on its
obligations. In such a case the Portfolio would be delayed, or prevented
from, exercising its rights to dispose of the underlying securities,
including the risk of possible decline in the value of the underlying
securities during the period in which the Portfolio seeks to assert its
rights to them, the risk of incurring expenses associated with asserting
those rights and the risk of losing all or part of the income from the
agreement.
Participation in the options market involves investment risks and
transaction costs which the Portfolio would not be subject to if it
didn't use this strategy. If its predictions of price movement are
inaccurate, the Portfolio might be in a worse position than if the
strategy were not used.
Neither the Fund, the investments of the Stock Portfolio, the Policies'
cash values, nor its death benefit are guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency.
INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES, AND RELATED RISKS OF THE
MONEY MARKET PORTFOLIO
The information below is intended to provide detailed information on the Money
Market Portfolio's investment objectives, strategies used in seeking to achieve
those objectives and the risks of investing in this Portfolio.
1. INVESTMENT OBJECTIVES
The Money Market Portfolio's primary objective is to seek maximum
current income consistent with the preservation of capital and the
maintenance of liquidity by investing in "money market" instruments
meeting specified quality standards.
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2. PRINCIPAL INVESTMENT STRATEGIES
The Money Market Portfolio may invest only in high-quality instruments
with a maturity or remaining maturity of 12 months or less from the date
of purchase, and may include the following: U.S. Government securities;
commercial paper maturing in nine months or less from the date of
purchase if rated A-1 by S&P or Prime-1 by Moody's, or debt obligations
rated at least AA by S&P or at least Aa by Moody's, repurchase
agreements maturing in seven days or less with Federal Reserve System
banks or with dealers in U.S. Government securities; and negotiable
certificates of deposit, bankers' acceptances, fixed-time deposits, and
other obligations of federally chartered domestic banks, savings banks,
or savings and loan associations having total assets of $1 billion or
more.
The Portfolio will not invest in any fixed-time deposit maturing in more
than 7 days if, as a result, more than 10% of the value of its total
assets would be invested in such fixed-time deposits and other illiquid
securities. The Portfolio may also invest in fixed-time or other
deposits with a state-chartered bank that acts as custodian to the Fund,
provided that any such bank has total assets of $2 billion or more. The
Portfolio may also purchase obligations that mature in 12 months or less
from the date of purchase if the obligation is accompanied by a
guarantee of principal and interest provided that the guarantee is that
of a bank or corporation whose certificates of deposit or commercial
paper may otherwise be purchased by the Portfolio.
The Portfolio is required to maintain an average weighted maturity of
not more than 90 days and invest exclusively in securities that mature
within 397 days. All investments by the Portfolio are limited to United
States dollar-denominated investments. The Portfolio may not invest more
than 25% of its total assets in securities of any one particular
industry nor invest more than 5% of its assets in any one issuer, except
that these restrictions do not apply to investments in U.S. Government
securities and the 25% limit does not apply to the Money Market
Portfolio for securities or obligations issued by U.S. banks.
3. THE RISKS OF INVESTING
Since the Money Market Portfolio invests primarily in Money Market
instruments, one risk is a default by an issuer and its loss to the
Portfolio of principal and/or interest payments. An additional risk is
the Portfolio not maintaining a value of $1.00 per share. Your cash
values and maybe the death benefit of your Policy will vary with the
investment performance of the Portfolio(s) you select. When interest
rates decline, the performance return for this Portfolio will decline.
The return will further be reduced by insurance charges and
administrative fees deducted by the insurance company's separate
account. In that environment your net performance return may be
relatively small. There is no assurance the investment objectives will
be achieved. Your Policy's cash values are not guaranteed. Its death
benefit is guaranteed by the insurance company which issued your Policy
not to decline below its minimum death benefit amount. However, a death
benefit above the minimum may decline as a result of poor investment
performance.
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In entering into a Repurchase Agreement, the Portfolio bears the risk of
loss in the event the other party to the transaction defaults on its
obligations. In such a case the Portfolio would be Portfolio is delayed,
or prevented from, exercising its rights to dispose of the underlying
securities, including the risk of possible decline in the value of the
underlying securities during the period in which the Portfolio seeks to
assert its rights to them, the risk of incurring expenses associated
with asserting those rights and the risk of losing all or part of the
income from the agreement.
Neither the Fund, the investments of the Money Market Portfolio the
Policies cash values, nor the death benefit are guaranteed by the
Federal Deposit Insurance Corporation or any other governmental agency.
INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES, AND RELATED RISKS OF THE
BOND PORTFOLIO
The information below is intended to provide detailed information on the Bond
Portfolio's investment objectives, strategies used in seeking to achieve those
objectives and the risks of investing in this Portfolio.
1. INVESTMENT OBJECTIVES
The Bond Portfolio's primary objective is to provide a high level of
income consistent with prudent investment risk by investing primarily in
investment-grade intermediate to long-term corporate bonds and other
debt securities. As a secondary objective, the Portfolio seeks capital
appreciation when consistent with its principal objective.
2. PRINCIPAL INVESTMENT STRATEGIES
To achieve its objective, the Portfolio invests primarily in securities
rated in the top four rating categories of either S&P (AAA, AA, A, and
BBB) or Moody's (Aaa, Aa, A, and Baa) or, if not rated, of equivalent
quality in the judgment of the Adviser. The Portfolio may also invest in
U.S. Government securities, commercial paper, certificates of deposit,
and other money market instruments including repurchase agreements
maturing in seven days or less with Federal Reserve System banks or with
dealers in U.S. Government. The Portfolio will not invest in common
stocks, rights, or other equity securities.
Generally turnover rates have been relatively low but on occasion, the
Portfolio has bought and sold securities frequently resulting in
portfolio turnover and higher transaction costs.
The weighted average maturity of the securities in the Portfolio will
vary from time to time depending upon the judgment of the Adviser as to
prevailing conditions in the economy and the securities markets and the
prospects for interest rate changes among different categories of
fixed-income securities. Under normal circumstances, more than 80% of
the Portfolio's assets will be invested in fixed-income securities,
including convertible and non-convertible debt securities.
14
<PAGE>
3. THE RISKS OF INVESTING
Since shares of the Portfolio normally represent an investment primarily
in debt securities with market prices that may vary, the value of the
Portfolio's shares will vary as the aggregate value of the Portfolio's
investments increases or decreases. Although the Portfolio will invest
only in investment-grade debt securities, the market price of the
Portfolio's securities will likely be affected by changes in interest
rates since the market value of debt obligations may be expected to rise
and fall inversely with interest rates generally. As interest rates
rise, the market value of fixed-income securities will likely fall,
adversely affecting the value of the Portfolio. Debt obligations with
longer maturities that typically provide the best yield will subject the
Portfolio to relatively greater price fluctuations than shorter-term
obligations. Your cash values will and the death benefit of your Policy
may vary with the investment performance of the Portfolio. Poor
investment performance would negatively affect the cash values in your
insurance Policy. Cash values are not guaranteed. Loss of money is a
risk of investing in the Portfolio. Your Policy's death benefit is
guaranteed by the insurance company which issued your Policy not to
decline below its minimum death benefit amount. However, if the death
benefit is above the minimum, poor performance would reduce the benefit,
but not below the minimum amount. The Portfolio is intended as a long
term investment vehicle for variable life insurance policies. However,
there is no assurance the investment objectives will be achieved. While
the Portfolio may compare its performance returns, for benchmark
purposes, to the performance returns of broad based indices such as the
Lehman Brothers Aggregate Bond Index (see below), the Portfolio is not
managed to replicate the securities contained in those indices, and may
achieve returns less than those indices.
In entering into a Repurchase Agreement, the Portfolio bears the risk of
loss in the event the other party to the transaction defaults on its
obligations. In such a case the Portfolio would be Portfolio is delayed,
or prevented from, exercising its rights to dispose of the underlying
securities, including the risk of possible decline in the value of the
underlying securities during the period in which the Portfolio seeks to
assert its rights to them, the risk of incurring expenses associated
with asserting those rights and the risk of losing all or part of the
income from the agreement.
Neither the Fund, the investments of the Portfolio, the Policies cash
values, nor the death benefit are guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency.
INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES, AND RELATED RISKS OF THE
ASSET ALLOCATION PORTFOLIO
The information below is intended to provide detailed information on the
Portfolio's investment objectives, strategies used in seeking to achieve those
objectives and the risks of investing in this Portfolio.
1. INVESTMENT OBJECTIVES
The Portfolio's primary objective is to achieve high total return,
consistent with prudent investment risk by investing in common stocks
and other equity securities, investment
15
<PAGE>
grade intermediate to long-term debt obligations and high quality money
market instruments.
2. PRINCIPAL INVESTMENT STRATEGIES
The Portfolio allocates its assets into three broad categories: (1) U.S.
common stocks and other equity securities believed to offer above
average growth potential; (2) intermediate to long-term investment grade
bonds; and (3) high quality money market instruments. Under normal
circumstances at least 30% of its assets will be invested in common
stocks and other equity securities, at least 20% in investment grade
bonds and the remainder in money market instruments. With certain
exceptions for money market investments, no more than 25% of the assets
of the Portfolio are invested in a single industry and no more than 5%
may be invested in any single company. The investment managers of the
stock portion of the Portfolio are "value oriented" in their investment
philosophy, which means they proceed from the premise that investment
value and return can best be realized through buying companies with a
low price relative to current earnings. This "bottom up" approach seeks
to identify companies whose earnings growth suggests an increasing
stream of future dividend income and whose share price is believed to be
undervalued. Consistent with this investment philosophy, the stock
portion of the Portfolio typically consists of large cap stocks with low
valuations and relatively high current dividend yields.
The equity investments are rotated among various market sectors based on
its investment manager's research and view of the economy. The Portfolio
may buy and sell equity securities frequently, resulting in portfolio
turnover and higher transaction costs.
From time to time the equity portion of the Portfolio will, on its
common stock portfolio, write covered call options that are traded on a
U. S. securities exchange or board of trade. It will do so when the
Portfolio manager believes the price of the stock will remain relatively
stable, thus allowing the Fund to enjoy the premium income and enhance
its return. (See "Options" under "Risk Factors and Special
Considerations" in this prospectus.)
The bond portion of the Portfolio invests primarily in securities rated
in the top four rating categories of either S&P (AAA, AA, A, and BBB) or
Moody's (Aaa, Aa, A, and Baa) or, if not rated, of equivalent quality in
the judgment of the adviser. This Portfolio will retain a flexible
approach to the investment of funds and the portfolio composition may
vary with the economic outlook. The Portfolio may invest U.S.
Governmental securities, commercial paper, and other money market
instruments, including repurchase agreements maturing in seven days or
less. When, in the judgment of the investment manager, current cash
needs or market or economic conditions warrant a temporary defensive
position, the Portfolio may invest to a greater degree in short-term
U.S. Government securities, commercial paper, and other money market
instruments. Taking temporary defensive positions may reduce the chances
of the Portfolio achieving its investment objectives.
The Money Market portion of the Portfolio may invest only in
high-quality instruments with a maturity or remaining maturity of 12
months or less from the date of purchase, and may include the following:
U.S. Government securities; commercial paper maturing
16
<PAGE>
in nine months or less from the date of purchase if rated A-1 by S&P or
Prime-1 by Moody's, or debt obligations rated at least AA by S&P or at
least Aa by Moody's, The Portfolio may also invest in repurchase
agreements maturing in seven days or less with Federal Reserve System
banks or with dealers in U.S. Government securities; and negotiable
certificates of deposit, bankers' acceptances, fixed-time deposits, and
other obligations of federally chartered domestic banks, savings banks,
or savings and loan associations having total assets of $1 billion
or more.
3. THE RISKS OF INVESTING
Since the Portfolio invests in U.S. common stocks, investment grade
bonds and Money Market instruments, its returns may, and probably will
vary. Your cash values and maybe the death benefit of your Policy will
vary with the investment performance of the Portfolio(s) you select.
Poor investment performance may result in the cash values in your
insurance Policy declining. Cash values are not guaranteed. Loss of
money is a risk of investing in the Portfolio. Your Policy's death
benefit is guaranteed by the insurance company which issued your Policy
not to decline below its minimum death benefit amount. However, if the
death benefit is above the minimum, poor performance could reduce the
benefit, but not below the minimum amount. The Portfolio is intended as
a long term investment vehicle for variable life insurance policies and
is not designed to provide policy owners with a means of speculating on
short-term stock or bond market movements. There is no assurance the
Portfolio's investment objectives will be achieved. While the Portfolio
may compare its performance returns, for benchmark purposes, to the
performance returns of broad based indices such as the S&P 500 Index and
the Lehman Brothers Aggregate Bond Index ("Lehman Index") (see below),
the Portfolio is not managed to replicate the securities contained in
those indices, and may achieve returns less than those indices.
In entering into a Repurchase Agreement, the Portfolio bears the risk of
loss in the event the other party to the transaction defaults on its
obligations. In such a case the Portfolio would be Portfolio is delayed,
or prevented from, exercising its rights to dispose of the underlying
securities, including the risk of possible decline in the value of the
underlying securities during the period in which the Portfolio seeks to
assert its rights to them, the risk of incurring expenses associated
with asserting those rights and the risk of losing all or part of the
income from the agreement.
Participation in the options market involves investment risks and
transaction costs which the Portfolio would not be subject to if it
didn't use this strategy. If its predictions of price movement are
inaccurate, the Portfolio might be in a worse position than if the
strategy were not used.
Neither the Fund, the investments of the Portfolio, the Policies cash
values, nor the death benefit are guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency.
17
<PAGE>
GENERAL PORTFOLIO POLICIES
Each Portfolio's investment objective together with the investment restrictions
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 (i) 67% or more of the voting securities present at such
meeting, if the holders of more than 50% of the outstanding securities of such
portfolio are present or represented by proxy; or (ii) more than 50% of the
outstanding voting securities of such Portfolio, whichever is less.
INVESTMENT RESTRICTIONS
Unless otherwise stated, each of the following policies applies to each of the
Portfolios. An existing Portfolio may not:
1. Purchase securities on margin or make short sales;
2. Invest more than 25% of its total assets in securities of any one
particular industry nor invest more than 5% of its assets in any one
issuer, except that these restrictions do not apply to investments in
U.S. Government securities and the 25% limit does not apply to the Money
Market or Bond Portfolios for securities or obligations issued by U.S.
banks;
3. Invest in more than 10% of any issuer's outstanding voting securities;
4. Invest in securities of other investment companies;
5. Participate in the underwriting of securities;
6. Borrow, pledge, or hypothecate its assets, except that a Portfolio may
borrow from banks for temporary purposes, but any such borrowing is
limited to an amount equal to 25% of a Portfolio's net assets and a
Portfolio will not purchase additional securities while borrowing funds
in excess of 5% of that Portfolio's net assets;
7. Invest for the purpose of exercising control over any company;
8. Invest in commodities or commodity contracts;
9. Purchase warrants, or write, purchase, or sell puts, calls, straddles,
spreads, or combinations thereof, except the Stock and Asset Allocation
Portfolios may write covered call options as described in their
sections;
10. Make investments in real estate or mortgages except that a Portfolio may
purchase readily marketable securities of companies holding real estate
or interest therein, or in oil, gas, or development programs;
11. Purchase securities having legal or contractual restrictions on resale;
18
<PAGE>
12. Make any loans of securities or cash, except that a Portfolio may,
consistent with its investment objective and policies, (i) invest in
debt obligations including bonds, debentures, or other debt securities,
bank and other depository institution obligations, and commercial paper,
even though the purchase of such obligations may be deemed the making of
loans, and (ii) enter into repurchase agreements;
13. Issue senior securities; and
14. Invest more than 10% of its total assets in repurchase agreements
maturing in more than seven days or in portfolio securities that are not
readily marketable.
ADDITIONAL INVESTMENT RESTRICTIONS APPLICABLE TO THE MONEY MARKET AND BOND
PORTFOLIOS
The Fund has adopted the following investment restrictions applicable only to
the Money Market and Bond Portfolios under which such Portfolios may not do the
following:
1. Invest in common stocks or other equity securities; and
2. Invest in securities of companies which, together with predecessor
companies, have a record of less than five years continuous operations.
If a percentage restriction is adhered to at the time of an investment for any
Portfolio, a later increase or decrease in percentage resulting from a change in
the value of portfolio securities or the amount of the Portfolio's net assets
will not be considered a violation of any of the foregoing restrictions.
DIVERSIFICATION
As indicated by the second fundamental investment restriction set forth above,
each Portfolio operates as a "diversified" fund. In addition, each Portfolio
intends to conduct its operations so that it will comply with diversification
requirements of Subchapter M of the Internal Revenue Code of 1986 as amended
(the "Code"), and qualify as a "regulated investment company." In order to
qualify as a regulated investment company, each Portfolio must limit its
investments so that at the close of each quarter of the taxable year, with
respect to at least 50% of its total assets, not more than 5% of its total
assets will be invested in the securities of a single issuer. The Code requires
that not more than 25% in value of each Portfolio's total assets may be invested
in the securities of a single issuer at the close of each quarter of the taxable
year. These restrictions do not apply to investments in U.S. government
securities. The 25% limit does not apply to the Money Market Fund or the Bond
Portfolio for securities or obligations issued by U.S. Banks.
19
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following risk factors are applicable to all Portfolios:
GENERALLY
The value of a Portfolio's investments, and as a result the net asset value of
the Portfolio shares, will fluctuate in response to changes in the market and
economic conditions as well as the financial condition and prospects of issuers
in which the Portfolio invests. Because of the risks associated with the Fund's
investments, the Fund is intended as a long term investment vehicle for Variable
Life Insurance Policies and is not designed to provide policyholders with a
means of speculating on short-term stock or bond market movements. While the
Fund may compare its total returns for benchmarking purposes to the total
returns of broad based securities indices (such as the S&P 500), the Fund is not
managed to replicate the securities contained in such indices and therefore may
achieve returns which are less than such indices.
REPURCHASE AGREEMENTS
In entering into a repurchase agreement, the Portfolio bears a risk of loss in
the event that the other party to the transaction defaults on its obligations
and the Portfolio is delayed, or prevented from, exercising its rights to
dispose of the underlying securities, including the risk of possible decline in
the value of the underlying securities during the period in which the Portfolio
seeks to assert its rights to them, the risk of incurring expenses associated
with asserting those rights and the risk of losing all or part of the income
from the agreement.
YEAR 2000
Many computer systems use only two digits to describe years, such as 99 for
1999. A program written this way will not recognize the Year 2000. Preparing for
Year 2000 is a high priority for the Fund and the Adviser and the Fund have been
actively working on changes to their own computer systems to deal with the Year
2000 and expect that their systems will be ready for the Year 2000. The Fund
does not anticipate that the move to Year 2000 will have a material impact on
its ability to continue to provide service at current levels; however, the Fund
cannot make any assurances that the steps it has taken to ensure Year 2000
compliance will be successful. In evaluating securities for investments by the
Portfolios, the Adviser considers Year 2000 risks in addition to other risks
relevant to the issuer. However, there can be no assurance that Year 2000 issues
will not affect the companies in which the Fund invests or worldwide markets and
economies.
The Following risk factor is applicable to the Stock and Asset Allocation
Portfolios:
OPTIONS
Participation in the options market involves investment risks and transaction
costs to which the Portfolio would not be subject, absent the use of this
strategy. If predictions of movements in the direction of the securities and
interest rate markets are inaccurate, the adverse consequences to the Portfolio
may leave it in a worse position than if such strategy was not used. Risks
inherent in the use of options include: (a) dependency on the ability of the
Portfolio Manager, as the case may be, to predict correctly movements in the
direction of interest rates and securities prices; (b)
20
<PAGE>
imperfect correlation between the price of options and movements in the prices
of the securities; (c) the fact that the skills needed to use these strategies
are unique to this investment technique; and (d) the possible need to defer
closing out certain positions.
MANAGEMENT OF THE PORTFOLIOS
INVESTMENT ADVISERS
Since April 1, 1995, ReliaStar Investment Research, Inc. ("RIRI"), f/k/a
Washington Square Advisers, Inc., 100 Washington Avenue, Minneapolis, MN 55401,
an affiliate of the insurance companies issuing the Policies, has served as the
investment adviser to the Fund's four Portfolios and is responsible for the
day-to-day management of the Money Market and Bond Portfolios, and the
non-equity portion of the Asset Allocation Portfolio and other business affairs.
RIRI and its predecessors have been managing investment assets for their
affiliated insurance companies since 1983 and currently manages $16 billion of
fixed income assets for their affiliates.
It furnishes continuous advice and recommendations concerning the Portfolios'
non-equity investments. It also furnishes certain administrative, compliance,
legal and accounting services for the Fund, and it or its affiliated companies
may be reimbursed by the Fund for its costs in providing those services. In
addition, employees of companies affiliated with RIRI serve as officers of the
Fund, and these companies provide office space for the Fund and pay the
salaries, fees and expenses of certain Fund officers.
Effective April 1, 1995 the Fund, RIRI and Pilgrim Baxter Value Investor's Inc.
("Pilgrim Baxter"), f/k/a Newbold's Asset Management, Inc. entered into a
Sub-Investment Advisory Agreement under which the Pilgrim Baxter, 825 Duportail
Road, Wayne, PA 19087 provides advisory services to the Stock Portfolio and the
equity portion of the Asset Allocation Portfolio of the Fund, and is responsible
for the day-to-day management of those assets. They have managed assets since
1943.
PORTFOLIO MANAGERS
The Stock Portfolio and that portion of the Asset Allocation Portfolio investing
in stocks, is managed by Gary Haubold, Jr., who since November, 1998 has had the
primary responsibility of the day to day investment management of those assets.
Mr. Haubold is the portfolio manager for the small cap value, mid-cap value and
large-cap value portfolios, advised by Pilgrim Baxter, including the PBHG Small
Cap Value Portfolio of the PBHG Insurance Series Fund, Inc. He also serves as
co-manager of the PBHG Strategic Small Company Fund. Prior to joining Pilgrim
Baxter, he was a Senior Portfolio Manager with Miller, Anderson & Sherred, LLP,
where he had responsibility for $1.5 billion in the MAS Small Cap and Mid-Cap
Value products. His fifteen years of portfolio management experience include
positions with Wood, Struthers & Winthrop, where he was Head of Equity Research
and Portfolio Manager for the small cap and growth equity portfolios. He is a
Chartered Financial Analyst, has an MBA in Finance from the Wharton School at
the University of Pennsylvania and graduated magna cum laude from Rice
University with a degree in Engineering.
21
<PAGE>
The Money Market and Bond Portfolios, and that portion of the Asset Allocation
Portfolio which invests in bonds and money market assets, is managed by James L.
Mahnke. He has been the Portfolio Manager for these assets since August, 1997.
He is a Senior Vice President and Portfolio Manager of the Adviser, RIRI, where
he has served in its investment department since October, 1995. Previously he
was employed by Alliance Capital Management, L.P. from 1987 to 1995; first as an
Analyst and then as a Vice President and Portfolio Manager. He has a Masters
Degree in Economics from Purdue University.
MANAGEMENT FEES
Under the Investment Advisory Agreement, the Adviser is compensated for its
services at a quarterly fee based on an annual percentage of the average daily
net assets of each Portfolio. For each Portfolio, the Fund pays the Adviser a
fee at a maximum annual rate of .50% of the first $100 million of the average
daily net assets of the Portfolio, and .45% of the average daily net assets of
the Portfolio in excess of $100 million. During 1998, 1997 and 1996 the Adviser
was paid a fee at an annual rate of .25% of the net asset value of the
Portfolios.
The Adviser pays the Sub-Adviser on a quarterly basis, based on the value of the
assets under the Sub-Adviser's Management on the last day of the quarter, an
annual fee of .50% on the first $20 million, .40% on the next $20 million and
.30% thereafter. The Fund does not directly compensate the Sub-Adviser.
OTHER EXPENSES
The Fund bears all costs of its operations. Such costs include fees to the
Adviser, shareholder servicing costs, trustees' fees and expenses, legal,
accounting services, auditing fees, custodian fees, printing and supplies,
registration fees, and others. 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. In 1998, 1997 and 1996, the Fund paid $240,886, $219,940 and
$189,587, respectively for these services.
TOTAL EXPENSES
In 1998, the management fee (computed on an annualized basis as a percentage of
the net asset value of each Portfolio) and the total operating expenses as a
percentage of average net assets of each Portfolio were as follows:
<TABLE>
<CAPTION>
TOTAL EXPENSES
PORTFOLIO MANAGEMENT FEE* (INCLUDING MANAGEMENT FEES)
--------- --------------- ---------------------------
<S> <C> <C>
Common Stock Portfolio .25% .75%
Money Market Portfolio .25% .75%
Bond Portfolio .25% .75%
Asset Allocation Portfolio .25% .75%
</TABLE>
*The Policies contain a contractual provision limiting the annual amount
Policyholders can be charged for management fees to .25%. Any management fees
above that amount are paid by the insurance companies. If this limit, which is
contractual, was not available, the management fees by portfolios would have
been: Stock, .45%; Money Market, . 25%; Bond, .25%; and Asset Allocation, .36%
22
<PAGE>
PRICING OF FUND SHARES
The price of Fund shares is based on the Fund's net asset value ("NAV"). All
purchases, redemptions and exchanges will be processed at the NAV next
calculated after a request is received and accepted by the Fund. The Fund's NAV
is calculated at the close of the regular trading session of the NYSE (normally
4:00 p.m. New York time) each day that the NYSE is open. The NAV of Fund shares
is not determined on days the NYSE is closed (generally, New Year's Day, Martin
Luther King Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas). In order to receive a day's price, the
order must be received by the close of the regular trading session of the NYSE.
Securities are valued at market value or, if a market quotation is not readily
available, at their fair value determined in good faith under procedures
established by and under the supervision of the Trustees. Short-term instruments
maturing within 60 days are valued at amortized cost, which approximates market
value.
DISTRIBUTIONS AND TAXES
To avoid taxation, the Internal Revenue Code requires the Fund to distribute net
income and any net capital gains realized on its investments annually. The
Fund's income from dividends and interest and any net realized short-term
capital gains are paid to shareholders as ordinary income dividends. Net
realized long-term gains are paid to shareholders as capital gains
distributions.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned [or lost] on a direct
investment in the Fund (assuming reinvestment of all dividends and
distributions) but does not include charges and expenses attributable to any
insurance product.
The information for the years ended December 31, 1998, 1997, 1996 and 1995 was
audited by Deloitte & Touche, LLP, independent auditors whose report, along with
the Fund's financial statements, are included in the Fund's annual report, and
is available on request at no charge, by calling 1-800-333-6965 x5782.
The information for the year ended December 31, 1994 was audited by KPMG LLP,
independent auditors.
23
<PAGE>
USLICO SERIES FUND
COMMON STOCK PORTFOLIO
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FINANCIAL HIGHLIGHTS (PER SHARE)
Net asset value, beginning of period $ 13.50 $ 13.25 $ 12.62 $ 10.37 $ 11.23
Income from investment operations:
Net investment income 0.20 0.27 0.34 0.36 0.36
Net Gains or Losses on Securities
(both realized and unrealized) 0.62 3.05 2.55 2.95 (0.05)
---------- ----------- ----------- --------- ---------
Total from investment operations 0.82 3.32 2.89 3.31 0.31
Less Distributions:
Dividends from net investment income (0.20) (0.27) (0.33) (0.37) (0.36)
Distribution from capital gains (0.48) (2.80) (1.93) (0.69) (0.81)
----------- ----------- ----------- --------- ----------
Net asset value, end of period $ 13.64 $ 13.50 $ 13.25 $ 12.62 $ 10.37
=========== =========== =========== ========= ==========
Total return (1) 6.00% 25.06% 22.90% 31.92% 2.76%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $27,774,017 $27,291,645 $23,558,091 $19,968,336 $14,687,489
Ratio of expenses to average net assets (2) 0.75% 0.73% 0.75% 0.63% 0.75%
Ratio of net investment income to average
net assets 1.49% 1.87% 2.50% 3.07% 3.23%
Portfolio turnover rate 172.22% 88.55% 79.17% 62.51% 59.41%
</TABLE>
(1) Assumes reinvestment of all dividends and distributions.
(2) The Policies contain a contractual provision limiting the annual amount
Policyholders can be charged for management fees to .25%. Any management
fees above that amount are paid by the insurance companies. If this limit,
which is contractual, was not available, the expenses would have been
approximately as follows: .95% for 1998, .93% for 1997, .95% for 1996,
.83% for 1995 and .95% for 1994.
USLICO SERIES FUND
MONEY MARKET PORTFOLIO
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FINANCIAL HIGHLIGHTS (PER SHARE)
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from investment operations:
Net investment income 0.05 0.05 0.05 0.05 0.04
Net Gains or Losses on Securities
(both realized and unrealized) - - - - -
--------- --------- --------- ----------- ------------
Total from investment operations 0.05 0.05 0.05 0.05 0.04
Less Distributions:
Dividends from net investment income (0.05) (0.05) (0.05) (0.05) (0.04)
Distribution from capital gains - - - - -
--------- --------- --------- ----------- ------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========== ========== =========== ============
Total return (1) 5.00% 5.00% 5.00% 5.00% 4.00%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $5,963,727 $5,784,312 $ 5,979,861 $ 5,819,470 $ 5,752,426
Ratio of expenses to average net assets 0.75% 0.75% 0.75% 0.63% 0.75%
Ratio of net investment income to average
net assets 4.79% 4.88% 4.77% 5.37% 3.54%
Portfolio turnover rate N/A N/A N/A N/A N/A
</TABLE>
(1) Assumes reinvestment of all dividends and distributions.
24
<PAGE>
USLICO SERIES FUND
BOND PORTFOLIO
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FINANCIAL HIGHLIGHTS (PER SHARE)
Net asset value, beginning of period $ 10.00 $ 10.02 $ 10.38 $ 9.41 $ 10.49
Income from investment operations:
Net investment income 0.55 0.59 0.64 0.66 0.67
Net Gains or Losses on Securities
(both realized and unrealized) (0.13) 0.12 (0.36) 1.04 (1.06)
--------- --------- --------- --------- ----------
Total from investment operations 0.42 0.71 0.28 1.70 (0.39)
Less Distributions:
Dividends from net investment income (0.55) (0.59) (0.64) (0.66) (0.67)
Distribution from capital gains (0.13) (0.14) - (0.07) (0.02)
--------- --------- --------- -------- ----------
Net asset value, end of period $ 9.74 $ 10.00 $ 10.02 $ 10.38 $ 9.41
========= ========= ========= ======== ===========
Total return (1) 4.30% 7.09% 2.70% 18.07% (3.72)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $2,831,882 $2,802,374 $2,783,385 $3,068,825 $ 2,484,720
Ratio of expenses to average net assets 0.75% 0.75% 0.75% 0.63% 0.75%
Ratio of net investment income to average
net assets 5.50% 5.88% 6.45% 6.49% 6.67%
Portfolio turnover rate 90.97% 117.24% 47.37% 32.67% 10.94%
</TABLE>
(1) Assumes reinvestment of all dividends and distributions.
USLICO SERIES FUND
ASSET ALLOCATION PORTFOLIO
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FINANCIAL HIGHLIGHTS (PER SHARE)
Net asset value, beginning of period $ 11.98 $ 11.85 $ 11.82 $ 10.18 $ 11.26
Income from investment operations:
Net investment income 0.39 0.46 0.53 0.55 0.55
Net Gains or Losses on Securities
(both realized and unrealized) 0.27 1.51 0.94 2.01 (0.70)
----------- ----------- ----------- --------- ----------
Total from investment operations 0.66 1.97 1.47 2.56 (0.15)
Less Distributions:
Dividends from net investment income (0.39) (0.46) (0.53) (0.55) (0.55)
Distribution from capital gains (0.33) (1.38) (0.91) (0.37) (0.38)
----------- ----------- ----------- --------- -----------
Net asset value, end of period $ 11.92 $ 11.98 $ 11.85 $ 11.82 $ 10.18
=========== =========== =========== ========= ===========
Total return (1) 5.51% 16.62% 12.44% 25.15% (1.33)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $16,335,368 $15,900,094 $14,614,568 $13,675,779 $10,548,284
Ratio of expenses to average net assets (2) 0.75% 0.74% 0.75% 0.63% 0.75%
Ratio of net investment income to average
net assets 3.19% 3.68% 4.39% 4.81% 5.09%
Portfolio turnover rate 135.68% 104.30% 61.98% 44.97% 28.53%
</TABLE>
(1) Assumes reinvestment of all dividends and distributions.
(2) The Policies contain a contractual provision limiting the annual amount
Policyholders can be charged for management fees to .25%. Any management
fees above that amount are paid by the insurance companies. If this limit,
which is contractual, was not available, the expenses would have been
approximately as follows: .86% for 1998, .85% for 1997, .86% for 1996,
.74% for 1995 and .86% for 1994.
25
<PAGE>
GLOSSARY OF INVESTMENT TERMS
U.S. GOVERNMENT SECURITIES - are obligations of, or guaranteed by, the U.S.
Government, its agencies or instrumentalities. Securities by the U.S. Government
include: (1) direct obligations of the U.S. Treasury (such as Treasury bills,
notes, and bonds) and (2) federal agency obligations guaranteed as to principal
and interest by the U.S. Treasury (such as GNMA certificates). In these
securities, the payment of principal and interest is unconditionally guaranteed
by the U.S. Government, and thus they are of the highest possible credit
quality. Such securities are subject to variations in market value due to
fluctuations in interest rates, but, if held to maturity, will be paid in full.
Securities issued by U.S. Government instrumentalities and certain federal
agencies are neither direct obligations of nor guaranteed by the Treasury.
However, they involve federal sponsorship in one way or another: some are
supported by the discretionary authority of the 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 Land Banks, Farmers
Home Administration, Central Bank for Cooperatives, Federal Intermediate Credit
Banks, and Federal Home Loan Banks. All of the Portfolios may invest in U.S.
Government securities.
MORTGAGE-RELATED SECURITIES - The Bond and Asset Allocation Portfolios may
invest in GNMA certificates and FNMA and FHLMC mortgage-backed obligations.
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 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.
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. Reinvestment of prepayments may occur at
higher or lower rates than the original yield on the certificates.
FNMA AND FHLMC MORTGAGE-BACKED OBLIGATIONS: The Federal National Mortgage
Association ("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. The Federal Home Loan Mortgage Corporation ("FHLMC"), a corporate
instrumentality of the United States, issues participation certificates which
represent an interest I a pool of conventional mortgage loans. FHLMC guarantees
the timely payment of interest and the ultimate collection of principal and
maintains reserves to protect holders against losses due to default, but the
certificates 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.
RISKS OF MORTGAGE-RELATED SECURITIES: In the case of mortgage pass-through
securities such as GNMA certificates or FNMA and FHLMC mortgage-backed
obligations, early repayment of principal arising from prepayments of principal
on the underlying mortgage loans due to the sale of the underlying property, the
refinancing of the loan, or foreclosure may expose
26
<PAGE>
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 mortgage-related security.
Conversely, when interest rates are rising, the rate of prepayment tends to
decrease, thereby lengthening the actual average life of the mortgage-related
security. 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. Therefore, the actual
maturity and realized yield on pass-through or modified pass-through
mortgage-related securities will vary based upon the prepayment experience on
the underlying pool of mortgages.
REPURCHASE AGREEMENTS - are agreements by which the Portfolio purchases a
security and obtains a simultaneous commitment from the seller (a member bank of
the Federal Reserve System or a recognized securities dealer) to repurchase the
security at an agreed upon price and date. The resale price is in excess of the
purchase price and reflects an agreed upon market rate unrelated to the coupon
rate on the purchased security. Such transactions afford an opportunity for a
Portfolio to maintain liquidity and earn income over periods of time as short as
overnight.
The underlying securities on repurchase agreements are ordinarily U.S.
Government securities but may be other securities in which the Portfolio might
otherwise invest. A Portfolio will enter into repurchase agreements only if they
are fully collateralized. The market value of the collateral, including accrued
interest, will equal or exceed the repurchase price, and the collateral will be
in the actual or constructive possession of the Portfolio.
A Portfolio will enter only into repurchase agreements that mature in seven days
or less. A repurchase agreement subjects a Portfolio to the risk of the ability
of the seller to pay the repurchase price on the delivery date; however, the
underlying security constitutes the collateral for the seller's obligation. In
addition, the Adviser will enter into repurchase agreements with parties that it
considers creditworthy. In the event the seller does default, the Portfolio may
incur (i) a loss if the value of the collateral declines and (ii) disposition
costs in connection with liquidating the collateral. In the event bankruptcy
proceedings are commenced with respect to the seller, realization upon the
collateral by the Portfolio may be delayed or limited and a loss may be incurred
if the collateral securing the repurchase agreement declines in value during the
bankruptcy proceedings.
CERTIFICATES OF DEPOSIT - are certificates issued against funds deposited in a
bank, are for definite period of time, earn a specified rate of return, and are
normally negotiable.
BANKERS'ACCEPTANCES - are short-term credit instruments issued by corporations
to finance the import-export transfer or storage of goods. They are termed
"accepted" when a bank guarantees their payment at maturity. These instruments
reflect the obligation of both the bank and drawer to pay the face amount of the
instrument at maturity.
COMMERCIAL PAPER - All Portfolios may invest in commercial paper. Commercial
paper represents short-term unsecured promissory notes issued by bank holding
companies, corporations, and finance companies. The commercial paper purchased
by a Portfolio will consist of direct obligations of domestic issuers which, at
the time of investment, (i) meet the rating standard for particular Portfolios
as specified in the section on Investment Objectives and
27
<PAGE>
Policies, or (ii) if not rated, are determined to be of an investment quality
comparable to rated commercial paper in which a Portfolio may invest.
CORPORATE DEBT SECURITIES - All Portfolios may invest in corporate debt
securities of domestic issuers. The debt securities in which a 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 or other standards set forth for that particular Portfolio, or,
if not so rated, are, in the Adviser's opinion, comparable in quality to
corporate debt securities in which a Portfolio may invest.
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 the 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.
OPTIONS - CALLS - The Stock Portfolio and the Asset Allocation Portfolio may
write (i.e., sell) call options ("calls") if (i) after any sale, not more than
25% of that Portfolio's total assets are subject to calls; (ii) the calls are
traded on a domestic securities exchange or board of trade; and (iii) the calls
are "covered." 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 placed in
a segregated account by its custodian) upon conversion or exchange of other
securities held by the Portfolio. When the Portfolio writes a call, it receives
a premium and agrees to sell the callable securities to a purchaser at a fixed
exercise price (which may differ from the market price of the underlying
security) regardless of market price changes during the call period. The
Portfolio may purchase a call only in a "closing purchase transaction" to
terminate its obligation on a call which it has written. For as long as the
Portfolio remains obligated as a writer of a call, it forgoes the opportunity to
profit from increases in the market price of the underlying security above the
call price. The principal objective in writing covered calls is to attempt to
attain, through the receipt of premiums from expired calls and net profits, if
any, from closing purchase transactions, a greater current return than might be
realized by holding the securities without writing calls.
28
<PAGE>
SHARES OF THE FUND ARE AVAILABLE EXCLUSIVELY TO INSURANCE COMPANY SEPARATE
ACCOUNTS AS AN INVESTMENT VEHICLE FOR VARIABLE INSURANCE CONTRACTS. THIS
PROSPECTUS SHOULD BE READ ALONG WITH THE PROSPECTUS OFFERING THE VARIABLE
INSURANCE. BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE
REFERENCE.
FOR MORE INFORMATION
If you'd like more information about the USLICO Series Fund and its four
Portfolios, the following documents are available free upon request:
ANNUAL AND SEMIANNUAL REPORT TO POLICY OWNERS
Additional information about the Fund's investments, including a list of its
Portfolios' holdings, is available in the Fund's annual and semiannual reports
to policy owners. In the Fund's annual report, you will find, except for the
Money Market Portfolio, a discussion of the market conditions and investment
strategies that significantly affected each portfolio's performance during its
most recent fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the Fund.
The current annual and semiannual reports and the SAI are incorporated by
reference into, and thus legally a part of, this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information or make inquiries about the Fund, please
contact us as follows:
USLICO Series Fund
C/o ReliaStar Life Insurance Company
20 Washington Avenue South
Route 1212
Minneapolis, MN 55401
Toll-Free Phone Number
1-800-333-6965 x5782
INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC): You can
review and copy information about the Fund (including the SAI) at the SEC's
Public Reference Room in Washington, D.C. To find out more about this public
service, call the SEC at 1-800-SEC-0330. Reports and other information about the
Fund are also available on the SEC's Internet site (www.sec.gov) or you can
receive copies of this information, for a fee, by writing the Public Reference
Section, Securities and Exchange Commission, Washington, DC 20549-6009.
Fund's Investment Company Act
File number 811-05451
29
<PAGE>
USLICO Series Fund
Statement of Additional Information
April 30, 1999
USLICO Series Fund (the "Fund") is an open-end, diversified management
investment company currently consisting of four separate investment Portfolios:
the Stock Portfolio, the Money Market Portfolio, the Bond Portfolio, and the
Asset Allocation Portfolio.
The Statement of Additional Information is intended to supplement the
information provided to investors in the Prospectus dated April 30, 1999, of
the USLICO Series Fund, and has been filed with the Securities and Exchange
Commission as part of the Fund's Registration Statement. This Statement of
Additional Information 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 Statement of Additional Information 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 number listed
below.
USLICO Series Fund
c/o ReliaStar Life Insurance Company
20 Washington Avenue So.
Route 1212
Minneapolis, MN 55401
(800) 333 6965 extension 5782
30
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
Introduction.......................................................................................S-1
General Information................................................................................S-1
General Portfolio Policies.........................................................................S-2
Investment Restrictions.......................................................................S-2
Additional Investment Restrictions Applicable to the Money Market
and Bond Portfolios........................................................................S-2
Description of Securities and Investment Techniques................................................S-3
Mortgage Related Securities...................................................................S-3
Bank Obligations..............................................................................S-3
Corporate Debt Securities.....................................................................S-4
Commercial Paper..............................................................................S-4
Repurchase Agreements.........................................................................S-5
Options.......................................................................................S-5
Risks Associated With Call Options On Securities..............................................S-6
Concentration Policy..........................................................................S-6
Management of the Fund.............................................................................S-7
Trustees and Officers.........................................................................S-7
Compensation of Trustees......................................................................S-8
Control Persons And Principal Holders Of Securities................................................S-8
The Investment Adviser And Sub-Adviser.............................................................S-9
Distributors Of Fund Shares........................................................................S-10
Suspension Of Redemptions.....................................................................S-10
Custodian..........................................................................................S-10
Administrative Services Agreement..................................................................S-10
Services Preformed by the Adviser and Payments by the Insurance Companies..........................S-10
Portfolio Transactions And Brokerage...............................................................S-11
Brokerage And Research Services...............................................................S-11
Portfolio Turnover............................................................................S-12
Net Asset Value....................................................................................S-12
Calculation Of Performance Data....................................................................S-13
The Money Market Portfolio Yield...................................................................S-14
The Bond Portfolio, The Common Stock Portfolio, The Asset Allocation Portfolio -
SEC 30 Day Yield................................................................................S-14
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
The Stock Portfolio, The Bond Portfolio, And The Asset Allocation Portfolio -
Average Annual Total Return.....................................................................S-15
The Stock Portfolio, The Bond Portfolio, The Asset Allocation Portfolio -
Cumulative Total Return.........................................................................S-15
Performance Comparisons............................................................................S-16
Taxation...........................................................................................S-16
Distributions.................................................................................S-17
Additional Information.............................................................................S-17
Shareholder Meetings..........................................................................S-17
Liability.....................................................................................S-17
Financial Statements...............................................................................S-17
Corporate Bond And Commercial Paper Ratings........................................................A-1
</TABLE>
<PAGE>
INTRODUCTION
This Statement of Additional Information is designed to elaborate upon
the discussion of certain securities and investment strategies which are
described in the Prospectus. 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 strategies.
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information or the Prospectus dated April 30, 1999, and, if given or made, such
information or representations may not be relied upon as having been authorized
by the Fund. This Statement of Additional Information does not constitute an
offer to sell securities in any state or jurisdiction in which such offering may
not lawfully be made. The delivery of this Statement of Additional Information
at any time shall not imply that there has been no change in the affairs of the
Fund since the date hereof.
GENERAL INFORMATION
USLICO Series Fund (the "Fund") is an open-end diversified management
investment company registered under the Investment Company Act of 1940 and
consists of four separate series (Portfolios), each of which has its own
investment objectives and policies. The Fund was organized as a business trust
under the laws of Massachusetts on January 19, 1988. On January 17, 1995,
ReliaStar United Services Life Insurance Company (hereinafter "RUSL" and
formerly known as "United Services Life Insurance Company") and ReliaStar Life
Insurance Company of New York (herein after "RLNY" and formerly known as
"Reliastar Bankers Security Life Insurance Company" and "Bankers Security Life
Insurance Society") became wholly-owned subsidiaries of ReliaStar Financial
Corp. ("ReliaStar"), previously the NWNL Companies, Inc., an insurance holding
company based in Minneapolis, Minnesota. On December 31, 1998, RUSL was
merged into ReliaStar Life Insurance Company ("RL").
Shares of the Portfolios are sold only to separate accounts of RL and
RLNY to serve as the investment medium for variable life insurance policies
issued by these companies. Each Portfolio share outstanding represents a
beneficial interest in the respective Portfolio and carries a par value of
$.001. The Fund has an unlimited number of shares authorized. All shares are
non-assessable and fully transfer when issued and paid for in accordance
thereof. The Fund sends its contract holders annual audited financial statements
and six-month unaudited financial statements.
S-1
<PAGE>
GENERAL PORTFOLIO POLICIES
Each Portfolio's investment objective together with the investment
restrictions 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 (i) 67% or more of the voting securities present at such
meeting, if the holders of more than 50% of the outstanding securities of such
portfolio are present or represented by proxy; or (ii) more than 50% of the
outstanding voting securities of such Portfolio, whichever is less.
INVESTMENT RESTRICTIONS
Unless otherwise stated, each of the following policies applies to each of the
Portfolios. An existing Portfolio may not:
1. Purchase securities on margin or make short sales;
2. Invest more than 25% of its total assets in securities of any one
particular industry nor invest more than 5% of its assets in any one
issuer, except that these restrictions do not apply to investments
in U.S. Government securities and the 25% limit does not apply to
the Money Market or Bond Portfolios for securities or obligations
issued by U.S. banks;
3. Invest in more than 10% of any issuer's outstanding voting
securities;
4. Invest in securities of other investment companies;
5. Participate in the underwriting of securities;
6. Borrow, pledge, or hypothecate its assets, except that a Portfolio
may borrow from banks for temporary purposes, but any such borrowing
is limited to an amount equal to 25% of a Portfolio's net assets and
a Portfolio will not purchase additional securities while borrowing
funds in excess of 5% of that Portfolio's net assets;
7. Invest for the purpose of exercising control over any company;
8. Invest in commodities or commodity contracts;
9. Purchase warrants, or write, purchase, or sell puts, calls,
straddles, spreads, or combinations thereof, except the Stock and
Asset Allocation Portfolios may write covered call options as
described in their sections;
10. Make investments in real estate or mortgages except that a
Portfolio may purchase readily marketable securities of companies
holding real estate or interest therein, or in oil, gas, or
development programs;
11. Purchase securities having legal or contractual restrictions on
resale;
12. Make any loans of securities or cash, except that a Portfolio may,
consistent with its investment objective and policies, (i) invest in
debt obligations including bonds, debentures, or other debt
securities, bank and other depository institution obligations, and
commercial paper, even though the purchase of such obligations may
be deemed the making of loans, and (ii) enter into repurchase
agreements;
13. Issue senior securities; and
14. Invest more than 10% of its total assets in repurchase agreements
maturing in more than seven days or in portfolio securities that are
not readily marketable.
ADDITIONAL INVESTMENT RESTRICTIONS APPLICABLE TO THE MONEY MARKET AND BOND
PORTFOLIOS
The Fund has adopted the following investment restrictions applicable only to
the Money Market and Bond Portfolios under which such Portfolios may not do the
following:
1. Invest in common stocks or other equity securities; and
2. Invest in securities of companies which, together with predecessor
companies, have a record of less than five years continuous
operations.
If a percentage restriction is adhered to at the time of an investment for any
Portfolio, a later increase or decrease in percentage resulting from a change in
the value of portfolio securities or the amount of the Portfolio's net assets
will not be considered a violation of any of the foregoing restrictions.
S-2
<PAGE>
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
Mortgage-Related Securities
The Bond and Asset Allocation Portfolios may invest in GNMA
certificates and FNMA and FHLMC mortgage-backed obligations. 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
bankers, commercial banks and others. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental and government-related
organizations.
GNMA Certificates: GNMA certificates are mortgage-backed securities
representing part ownership of a pool of mortgage loans for 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 FHA-insured or VA-guaranteed mortgages. 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.
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 the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Association ("FHLMC"). FNMA, a federally-chartered
and privately-owned corporation, issues pass-through securities representing
interest 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. 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.
Bank Obligations
Bank obligations in which all Portfolios may invest include
certificates of deposit, bankers' acceptances and fixed time deposits.
S-3
<PAGE>
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 are
dependent upon the market conditions and the remaining maturity of obligations.
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 any security issued by a commercial bank
unless the bank is federally-chartered and has total assets of at least U.S. $1
billion, or the equivalent in other currencies. All Portfolios may invest in
obligations of savings banks. A Portfolio will not invest in any security issued
by a savings bank unless such institution is federally-chartered and has total
assets of at least $1 billion.
Corporate Debt Securities
All Portfolios may invest in corporate debt securities or obligations.
The investment return of corporate debt securities reflects interest earnings
and changes in the market value of the security. The market value of a corporate
debt obligation may also 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.
Commercial Paper
All of the Portfolios may invest in commercial paper (including
variable amount master demand notes) issued by U.S. corporations (1) that have
the rating designated for the applicable Portfolio as described in the
Prospectus in the section on Investment Objectives and Policies, or (2) if not
rated, are determined to be of an investment quality comparable to rated
commercial paper in which a Portfolio may invest.
S-4
<PAGE>
Repurchase Agreements
All Portfolios may invest in repurchase agreements. 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 month (up
to one year) from the date of delivery. The resale price is in excess of the
purchase price by an amount which reflect 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.
Under the Investment Company Act of 1940 (the "1940 Act"), repurchase
agreements are considered to be loans by the purchaser collateralized by the
underlying securities. The Adviser or Sub-Adviser of a Portfolio will monitor
the value of the underlying securities at the time a 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, in accordance with procedures established by the
Board of Trustees, will also evaluate the creditworthiness and financial
responsibility of the banks and broker-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 ten percent
(10%) of the net assets of the 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
liquidation of the securities.
Options
In pursuing their investments objectives, the Stock and Asset
Allocation Portfolios may engage in the writing of call options on debt
securities.
Writing Options on Securities: The Portfolios may write (sell) call
options on debt or other securities in standardized contracts traded on national
securities exchanges or boards of trade.
A call option on a security is a contract that gives the holder of the
call, in return for a premium, the right to buy the underlying security from the
writer of the option at a specified exercise price at any time during the term
of the option. The writer of a call option on a security has the obligation upon
exercise of the option to deliver the underlying security upon payment of the
exercise price.
A Portfolio may write call 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 placed in a segregated account by its custodian) upon conversion
or exchange of other securities held by the Portfolio.
S-5
<PAGE>
If an option written by a Portfolio expires unexercised, the Portfolio
realizes a capital gain equal to the premium received at the time the option was
written. If an option purchased by a Portfolio expires unexercised, the
Portfolio realized a capital loss equal to the premium paid.
A Portfolio may purchase a call only in a "closing purchase
transaction" to terminate its obligation on a call that it has written. Prior to
the earlier of exercise or expiration of the call, an option may be closed out
by an offsetting purchase of a call option of the same series (type, exchange,
underlying security, exercise price and expiration). There can be no assurance,
however, that a closing purchase transaction can be effected when the Portfolio
desires.
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. The principal factors affecting the market value of 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 received for an option written by a Portfolio is recorded
as a deferred credit. The value of the option is marked-to-market daily and is
valued at the closing price on the exchange or board of trade on which it is
traded, or, if no closing price is available, at the mean between the last bid
and asked prices.
Risks Associated with Call Options on Securities:
There are several risks associated with writing call options on
securities. For example, there are significant differences between the
securities and option 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 a call option
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 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 a writer of a covered call option, a Portfolio foregoes, 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 written 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.
Concentration Policy
As a fundamental policy, each Portfolio may not invest 25% or more of
its total assets in the securities of any industry, nor more than 5% of its
assets in any one issuer. Although, for purposes of this limitation, U.S.
Government obligations are not considered to be part of any industry; therefore
these restrictions do not apply to U.S. Government securities. Further, the 25%
limit does not apply to the Money Market or Bond Portfolios for securities or
obligations issued by U.S. Banks.
Each Portfolio will retain a flexible approach to the investment of
funds and the Portfolio's composition may vary with the economic outlook. The
Portfolio may invest in U.S. Governmental securities, commercial paper, and
other money market instruments, including repurchase agreements maturing in
seven days or less. When, in the judgment of the investment manager, current
cash needs or market or economic conditions warrant a temporary defensive
position, the Portfolio may invest to a greater degree in such short-term U.S.
Government securities, commercial paper, and other money market instruments.
Taking temporary defensive positions may reduce the chances of the Portfolio
achieving its investment objectives.
Except for the Money Market Portfolio, each Portfolio's investments are
rotated among various market sectors based on the investment manager's research
and view of the economy. The Portfolio may buy and sell securities frequently,
resulting in portfolio turnover and higher transaction costs.
S-6
<PAGE>
MANAGEMENT OF THE FUND
The business and affairs of the Fund are managed under the direction of
its Board of Trustees according to appliable laws of the Commonwealth of
Massachusetts and the Fund's Declaration and Agreement of Trust. The Trustees
are Richard C. Kaufman, Chairman, David H. Roe, President, Jeri A. Eckhart, and
Wayne O. Jefferson, Jr. Additional information about the Trustees and the Fund's
executive officers may be found in the Statement of Additional Information under
the heading "Management of the Fund."
Trustees and Officers
Information pertaining to the Trustees and Executive Officers of the Fund is set
forth below.
The Trustee and officers are as follows:
<TABLE>
<CAPTION>
Name, Address and Age Position Held With Fund Principal Occupation During the Past Five Years
- --------------------- ----------------------- -----------------------------------------------
<S> <C> <C>
Richard C. Kaufman (65) Chairman and Trustee Consultant, 1994-present; Assistant Director of Legislative
New address Affairs, AUSA 1984-1994 Retired; Colonel, AUS (Ret.);
previously served on RUSL Advisory Counsel
David H. Roe (57) President, Trustee President, Central College, Pella, Iowa, 1998; Senior Vice
New address President, ReliaStar Financial Corp. 1995 to 1996 Retired;
President and Chief Operating Officer of USLICO Corporation,
1993-1995; President and CEO of ReliaStar United Services Life
Insurance Company ("RUSL"); and ReliaStar Bankers Security Life
Insurance Company ("RBSL") an officer from 1991-1996.
Jeri A. Eckhart (44) Trustee Independent Management Consultant, 1988-present; Board
6619 Jill Court Member, White House Fellows Foundation, 1990-present.
McLean, VA 22101
Wayne O. Jefferson, Jr. (61) Trustee Telecommunications Consultant, 1994-present; Executive
1003 Emerald Dr. Director, Support Services, LLC, Arlington, VA
Alexandria, VA 22308 1992-1994; General Manager, Telecom Solutions, Inc.,
Arlington, VA, 1991-1992; Telecommunications Consultant
and President, Jefferson Associates, Inc., Alexandria,
VA, 1989-1992.
David P. Wilken (35) Treasurer Second Vice President of Reliastar Life Insurance Company and
20 Washington Avenue South Assistant Vice President of RLNY; Affiliated with ReliaStar
Minneapolis, MN 55401 Life since 1977.
Robert B. Saginaw (59) Vice President, Secretary and Counsel, ReliaStar Life Insurance Company, 1995 to present; Vice
20 Washington Avenue South Counsel President and Associate Counsel of RUSL from 1980-1995.
Minneapolis, MN 55401
</TABLE>
S-7
<PAGE>
Compensation of Trustees
Mr. Saginaw, a Vice President and Secretary of the Fund, is an
"interested person" of the Fund and is also an employee of ReliaStar Life and
receives compensation therefrom. He does not receive additional compensation for
services rendered to the Fund. Mr. Roe, President of the Fund and an "interested
person" of the Fund, and the "Non-Interested" Trustees of the Board received in
1998, a fee of $1,000 for each meeting. The regular meetings of the Board are
held quarterly. For the years ended December 31, 1998, 1997 and 1996, total
fees paid to the Trustees aggregated $8,000, $6,000 and $6,000 respectively
for all portfolios combined.
<TABLE>
<CAPTION>
1998 Compensation
Pension or Estimated Total Compensation
Aggregate Retirement Benefits Annual From Registrant and
Compensation Accrued as Part of Benefits Upon Fund Complex Paid to
Name and Position From Registrant Fund Expense Retirement Trustees
----------------- --------------- ------------ ---------- --------
<S> <C> <C> <C> <C>
Richard C. Kaufman $4,000 0 0 $4,000
Chairman and Trustee
David H. Roe $4,000 0 0 $4,000
President and Trustee
Jeri A. Eckhart $4,000 0 0 $4,000
Trustee
Wayne O. Jefferson, Jr. $4,000 0 0 $4,000
Trustee
</TABLE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
On January 17, 1995, ReliaStar Financial Corp. ("ReliaStar") acquired
USLICO. USLICO was a holding company with two primary subsidiaries: United
Services Life Insurance Company, (now merged into ReliaStar Life Insurance
Company "RL"), of Arlington, Virginia and Bankers Security Life Insurance
Society (now known as ReliaStar Life Insurance Company of New York or "RLNY"),
of Woodbury, New York.
USLICO Series Fund (the "Fund"), consisting of four distinct
Portfolios, is an investment vehicle for certain separate accounts of RL and
RLNY. At the present time, shares of the Fund are sold exclusively to RL and
RLNY. The shares serve as the investment medium for variable life insurance
policies issued by these companies.
Beneficial owners of more than 25% of the Fund's outstanding securities
as of January 1, 1999 were: ReliaStar United Services Variable Life Separate
Account I and ReliaStar Life Insurance Company of New York Variable Life
Separate Account I. For this purpose "control" means: (i) the beneficial
ownership, either directly or through one or more controlled companies, of more
than 25% of the voting securities of a company; (ii) the acknowledgment or
assertion by either the controlled or controlling party of the existence of
control; or (iii) an adjudication under the terms and conditions of the
"40 Act", which has become final, that control exists.
No person owns of record or is know by the Fund to own beneficially 5%
or more of any Class of the Fund's outstanding equity securities, except that
ReliaStar United Services Variable Life Separate Account I, a separtate account
of RUSL, 4601 N. Fairfax Drive, Arlington, VA 22201, owns 52.8% of the Fund's
Common Stock, and ReliaStar Life Insurance Company of New York Variable Life
Separate Account I, a separate account of RLNY, 1000 Woodbury Road, Woodbury,
L.I., New York 11797, owns 47.2% of the Fund's Common Stock.
The Fund's equities securities owned by all officers, directors and
members of any advisory board as a group is less than 1% of the outstanding
Common Stock of the Fund.
S-8
<PAGE>
THE INVESTMENT ADVISER AND SUB-ADVISER
Since April 1, 1995, ReliaStar Investment Research, Inc. f/k/a
Washington Square Advisers, Inc. the "Adviser") has served as Investment Adviser
(the "Adviser") to the Fund pursuant to an Investment Advisory Agreement between
it and the Fund. The Adviser is a wholly owned subsidiary of ReliaStar Financial
Corp. From April 1988 through April 1995, the Adviser for the Fund was Bankers
Centennial Management Corp. The Adviser is responsible for administering affairs
of and supervising the investment program for the Fund. The Adviser 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. The Adviser's address is 100 Washington Ave. So.,
Minneapolis, MN 55401.
Effective April 1, 1995, the Fund, the Adviser and Pilgrim Baxter Value
Investors, Inc., then known as Newbold's Asset Management, Inc. (the
"Sub-Adviser") entered into an Investment Advisory and a Sub-Investment Advisory
Agreements. The Sub-Adviser provides advisory services to the Stock Portfolio
and the Asset Allocation Portfolio of the Fund. The address of the Sub-Adviser
is 825 Duportail Road, Wayne, PA 19087. Pilgrim Baxter has been the Sub-Adviser
for equities since July 1992.
Subject to overall supervision of the Fund's Board of Trustees, the
Adviser exercises overall responsibility for the investment and reinvestment of
the Fund's Assets for which its has primary investment responsibility and
continuously monitors and supervises all aspects of the Sub-Adviser's
performance of its investment duties. In so doing, the Adviser manages the
day-to-day investment operations of the Fund and the composition of the
investment portfolios of the Bond and Money Market Portfolios and the assets of
the Asset allocation Portfolio not allocated to the management of the
Sub-Adviser, including the purchase, retention and disposition of the
investments, securities and cash contained therein.
Subject to overall responsibility of the Fund's Board of Trustees and
the Adviser, the Sub-Adviser will exercise overall responsibility for the
investment and reinvestment of the Stock Portfolio and the portion of the assets
of the Asset Allocation Portfolio allocated by the Adviser to the Sub-Adviser.
In so doing, the Sub-Adviser will manage the day-to-day operations of the
investment portfolio of the Stock Portfolio and the portion of the Asset
Allocation Portfolio for which it has primary advisory responsibility, which
includes all equity investments.
Under the terms of the Advisory Agreement, the Adviser is obligated to
manage the Fund's Portfolios in accordance with applicable laws and regulations.
The Advisory and Sub-Advisory Agreements ("Agreements") were reapproved
by the Board of Trustees, including a majority of the Trustees who are not
parties to the Agreements, or interested persons of such parties, at a meeting
held on March 3, 1998, to be effective April 1, 1998. The Agreements will
continue in effect indefinitely, 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, and (ii) a majority of the Trustees who are not parties to
such Advisory Agreement or "interested persons" (as defined in the 1940 Act) of
any such party. The Board previously approved the Agreements on March 5, 1997.
Each Agreement may be terminated without penalty on 60 days written notice by
either party to the Agreement 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 each Portfolio, the Fund pays the Adviser a fee at an annual rate not to
exceed .50% of the first $100 million of the average daily net assets of the
Portfolio, and .45% of the average daily net assets of the Portfolio in excess
of $100 million. The Fund does not pay the Sub-Adviser. For the years 1998,
1997 and 1996, the Fund paid the Adviser the following management fees: Stock
Portfolio, $98,513, $64,509 and $53,353, respectively; Money Market Portfolio,
$19,255, $14,571 and $14,752, respectively; Bond Portfolio, $12,107, $7,027 and
$7,176, respectively; Asset Allocation Portfolio, $57,991, $38,430 and $34,689,
respectively.
S-9
<PAGE>
DISTRIBUTION OF FUND SHARES
Shares of the Fund are continuously distributed through Washington
Square Securities, Inc., a wholly-owned subsidiary of ReliaStar Financial Corp.,
which is the 100% owner of RUSL and RLNY. Robert B. Saginaw is employed by
ReliaStar Life Insurance Company, an affiliated company, and is the Vice
President and Secretary of the Fund. The Fund entered into a distribution
agreement, with Washington Square Securities, Inc. on February 1, 1997.
Washington Square Securities, Inc., a registered broker-dealer under the
Securities Act of 1934, and member of the National Association of Securities
Dealers, Inc., receives no remuneration from the Fund. Its address is 111
Washington Ave. S., Minneapolis, MN 55401.
ReliaStar Financial Marketing Corporation, formerly known as USLICO
Securities Corp., a direct wholly-owned subsidiary of ReliaStar Financial Corp.
served as the Fund's Distributor from 1988 until February 1, 1997, pursuant to
a distribution contract. It received no compensation from the Fund.
Suspension of Redemptions
The Fund may suspend the right of redemption of shares of any
Portfolio 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 Securities and Exchange
Commission determines that a state of emergency exists which may make payment or
transfer not reasonable practicable; (iii) as the Securities and Exchange
Commission may by order permit for the protection of the security holder 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.
CUSTODIAN
On October 1, 1997, State Street Bank and Trust Company, a
Massachusetts banking institution became Custodian for all the Fund's portfolios
and their cash. Previously Crestar Bank, a Virginia banking institution served
as custodian for the Fund's portfolios securities and cash. In its capacity as
Custodian, State Street maintains certain financial and accounting books and
records pursuant to a separate agreement with the Fund.
ADMINISTRATIVE SERVICES AGREEMENT
ReliaStar Life Insurance Company, successor by merger, on December 31,
1998, to ReliaStar United Services Life Insurance Company ("RUSL") acts as the
Fund's dividend disbursing and transfer agent and provides administrative, legal
and accounting services pursuant to an Administrative Services Agreement (the
"Administrative Agreement") by and between the Fund, RUSL, and the Adviser.
As compensation, RUSL (now merged into RL) will be reimbursed for its
costs associated with providing services under the Administrative Agreement to
the Fund. Such reimbursements will be fair and reasonable and include all costs
incurred by RUSL.
The Administrative Services Agreement is renewable from year to year if
the Fund's trustees, (including a majority of the Fund's disinterested trustees)
approve the continuance of the Agreement. RUSL or the Fund may terminate the
Administrative Services Agreement on 90 days written notice to the other party.
Amendments to the Agreement may be effected if approved by the Trustees of the
Fund (including a majority of the disinterested trustees) and the Agreement is
not assignable by the Fund without the written consent of RUSL, or by RUSL
without the written authorization of the Fund's Board of Trustees.
SERVICES PREFORMED BY THE ADVISER
AND PAYMENTS BY THE INSURANCE COMPANIES
The Fund has entered into an investment advisory agreement with an
affiliate of the Insurance Companies, ReliaStar Investment Research, Inc.
("RIRI") pursuant to which RIRI furnishes investment advisory and other
services.
RIRI provides the Fund with all necessary office facilities and
personnel for servicing the Fund's investments, and compensates all personnel of
RIRI performing services relating to research, statistical and investment
activities.
In addition, RIRI or its affiliates, subject to the supervision of the
Board of Trustees, provide the management and administrative services necessary
for the operation of the Fund. These services include providing facilities for
maintaining the Fund's organization: supervising relations with custodians,
transfer and pricing agents, accountants, legal counsel, underwriters, and other
persons dealing with the fund; preparing all general shareholder communications
and conducting shareholder relations; maintaining the Fund's records and the
registration of the Fund's shares under federal securities laws and making
necessary filings under state securities laws; developing management and
shareholder services for the fund; and furnishing reports, evaluations, and
analyses on a variety of subjects to the Trustees.
Pilgrim Baxter Value Investors, Inc ("PB") is the sub-adviser of the
Stock Portfolio and the equities portion of the Asset Allocation Portfolio.
Under its contract with the Fund, RIRI acts as investment adviser. Under its
sub-advisory agreement, and subject to the supervision of the Board of Trustees,
PB directs the equities investments of the Fund in accordance with its
investment objectives, policies and limitations.
By contractual provision within the Policies, the management fees that
can be charged against the Policyholders for all investment advisory services
are limited to .25% on an annual basis. All management fees above that amount
are paid for by the Insurance Companies.
S-10
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
Brokerage and Research Services
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. Transaction on
national stock exchanges and other agency transaction involve the payment of 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.
The Adviser or the Sub-Adviser for a Portfolio places all orders for
the purchase and sale of portfolio securities and options for a Portfolio
through a substantial number of broker-dealers. In executing transactions, the
Adviser or the Sub-Adviser will attempt to obtain the best execution for a
Portfolio taking into account such 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 effecting purchases
and sales of portfolio securities in transaction on national stock exchanges for
the account of the Fund the Adviser or the Sub-Adviser may pay higher commission
rates than the lowest available when the Adviser or the Sub-Adviser believes it
is reasonable to do so in light of the value of the brokerage and research
services provided by the broker-dealer effecting the transaction, as described
below. 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 mark-up.
Some securities considered for investment by the Fund's Portfolios may
also be appropriate for other clients served by the Adviser or the Sub-Adviser.
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 the
Sub-Adviser is considered at or about the same time, transactions in such
securities will be allocated among the Portfolios and clients in a manner deemed
fair and reasonable by the Adviser or the Sub-Adviser. Although there is no
specified formula for allocating such transaction, the various allocation
methods used by the Adviser or the Sub-Adviser, 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 for a Portfolio may receive research services from many
broker-dealers with which the Adviser places the 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 in
advising its various clients (including the Fund), although not all of these
services are necessarily useful and of value in managing a Portfolio. The
management fee paid by the Portfolio is not reduced because the Adviser and its
affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934,
the adviser may cause a Portfolio to pay a broker-dealer, which provides
"brokerage and research services" (as defined in that Act) to the Adviser, 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.
The Fund paid aggregate brokerage commissions of $336,570 for the for
the three years ended December 31, 1998.
S-11
<PAGE>
Portfolio Turnover
For reporting purposes, the portfolio turnover rate of each Portfolio
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 Portfolio's
securities (other than short-term securities) were replaced once during the
fiscal year. The portfolio turnover rate for each Portfolio will vary from year
to year, depending on market conditions. Because each Portfolio has a different
investment objective, each will have a different expected rate of portfolio
turnover. However, the portfolio turnover rate will not be a limiting factor
when management deems it appropriate to buy or sell securities for a particular
Portfolio.
The writing of call options by the Stock and Asset Allocation
Portfolios may result in higher turnover than otherwise would be the case and,
therefore, greater commission expenses.
It is anticipated that the annual portfolio turnover, as defined above,
will not exceed the following limits of the Portfolios under normal market
conditions: Money Market Portfolio -- 0%; Stock Portfolio -- 125%; Bond
Portfolio -- 100%; and Asset Allocation Portfolio -- 150%. Increased portfolio
turnover may result in greater brokerage commission. In 1998, the Portfolio
turnover rate was: Stock Portfolio -- 172.22%; Bond Portfolio -- 90.97%; and
Asset Allocation Portfolio -- 135.68%.
Market conditions and changes in interest rates may result in turnover
at a greater or lesser than anticipated.
NET ASSET VALUE
As indicated under "Net Asset Value" in the Prospectus, the Fund's net
asset value per share for the purpose of pricing purchase and redemption orders
is determined after 4:00 p.m. Eastern Standard Time, on each day the New York
Stock Exchange is open for trading. Net asset value will not be determined on
the following days: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
Pursuant to an exemptive rule of the Securities and Exchange
Commission, The Money Market Portfolio's securities are valued by the amortized
cost method. This method of valuation involves valuing a security at its cost at
the time of purchase and thereafter assuming a constant amortization to maturity
of any discount or premium, regardless of the impact of fluctuating interest
rates on the market value of the security. 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 security. During periods of declining interest rates, the quoted
yield on shares of the Portfolio may tend to be higher than that of a fund or
Portfolio with identical investments which uses a method of valuation based on
market prices an estimates of market prices for all its portfolio securities.
Thus, if the use of amortized cost by the Portfolio resulted in lower aggregate
portfolio value on a particular day, a prospective investor in the Portfolio
would be able to obtain a somewhat higher yield of he purchased shares on that
day than he would be able to receive from a fund or Portfolio using solely
market values. Existing investors in the Portfolio would receive less investment
income. The converse is true in a period of rising interest rates.
The Rule permitting the Portfolio to use the amortized cost method of
valuation requires that, under the direction of the Board of Trustees, certain
procedures be adopted to monitor and stabilize the price per share of the
Portfolio. Calculations are made to compare the value of its investments valued
at amortized cost with market values. Market valuations are obtained by using
actual quotations provided by
S-12
<PAGE>
issuers or market makers, estimates of market value, or values obtained from
yield data relating to classes of money market instruments or U.S. Government
securities published by reputable sources at the mean between the bid and asked
prices for the instruments. In the event that a deviation of 1/2 of 1% or more
exists between the Fund's $1.00 per share net asset value and the net asset
value calculated by reference to market quotations, or if there is any other
deviation which the Board of Trustees believes would result in a material
dilution of shareholders or purchasers, the Board of Trustees will promptly
consider what action, if any, should be initiated.
Under the exemptive Rule of the Securities and Exchange Commission
allowing the Fund to use the amortized cost method of valuation of portfolio
securities, the Fund must maintain a dollar-weighted average portfolio maturity
of 90 days or less. In addition, with certain limited exceptions, the Fund
cannot invest more than 5% of its assets in the securities of a single issuer
(other than government securities). Investments in Second Tier securities in the
aggregate must be limited to 5% of the Fund's total assets, and investment in a
single Second Tier Security cannot exceed the greater of 1% of total assets or
$1 million. See, "Investment Strategies."
The Fund can only invest in instruments having remaining maturities of
397 days or less and can only invest in securities determined by the Adviser to
be of high quality with minimal credit risks.
On December 31, 1998, the net asset value per share of each portfolio
was calculated as follows:
<TABLE>
<S> <C>
The Stock Portfolio
Net Assets $27,774,017 = Net Asset Value Per Share $13.63
-----------------------------------
Shares Outstanding 2,037,007
The Money Market Portfolio
Net Assets $ 5,963,727 = Net Asset Value Per Share $1.00
-----------------------------------
Shares Outstanding 5,963,727
The Bond Portfolio
Net Assets $ 2,831,882 = Net Asset Value Per Share $9.75
-----------------------------------
Shares Outstanding 290,556
The Asset Allocation Portfolio
Net Assets $16,335,368 = Net Asset Value Per Share %11.92
-----------------------------------
Shares Outstanding 1,370,087
</TABLE>
CALCULATION OF PERFORMANCE DATA
The Fund is the successor to the Separate Account I (a Stock Account),
Separate Account II (a Money Market Account), Separate Account III (a Bond
Account) and Separate Account IV (an Asset Allocation Account) of ReliaStar
United Services Life Insurance Company and Separate Account I (a Stock Account),
Separate Account II (a Money Market Account), Separate Account III (a Bond
Account) and Separate Account IV (an Asset Allocation Account) of ReliaStar Life
Insurance Company of New York (collectively, the "RUSL and RLNY Separate
Accounts"). On April 30, 1988, the investment-related assets and liabilities of
the RUSL and RLNY Separate Accounts were transferred to the Stock, Money Market,
Bond and Asset Allocation Portfolios of the Fund. Performance calculations are
based upon the RLNY Separate Accounts.
S-13
<PAGE>
THE MONEY MARKET PORTFOLIO YIELD
To calculate a seven-day yield for the Money Market Portfolio, the Fund
uses a hypothetical, pre-existing account having a balance of $100 at the
beginning of the seven-day period. The net change in the value of the Portfolio
during the seven-day period (excluding any realized gains or losses from the
sale of securities and unrealized appreciation and depreciation) is divided by
the value of the Account at the beginning of the period and then multiplied by
365/7 to obtain the annual yield to the nearest hundredth of one percent. Since
the net change in the seven-day value is used, the values reflect the charges
made against the Portfolio.
The seven-day yield does not necessarily represent the future yield of
the Money Market Portfolio. Yields fluctuate on a daily basis and reflect
quality, length of maturities, rates of return and market conditions for money
market investments suitable for this Portfolio.
A hypothetical example of how we calculate the seven-day yield for the
period ending December 31, 1998, assuming the values used are as follows:
<TABLE>
<S> <C> <C>
(1) Value on Dec. 24, 1998.......................................... $100.00
(2) Value on Dec. 31, 1998 (exclusive of capital charges).......... 100.08
(3) Net change:(2) - (1)............................................ .08
(4) Net change divided by Value on Dec. 24, 1998:
(3) divided by (1)......................................... .0008
(5) Seven-day yield annualized (multiplied by 365/7)................ 4.17%
</TABLE>
THE BOND PORTFOLIO, THE COMMON STOCK PORTFOLIO,
THE ASSET ALLOCATION PORTFOLIO -
SEC 30 DAY YIELD
Yield is computed by dividing the net investment income per share
deemed earned during the computation period by the maximum offering price per
share on the last day of the period according to the following formula:
a-b
---
SEC YIELD = 2[( cd + 1)(6)-1]
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.
The SEC 30 day yield for the period ending December 31, 1998 for the
Bond Portfolio was 5.77%; the Common Stock Fund, .74%; and the Asset Allocation
Fund 2.52%
S-14
<PAGE>
THE STOCK PORTFOLIO, THE BOND PORTFOLIO, AND THE ASSET ALLOCATION
PORTFOLIO - AVERAGE ANNUAL TOTAL RETURN
Average Annual Total Return is computed by finding the average annual
compounded rates of return over 1, 5, and 10 years that would equate the initial
amount invested to the ending redeemable value, according to the following
formula:
P(1+T) = ERV or T = ERV/P 1/n - 1
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and,
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of
such period.
This calculation assumes all dividends and capital gain distributions
are reinvested at net asset value on the appropriate reinvestment dates as
described in the Prospectus, and includes all recurring fees, such as investment
advisory and management fees, charged as expenses to all shareholder accounts.
Average annual total return figures for one year ending December 31,
1998 are: 6% -- Stock Portfolio; 4.30% -- Bond Portfolio; and, 5.51% --
Asset Allocation Portfolio. For the five year period ending December 31, 1998,
the average annual total return figures are: 17.73% -- Stock Portfolio; 5.69% --
Bond Portfolio; and, 11.68% -- Asset Allocation Portfolio. For the ten year
period ending December 31, 1998, the average annual total return for the Stock
Portfolio was 13.99%. For the Bond and Asset Allocation Portfolios the ten-year
period average annual total return figures are: 7.73% -- Bond Portfolio and
10.91% -- Asset Allocation Portfolio.
THE STOCK PORTFOLIO, THE BOND PORTFOLIO, THE ASSET ALLOCATION
PORTFOLIO - CUMULATIVE TOTAL RETURN
Cumulative Total Return is computed by finding the cumulative
compounded rate of return over the period indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
CTR = ERV - P
---------- *100
P
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of
such period; and,
P = initial payment of $1,000.
This calculation assumes all dividends and capital gain distributions
are reinvested at net asset value on the appropriate reinvestment dates as
described in the Prospectus, and includes all recurring fees, such as investment
advisory and management fees, charged as expenses to all shareholder accounts.
S-15
<PAGE>
The cumulative total return for the fiscal year ending December 31,
1998, for each Portfolio was 270.49%, Stock Portfolio; 110.55%, Bond Portfolio;
and, 181.52%, Asset Allocation Portfolio.
PERFORMANCE COMPARISONS
Comparative performance information may be used from time to time in
advertising each Portfolio's shares, including data from Lipper Analytical
Services, Inc., Morningstar, Inc. and other entities or organizations which
track the performance of investment companies. Each Portfolio's performance also
may be compared to the performance of its respective Comparison Index, if any,
as described in the Prospectus, and, additionally, to the performance of
unmanaged indices. Unmanaged indices may assume the reinvestment of dividends
but generally do not reflect deductions for administrative and management cost
and expenses.
Quotations of yield or total return for the Fund will not take into
account charges or deductions against the Separate Account to which the Fund
shares are sold or charges and deductions against the policies issued by RUSL
and RLNY. Performance information for a Portfolio reflects only the performance
of a hypothetical investment in the Portfolio during the particular time period
on which the calculation is based. Performance information should be considered
in light of the Portfolios' 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 elects 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 must,
among other things: (i) derive in each taxable year at least ninety percent
(90%) of its gross income from dividends, interest, payments with respect to
securities loan, 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 fifty percent (50%) of the market value of the Portfolios' assets are
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 five percent (5%) of the value of the Portfolio's total assets and
10 percent (10%) of the outstanding voting securities of such issuer, and (b)
not more than twenty-five percent (25%) of the value of its total assets is
invested in the securities of and one issuer (other than U.S. Government
securities or the securities of other resulted investment companies); and (iii)
distribute at least ninety percent (90%) of its net investment income (which
includes dividends, interest, and net short-term capital gains in excess of and
net long-term capital losses) each taxable year.
As a regulated investment company, a Portfolio will not be subject to
U.S. federal income tax on its net investment 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 net investment 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 four percent (4%) excise tax. To avoid the tax, a
Portfolio must distribute during each calendar year, (i) at least ninety-eight
percent (98%) of its ordinary income (not taking into account any capital gains
or losses) for the calendar year, (ii) at least ninety-eight percent (98%) of
its capital gains in excess of its capital losses for the twelve-month period
ending October 31 of the calendar year, and (iii) all ordinary income and
capital gains for previous years that were not distributed during such years. To
avoid application of the
S-16
<PAGE>
excise tax, each Portfolio intends to make these distributions in accordance
with the calendar year distribution requirement. A distribution will be treated
as paid during the calendar year if it is declared by a Portfolio before
December 31 of the year and paid by the Portfolio by January 31 of the following
year. Such distribution will be taxable to shareholders (the Separate Account)
in the year the distributions are declared, rather than the year in which the
distributions are received.
Distributions
Distributions of any new investment income by a Portfolio are taxable
to the shareholder as ordinary income. Net capital gains will be treated, to the
extent distributed, as long-term capital gains in the hands of the shareholder.
ADDITIONAL INFORMATION
Shareholder Meetings
The Declaration of Trust does not require that the Fund hold annual or
regular meetings of shareholders. Meetings of the Shareholders may be called by
the Trustees and held at such times the Trustees may from time to time
determine, for the purpose of the elections of Trustees or such other purposes
as may be specified by the Trustees.
Liability
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund, or
Portfolio thereof, organized as a Massachusetts business trust. The Declaration
of Trust further provides for indemnification out of the assets and property of
the Fund, or Portfolio thereof, for all loss and expense of any shareholder held
personally liable for the obligations of the Fund or Portfolio. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund or Portfolio would be unable to meet
its obligations.
FINANCIAL STATEMENTS
The audited Financial Statements and Report of Independent Auditors'
(Deloitte & Touche LLP for the Fund for the fiscal years ended December 31,
1998) are incorporated herein by reference to the Registrant's 1998 Annual
Report to Shareholders filed with the U.S. Securities and Exchange Commission on
April 28, 1999. No other portion of the Annual Report is so incorporated. Please
call 1-800-338-7737, ext. 3626 to obtain a copy of the most recent Annual Report
of the Fund at no charge.
S-17
<PAGE>
APPENDIX I
CORPORATE BOND AND COMMERCIAL PAPER RATINGS
(a) Corporate Bonds: Bonds are rated Aa by Moody's Investors Service,
Inc. 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 may
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 as 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 Corporation 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 have a strong capacity to pay
principal 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
elements begin to predominate. These bonds have adequate asset coverage and
normally are protected by satisfactory earnings. Their susceptibility to
changing conditions, particularly 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.
(b) Commercial Paper: The ratings Prime-1 and Prime-2 are the two
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 within this Prime category may be given ratings 1, 2 or 3,
depending on the relative strengths of these factors.
Commercial paper rated A-1 or A-2 by Standard & Poor's has the
following characteristics: (1) liquidity ratios are adequate to meet cash
requirements; (2) 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; (3)
the issuer should have access to at least two additional channels of borrowing;
(4) basic earnings and cash flow should have an upward trend with allowance made
for unusual circumstances; and (5) 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 within this highest classification.
A-1
<PAGE>
Part C. OTHER INFORMATION
Item 23. Financial Statements and Exhibits
I Financial Statements
Contained in Part A:
Financial Highlights for each portfolio for each year in the
five year period ending December 31, 1998.
Contained in Part B:
The financial statements are incorporated by reference into in
Part B from the Registrant's 1998 Annual Report to
Shareholders filed April 28, 1999.
II Exhibits
(a) Agreement and Declaration of Trust of USLICO Series
Fund, filed as an Exhibit to Form N-14 of Bankers
Security Variable Life Separate Account I, Bankers
Security Life Insurance Society, and the USLICO Series
Fund on January 19, 1988, File No. 33-19750.*
(b) USLICO Series Bylaws, filed as an Exhibit to Form N-14
of Bankers Security Variable Life Separate Account I,
Bankers Security Life Insurance Society, and the
USLICO Series Fund on January 19, 1988, File No.
33-19750.*
(c) Voting Trust Agreement. Not Applicable.
(d).1 Investment Advisory Agreement by and between USLICO
Series Fund and Washington Square Advisers, Inc.
restated as of March 5, 1997, to reflect a name
change.*
(d).2 Sub-Investment Advisory Agreement by and between
Pilgrim Baxter Value Investors, Inc. (formerly
Newbold's Asset Management, Inc.) and Washington
Square Advisers, Inc. restated as of March 5, 1997, to
reflect a name change.*
(e) Distribution Agreement by and between USLICO Series
Fund and Washington Square Securities, Inc., dated
February 1, 1997.*
(f) Bonus, Profit Sharing, or Pension Plans. None.
(g) Custodian Contract by and between USLICO Series Fund
and State Street Bank and Trust Company, dated October
1, 1997.**
(h) Administrative Services Agreement by and between
USLICO Series Fund, Washington Square Advisers, Inc.
and ReliaStar United Services Life Insurance Company
dated January 1, 1997.*
C-1
<PAGE>
(i) Opinion and Consent of Robert B. Saginaw filed as an
Exhibit to Post-Effective Amendment No. 9 to Form N-1A
on April 30, 1996, File No. 33-20957, and incorporated
herein by reference.
(j).1 Consent of Deloitte & Touche LLP
(j).2 Consent of KPMG LLP
(k) All Financial Statements Omitted from Item 22. None.
(l) Initial Capital Agreements. Not Applicable.
(m) Plan pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Not Applicable.
(n).1 Financial Data Schedule - Common Stock Fund
incorporated by reference to the Fund's 1998 Report on
Form N-SAR.
(n).2 Financial Data Schedule - Money Market Portfolio
incorporated by reference to the Fund's 1998 Report on
Form N-SAR.
(n).3 Financial Data Schedule - Bond Portfolio incorporated
by reference to the Fund's 1998 Report on Form N-SAR.
(n).4 Financial Data Schedule - Asset Allocation Portfolio
incorporated by reference to the Fund's 1998 Report
on Form N-SAR.
(o) Plan pursuant to Rule 18f-3 under the Investment
Company Act of 1940. Not Applicable.
(p).1 Power of Attorney, dated May 1, 1989, filed as an
Exhibit to Post-Effective Amendment No. 2 to Form N-1A
on May 1, 1989, File No. 33-19749, and incorporated
herein by reference.
(p).2 Power of Attorney, dated April 27, 1995, filed as an
Exhibit to Post-Effective Amendment No. 8 to Form N-1A
of USLICO Series Fund, on April 27, 1995, File No.
33-20957, and incorporated herein by reference.
(p).3 Power of Attorney, dated May 7, 1997. **
* Filed in 485BPOS on April 30, 1997, Post-Effective Amendment
No. 10, File 033-20957, 811-05451, and incorporated herein by
reference;
**Filed in 485BPOS on April 29, 1998, Post-Effective Amendment
No. 11, File 033-20957, 811-05451, and incorporated herein by
reference.
Item 24. Persons Controlled by or Under Common Control with Registrant
A chart identifying the subsidiaries of ReliaStar Financial Corp. and
their relationship to one another is incorporated by reference to
item 26 of Form N-4 Registration Statement of Separate Account One of
Northern Life Insurance Company, File No. 33-90474, filed April 23,
1999.
C-2
<PAGE>
Item 25. Indemnification
Reference is made to Article V, Section 5.4 of the Registrant's
Agreement and Declaration of Trust, which is incorporated by
reference herein.
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 Advisers
(a) The directors and officers of the Adviser, ReliaStar
Investment Research, Inc.("RIRI") and their businesses and
other connection during the past two years are as follows. All
addresses are 20 Washington Avenue S., Minneapolis, MN 55401.
<TABLE>
<CAPTION>
Name of Individual Business and Other Connections
------------------ ------------------------------
<S> <C>
Gregory M. Anderson Senior Vice President, Portfolio Management for RIRI
Susan M. Bergen Counsel of ReliaStar Life Insurance Company; Secretary of
RIRI and Washington Square Securities, Inc.
Stephen L. Buchert Director of Compliance for RIRI.
Richard R. Crowl Senior Vice President and General Counsel, ReliaStar Financial
Corp. and ReliaStar Life Insurance Company; Senior Vice
President and General Counsel, RIRI.
Gary L. Jacobson Senior Vice President, Special Investments for RIRI
Mark S. Jordahl President, Chief Executive Offices and Director, RIRI.
Michael L. Sheplee Senior Vice President, Administration and Treasurer for RIRI
Winifred Smith Senior Vice President, Real Estate for RIRI
John J. Turner Chairman and Chief Executive Officer, ReliaStar Financial Corp.
and ReliaStar Life Insurance Company; Director, RIRI.
</TABLE>
C-3
<PAGE>
(b) The directors and officers of the Sub-Adviser, Pilgrim Baxter
Value Investors, Inc. and their businesses and other
connection during the past two years are as follows:
<TABLE>
<CAPTION>
Name Title Business and Other Connections
---- ----- ------------------------------
<S> <C> <C>
Harold Joseph Baxter Chairman, CEO, Director Chairman, CEO, and Director of the sub-adviser since
July, 1996; Chairman, CEO, and Director of Pilgrim
Baxter & Associates, Ltd. since August, 1985.
David Wade Jennings President, COO, Director and President, COO, Director, and Treasurer of the Treasurer sub-adviser
since July, 1996; Director of Client Services at Pilgrim Baxter &
Associates, Ltd., since March 1996; prior thereto President of Downing
Street Associates from February, 1994 to February, 1996.
Eric Charles Schneider Chief Financial Officer CFO of the sub-adviser since July, 1996; CFO of Pilgrim Baxter &
Associates, Ltd. since February, 1996; prior thereto, Partner, Sacco,
Sweeney & Schneider from January, 1986 to January 1996.
Amy Yuter Chief Compliance Officer Chief Compliance Officer of the sub-adviser since July, 1996; Registered
Principal, SEI Financial Services Company since March, 1996; Chief
Compliance Officer, Pilgrim Baxter & Associates, Ltd. since July, 1995.
John Mark Zerr General Counsel, Secretary General Counsel and Secretary of the sub-adviser since
July, 1996; General Counsel and Secretary of Pilgrim
Baxter & Associates, Ltd. since November, 1996; prior
thereto Vice President and Assistant Secretary of
Delaware Management Company, Inc. from July, 1995 to
November, 1996.
</TABLE>
Item 27. Principal Underwriters
(a) Washington Square Securities, Inc. serves as the Fund's
Distributor and as the Distributor of ReliaStar Life Insurance
Company of New York Variable Annuity Contracts issued by
subaccounts of its Separate Accounts P and Q, pursuant to a
distribution contract. It also acts as Distributor to
ReliaStar Life Insurance Company products: ReliaStar Select
Variable Account Annuity II; ReliaStar Select Variable Account
Annuity III; Select*Life Variable Account - Life I;
Select*Life Variable Account - Life II; Select*Life Variable
Account - Life III; Select*Life Variable Account - SVUL.
Washington Square Securities, Inc. also acts as Distributor
to: Northern Life Insurance Co. - Separate Account One -
Advantage; and, ReliaStar Life Insurance Company of New York
- ReliaStar Variable Life New York.
C-4
<PAGE>
(b) The directors and officers of WSSI are as follows:
<TABLE>
<CAPTION>
Name Positions and Offices with WSSI
---- -------------------------------
<S> <C>
John H. Flittie Director and Chairman
Anne W. Dowdle Director
Wayne R. Huneke Director
Michael J. Dubes Director
Robert C. Salipante Director
James R. Gelder Director
Jeffrey A. Montgomery President and Chief Executive Officer
Kenneth S. Cameranesi Executive Vice President and
Chief Operating Officer
Gene Grayson Vice President--National Sales
Susan M. Bergen Secretary
David Braun Assistant Vice President
Karin Callanan Assistant Vice President
Margaret B. Wall Treasurer and Chief Financial Officer
Allen L. Kidd Assistant Secretary
Loralee A. Renelt Assistant Secretary
</TABLE>
The principal business address of each of the foregoing executive
officers is 20 Washington Avenue South, Minneapolis, Minnesota 55401,
except for the following individuals whose principal business
addresses are listed after their respective names: Michael J. Dubes,
1501 4th Avenue, Seattle, Washington 98111; Allen L. Kidd, 222 North
Arch Road, Richmond, Virginia 23236.
C-5
<PAGE>
Item 28. Location of Accounts and Records
The account 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 thereunder will be maintained at c/o ReliaStar
Life Insurance Company, 20 Washington Avenue S., Route 1212,
Minneapolis, MN 55401.
Item 29. Management Services
Not applicable.
C-6
<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 Post-Effective Amendment No. 13 to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of Minneapolis, County of Hennepin, State of Minnesota this 28th day of
April 1999.
USLICO SERIES FUND
By /s/ Robert B. Saginaw
---------------------
Robert B. Saginaw
Vice President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment 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>
Richard C. Kaufman* Chairman of the Board of Trustees April 28, 1999
Jeri A. Eckhart** Trustee April 28, 1999
Wayne O. Jefferson, Jr.** Trustee April 28, 1999
David H. Roe*** Trustee April 28, 1999
---------------------- Treasurer April 28, 1999
David P. Wilken
</TABLE>
* By: /s/ Robert B. Saginaw
---------------------
Robert B. Saginaw
Attorney-in-Fact
April 28, 1999
* Power of Attorney filed in Post-Effective Amendment No. 2, File No.
33-19749, filed on May 1, 1989, and incorporated by reference herein.
** Powers of Attorney for Ms. Eckhart and Mr. Jefferson filed in
Post-Effective Amendment No. 8, filed April 27, 1995, File No. 33-19749,
and incorporated by reference herein.
*** Power of Attorney for David H. Roe filed in Post-Effective Amendment No.
11, filed April 29, 1998, File No. 33-19749, and incorporated by reference
herein.
INDEPENDENT AUDITORS' CONSENT
The Board of Trustees
USLICO Series Funds
We consent to the incorporation by reference in this Post-Effective Amendment
No. 13 and 14 to the Registration Statement on Form N-1A of USLICO Series Fund
filed under Securities Act of 1933 and the Investment Company Act of 1940 of our
report dated February 16, 1999, on the statement of assets and liabilities,
including the statement of investments, as of December 31, 1998, and the related
statements of operations and changes in net assets and the condensed financial
information for the years ended December 31, 1998, 1997, 1996 and 1995, as
listed in Item 22 of such Registration Statement.
We also consent to the reference to us under the heading "Financial Highlights"
in the prospectus and under the heading "Financial Statements" in the Statement
of Additional Information.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
April 27, 1999
KPMG LLP
2001 M Street, N.W.
Washington, DC 20036
Independent Auditors' Consent
Board of Trustees
USLICO Series Fund:
We consent to the use in this Post-Effective Amendment No. 13 and No. 14 to
Registration Statement on Form N-1A (File No. 33-20957) of the USLICO Series
Fund filed under the Securities Act of 1933 and the Investment Company Act of
1940, respectively, of our report dated February 2, 1995 on the audit of the
statement of assets and liabilities and the related statement of operations and
changes in net assets as of and for the year ended December 31, 1994 (not
presented herein), and the condensed financial information of the USLICO Series
Fund for the year ended December 31, 1994, appearing in the Prospectus and under
the heading "Condensed Financial Information" of such Registration Statement;
and to the references to us under the heading "Financial Highlights," which is
part of such Registration Statement.
KPMG LLP
Washington, D.C.
April 27, 1999
<TABLE>
<CAPTION>
<S> <C>
EX-99.B16 Filing of Performance Quotations with the Annual Report: ERV:
6.00% = 1 Year Avg Annual Total Ret (STOCK) AS OF 12/31/1998 1,060.00
4.30% = 1 Year Avg Annual Total Ret (BOND) AS OF 12/31/1998 1,043.00
5.51% = 1 Year Avg Annual Total Ret (AA) AS OF 12/31/1998 1,055.09
17.73% = 5 Year Avg Annual Total Ret (STOCK) AS OF 12/31/1998 2,261.44
5.69% = 5 Year Avg Annual Total Ret (BOND) AS OF 12/31/1998 1,318.54
11.68% = 5 Year Avg Annual Total Ret (AA) AS OF 12/31/1998 1,737.08
13.99% = 10 Year Avg Annual Total Ret (STOCK) AS OF 12/31/1998 3,704.92
7.73% = 10 Year Avg Annual Total Ret (BOND) AS OF 12/31/1998 2,105.54
10.91% = 10 Year Avg Annual Total Ret (AA) AS OF 12/31/1998 2,815.22
Formula: 1000* (1+Avg ROR)^years
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CUMULATIVE 10-YEAR TOTAL RETURN 7-DAY MONEYMARKET YIELD ON PAGE S-13
3,704.92 270.49% (STOCK) 12/31/98 SAI 12/24/98 SAI
2,105.54 110.55% (BOND) RUSL: 1.712780856 1.656363820 SAI Calcs from
2,815.22 181.52% (AA) RBSL 2.417741644 2.380123243 Christa
Formula (ERV-1000)/1000*100 TTL: 4.130522500 4.036487063 102.33
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
30-DAY SEC YIELD STOCK BOND ASSET ALLOCATION
A.Divs + Int + Amortization 34,083.10 15,305.40 44,302.64 98 feecalc file
B.Expenses Accrued 17,086.84 1,799.56 10,208.02 98 feecalc file
C.Avg Daily Shares O/S 2,031,719.78 291,650.64 1,367,726.05 98 feecalc file
D.Price at period end 13.63 9.75 11.92
SEC Yield 0.74% 5.77% 2.52%
Formula: 2(((A-B)+1)^6 -1)
-----
C*D
</TABLE>
